Wednesday 26th October 2016

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Meet the new fix

Claims of greater transparency fail to satisfy critics of the LBMA silver price

by Greg Klein

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It begins each weekday at noon London time. Beginning with an algorithmically produced price, participants have 30 seconds to place their silver bids and offers. If they diverge by more than three lakhs (a total of 300,000 ounces), the price is adjusted up or down and another 30-second round begins. The process continues until bids and offers fall within the three-lakh range. That “daily equilibrium auction” now sets silver’s price. But controversy remains—has the “fix” been fixed in any sense of the word?

As an industrial, luxury and investment metal, silver brings together “a really disparate group of stakeholders from solar panel manufacturers to coin collectors to copper miners to pawnshops,” said Andrew Leyland, precious metals manager at Thomson Reuters in an August 19 conference call. But the new pricing regimen began five days earlier with just three very deep-pocketed participants: HSBC Bank, Mitsui Global Precious Metals and the Bank of Nova Scotia’s ScotiaMocatta.

Claims of greater transparency fail to satisfy some critics of the new LBMA silver price

The London Bullion Market Association selects those who wish to participate through its accreditation process. The CME Group, “the world’s leading and most diverse derivatives marketplace,” provides the electronic platform. Thomson Reuters takes care of administration and governance.

The new process replaces the 117-year-old silver fix, which lost one of its three participants last April when Deutsche Bank dropped out, apparently overcome by Libor-chill after heavy fines hit Barclays for its role in the London Interbank Offered Rate scandal and gold price manipulation.

Deutsche’s departure sparked the rush to a new system. The LBMA conducted consultations and surveys with some 444 stakeholders. A seminar then demonstrated seven options submitted after a request for proposals. A second survey followed, then a vote by LBMA members. All that took place over just three months.

Two previous participants are back. Mitsui is the sole newcomer.

Controversy surrounded the old system, especially for its secrecy. Indeed its former participants face at least one U.S. class action suit for allegedly reaping huge profits from price-fixing. “Transparency” prevails with the new system, its adherents maintain.

But it’s still closed to all but the very rich and can’t even be monitored without buying into an expensive technology platform. Even then, the identities of who’s placing which buy or sell aren’t divulged.

Phase II will bring more participants, possibly including trading houses, large refiners and producers, according to the CME, which expects to see “a big jump in terms of who can take part.” Those who seldom trade or can’t meet the LBMA criteria may do business through a broker or banker.

Wider participation will further enhance transparency says Harriet Hunnable, CME head of precious metals. Meanwhile the ability of a favoured few to watch volume and price activity in real time marks “a major step forward,” she told the conference call.

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