Silver market sets scene for new benchmarking in electronic era
Market replaces century-old 'fix' with auction-based and auditable mechanism that is also tradeable with more direct participants
The silver market entered a new electronic era in benchmarking yesterday after a regulatory drive for more transparency in price setting brought the 117-year-old silver "fix" to an end.
The final conference call took place on Thursday between banker-dealers in the London silver market in the old process of fixing the benchmark price.
Driving the change has been the increased scrutiny of precious metals "fixes" by European and United States watchdogs in the wake of benchmark manipulation in other financial markets.
The new price mechanism is not only electronic, auction-based and auditable, it is also tradeable with an increased number of direct participants.
The process will be operated jointly by the Chicago Mercantile Exchange, which provides the platform and algorithm, and administrator Thomson Reuters.
The London Bullion Market Association, which acted as a facilitator in the quest to find an alternative to the benchmark, said on its website that the exact number of participants in the first auction would not be known until yesterday.
Banks, trading houses, refiners and producers have expressed interest in contributing, "but the tight schedule and the time of year has imposed time constraints on some potential participants seeking internal sign-off on the necessary credit, legal, compliance and [information-technology] requirements", the association said.
"This means that not all those who have already participated in the live trials will be accredited in time to participate [yesterday]," it added.
At its silver price webinar last month, the CME said that "for day one participation, we are looking at the [association's] market makers with consistent and constant bilateral credit facilities".
Eleven institutions are the association's market makers for gold and silver.
Credit Suisse said on Thursday it would be taking part in the new process, while UBS said "it is currently evaluating the feasibility of becoming an auction member in the near future".
HSBC Holdings, Societe Generale, JP Morgan, Bank of America Merrill Lynch, Deutsche Bank and Barclays declined to comment on whether they would be involved in the process from day one. Bank of Nova Scotia, Mitsui Precious Metals and Goldman Sachs did not respond to a request for comment.
The new benchmark - used by producers, consumers and investors - will be set every day at noon, but as an online "equilibrium auction" that will be conducted over multiple auction rounds.
Like the old process, it will start with a price that reflects the spot market level. Then within each round of the auction, participants will enter their buy and/or sell orders, which will be compared at the end of each round to determine if the market is balanced or not. To be balanced, the total of buy against sell orders entered by all market participants need to be within a certain tolerance, which is initially 3 lakhs, or 300,000 ounces.
If the market is not balanced, a new suggested price is automatically calculated (moved up or down on the side of the imbalance) and a new round begins at this price.
If the market is balanced, the London silver price is determined, and market participants then execute trades based on the buy/sell orders they entered in the last round and any at-market orders entered.
The operator and administrator will have full transparency about the names during the auction process, but participants, who can change the size of their orders at any time, cannot see the names of others.
The overhaul of the silver fix process is the first in a series of revamps of all precious metals benchmarks, including the century-old gold fix and the platinum and palladium fixes, whose operators said earlier this month that were looking for a new administrator.
Some of the companies that had proposed alternatives to the silver fix said they would send their tenders for the gold market, when the request for proposals process starts at the end of this month.