posted 05-26-2014 11:41 AM            

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The Fix Is Out In Silver Market
WSJ
By
Francesca Freeman
connect
Updated May 15, 2014 12:27 a.m. ET

After 117 years, London's silver fix will be set for the last time on Aug. 14.

The demise of the fix, which is being scrutinized by regulators as part of a broader probe of financial benchmarks, leaves jewelers, mining companies and investors in need of a new way to price the metal for the first time since 1897.

"We will need to find a substitute," said Lenic Rodriguez, chief executive of Canadian silver-mining company Aurcana Corp. AUN.V 0.00% "The silver price is very speculative and volatile, so for accounting and planning purposes, the benchmark is good."

The benchmark plays a crucial role in the roughly $30 billion a year global trade in silver. It affects the price of jewelry, helps determine the value of some derivative contracts and affects the earnings of mining companies that sell raw material to metals refiners.

The fix has gone through various iterations in its history. Most recently, it has been set daily at noon by way of a conference call involving representatives from Deutsche Bank AG DBK.XE +0.35% , HSBC Holdings HSBA.LN -0.21% PLC and Bank of Nova Scotia. BNS.T +0.26% The benchmark was considered unviable, however, after Deutsche Bank recently declared its intention to leave the process as part of a wider scaling back of its commodities business, according to people familiar with the matter.

London Silver Market Fixing Ltd., which administers the fix, announced the end of the benchmark Wednesday. It said it would now be left to "market participants" to come up with an alternative.

The end of the silver fix marks a turbulent period for London's precious-metals benchmarks. The silver fix and its counterpart the gold fix—which is set by four banks and has been around since 1919—have been under the regulatory spotlight as part of a broader examination of financial benchmarks in the wake of a global interest-rate-rigging scandal.

Three banks are paying a total of $2.5 billion in penalties over alleged manipulation of the London interbank offered rate, while more than a dozen financial firms are under investigation related to the scandal.

The gold and silver fixes are being scrutinized by authorities including the Commodity Futures Trading Commission and the U.K.'s Financial Conduct Authority, said people familiar with the matter.

Some users of the silver fix were left bewildered. "It's all very well to say there will be no fix after a certain time, but we need to know what happens next," said Ross Norman, chief executive of London-based bullion dealer Sharps Pixley.

Courtney Lynn, treasurer of Coeur Mining Inc., the U.S.'s largest listed primary silver producer, said silver mining companies would be concerned because sales performance was measured in relation to the fix. "We need a consistent, reliable benchmark," she said.

Mark O'Byrne, a director at Dublin-based bullion dealer GoldCore, said the end of the silver fix could indicate uncertainty about the gold benchmark's future, too. "If they do away with the silver fix, it suggests to me that it won't be long before the gold fix comes to an end," he said.

Deutsche Bank said last month that it was resigning from the silver- and gold-fixing process after a three-month search failed to result in a buyer for its seats on the panels. On Wednesday, the German bank said it postponed its resignation from the silver fix until Aug. 14, in response to a request from the FCA. The U.K.'s financial regulator asked Deutsche Bank to postpone its silver-fix resignation so that there would be more time to find an alternative benchmark after the two remaining silver banks also opted to quit the benchmark, said people familiar with the matter.

A spokesman for HSBC said the bank remains "committed to the silver market and, if the market wishes to develop an alternative to the London Silver Fixing, it is willing to take part in discussions with other market participants."

Scotiabank's global head of foreign exchange and precious metals said the Canadian bank "will work with market participants to find an alternative to the silver fix."

Industry participants said alternatives could include an electronically derived benchmark calculated and published by a brokerage or other exchange, such as the London Metal Exchange.

The LME said that "we are always looking at ways to expand our product offering, and are ready to expand our range of price discovery and post-trade tools to further service the precious metals market."

CME Group Inc. CME -0.48% is in the early stages of discussion about establishing its own silver fix, said a person with knowledge of the matter. The exchange is looking at several options.

—Biman Mukherji,
Debiprasad Nayak
and Ira Iosebashvili contributed to this article.

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posted 05-26-2014 12:07 PM            

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London Silver Fixing To Be Scrapped; LBMA To Study Possible Alternatives

By Allen Sykora and Debbie Carlson of Kitco News
Wednesday May 14, 2014 9:10 AM

Editor's Note:Updating earlier story with reaction from analysts, traders.

(Kitco News) - The London Silver Market Fixing Limited said Wednesday it will stop administering the London silver fixing after Aug. 14.

Until then, the organization said, Deutsche Bank, HSBC and Bank of Nova Scotia will continue to administer the benchmark price-setting mechanism.

Analysts offered mixed views of the impact on the market, with some suggesting there will be a void for those institutions that want a benchmark price, while others say the significance had waned anyway as markets become more global and electronic.

“It’s disappointing to see a 117-year institution coming to an end,” said Ross Norman, CEO of Sharps Pixley. “My personal view is that it’s been conducted well…. It’s not sufficient just to be good. You’ve got to be seen to be good as well.”

The news comes amid rising scrutiny of the gold fixing by market participants and regulators. Deutsche Bank previously said it would be leaving the fixings without finding a buyer for its seat as it scales back its commodities business.

Norman said he suspects any alternative to the fixing will be more transparent and technically derived. “I think that was fundamentally one of the biggest issues people had with the fix is it didn’t quite give you enough,” he said.

For both gold and silver, representatives of several banks hold conference calls to match buy and sell orders and decide on a London fixing, which is a single reference price for miners, consumers, investors and others in the gold industry.

The period from now until the end of the silver fixing in August is intended to provide market participants an opportunity to explore possible alternatives, according to the company that operates the fix.

“The good news is that gives us adequate time to come up with an alternative solution to the fix, because there are a lot of institutions that rely on a global benchmark, which is what fixes are,” Norman said. “Just to have nothing would be difficult for these institutions.”

The veteran bullion market participant said there is market chatter that several organizations are considering an alternative. The London Bullion Market Association said Wednesday it will consider such an effort.

“As part of our role as the trade association for the London Bullion Market, the LBMA has launched a consultation in order to ensure the best way forward for a London silver daily price mechanism,” said Ruth Crowell, the LBMA chief executive. “The LBMA will work with market participants, regulators and potential administrators to ensure the London silver market continues to serve efficiently the needs of market users around the world. As part of the consultation process, the LBMA will be actively approaching market participants requesting feedback.”

Norman said many institutions want a benchmark such as the fixing rather than simply relying upon the spot price, which he described as “subjective” since bids and offers reflect what a single large participant might think is the appropriate price at a particular moment. Some institutions want to know they are getting the best price for their needs so favor a process in which many market participants take part all at once, resulting in an “objective” equilibrium benchmark.

Frank McGhee, senior managing member of Alliance Financial, said the loss of the silver fixing will leave a void.

"It’s a sad day. The problem is the silver fix was an a.m. fix only, so it was predominantly concentrated for London business,” he said. “You’ve got a fair amount of retail trade, especially in the U.S. Mint, that was priced against it. I personally always thought it would be better as a p.m. fix for U.S. clientele….But it is going to leave somewhat of a hole. To me it’s something that needs to be replaced because there is a need for neutral pricing."

However, Bill O’Neill, one of the principals with LOGIC Advisors, called the gold and silver fixes an “anachronism” that is losing much of their significance as markets become more global and trade 24 hours a day.

“The fix became little more than a figurehead benchmark, if there is such a thing,” O’Neill said. This especially became the case with the manipulation allegations surrounding this and other markets, he continued. He speculated that the gold fixing may eventually go away also.

The fixing in essence has acted as a “measuring system” for the market, he said.

“But it (end of the fixing) is not going to affect price whatsoever,” he said.

There might be potential for the Comex division of the New York Mercantile Exchange, where gold futures trade in the U.S., to benefit, O’Neill added. McGhee said “I wouldn’t be surprised if some of the U.S. pricing goes that route” but he also expressed doubt that London market participants would want to accept a New York trading mechanism.

“Comex is fundamentally the smaller market versus London; you’re never going to get London to adopt that,” McGhee said. “You will have a void here in that will not serve the industry well in the guise of correcting a perceived regulatory (failing).

"I think people are seeing things that don’t truly occur. If you want to make the fixing more transparent, you can make it a viewable Web-based process, if that’s the concern. Over 20 years of trading on the fix, there are good fixes, there are bad fixes. At the end of the day it all evens out. It still, for what it was, you’re still bringing the five biggest market participants (in gold) together to come to a price. Now is it an anachronism? Probably, but it’s one that’s thoroughly embedded in the industry."

Now, there is a “vacuum” in the market, he added.

“To me it’s a real problem, whenever you’ve had a benchmark that’s been used for so long people get used to it."

By Allen Sykora and Debbie Carlson of Kitco News

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