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Silver and gold benchmarks to be overhauled

The 117-year-old London silver fix will be set for the last time on August 14. The London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) both reported last week that they were in consultations with the London Bullion Market Association (LBMA) and other market participants regarding a new transaction based benchmark.

The LMBA revealed that a survey of around 440 market participants showed a clear desire for an electronic, auction-based benchmark to replace the London silver fix. Respondents also called for a tradable pricing system, with an increased number of contributors. Sixty-four percent said they use the fixing daily and the usefulness of the current silver mechanism was rated an average of 7.5, on a scale up to 10.

“While the London market is looking at a new way to set the daily spot price of silver, we are working closely with the precious metals industry and the LBMA to reduce market disruption by helping to find a robust transaction-based way to set the daily spot price so the markets can continue to work efficiently and seamlessly,” said Harriet Hunnable, CME managing director of metals products, in a statement.

The silver and gold fixes came under scrutiny as part of a wider examination of financial benchmarks in the wake of a global scandal involving the rigging of interest rates. The price of silver and gold are set daily in London by way of conference calls between banks, currently four for gold and three for silver.

The London Silver Market Fixing Ltd. will cease running the fixing on Aug. 14, as Deutsche Bank a two-decade member of the gold and silver fixes exits the panel after scaling back its commodities business. This would leave just two banks to conduct the silver price-setting routine that is used to price the precious metal and provides a benchmark for mining companies to settle sales trades, and for investors to price derivatives as exchange-traded funds. According to people familiar with the matter, the process was deemed unviable with just two panel members.

Litigation concerns have pushed prospective panel members away from the once-prestigious undertaking. US lawyers have filed over 20 class lawsuits alleging manipulation by the banks responsible for the gold fix. In May, Barclays PLC was fined GBP26 million ($43.5 million) by the U.K.’s Financial Conduct Authority for lax controls after one of its traders manipulated the gold fix at the expense of a client.

Other organizations that are looking to provide solutions to the market after the last London silver fix include commodity price benchmarks provider Platts and news agency Thomson Reuters, both of which are consulting with the LBMA. LBMA Chief Executive Ruth Crowell said the association’s members will give their feedback on these proposals on June 20.

The silver market “wants greater transparency and the influence [of individual market players] to be distributed more widely,” said Courtney Lynn, treasurer of Coeur Mining Inc., the largest listed U.S. primary-silver producer. “My only concern is timing,” she said. “To get a robust alternative established in two months with all the regulatory requirements and infrastructure needs isn’t going to be easy”.

Some think the gold fix, a similar benchmark that has been around since 1919, also needs to be reformed. “When people sit around a table and lift a flag in the gold market and say this is where the price is, obviously it is open to manipulation if it’s done in this opaque way,” LME Chief Executive Garry Jones told a conference in London last Tuesday. Jones said the LME system of open-outcry ring trading was a good example of transparent price setting. “I think more of the reference prices will be set by exchanges… a neutral independent place where transactions happen,” he said.

The gold fix – a benchmark widely used across the industry – is set twice a day by banks that get together over the telephone to work out a standard price for the metal based on transactions between their clients. With Deutsche Bank leaving, just Barclays, HSBC, Société Générale and Bank of Nova Scotia would be left in the fixing panel.

The World Gold Council (WGC), a gold mining industry group, said on Wednesday that bullion banks, refiners, fund firms, central banks and mining companies had been invited to the a forum, with the first meeting scheduled for July 7 in London. Britain’s Financial Conduct Authority will also attend the discussion forum as an observer.

The WGC said the any reformed fix should be based on executed trades rather than quotes and should be a tradable price, not a reference one. Input data for the new fix should also be transparent, published and subject to audit, while the benchmark should also be calculated from a deep and liquid market.

Regulatory focus on financial benchmarks is intensifying after rigging was uncovered in everything from interbank lending rates to currencies. Economists and academics have said that fixings are susceptible to manipulation and lack sufficient regulation.

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