The first London silver price to replace the 117-year-old fixing ritual conducted by a few traders was set today in an attempt to make the process more transparent amid increased scrutiny of benchmarks.
The LBMA Silver Price, set through an electronic, auction-based mechanism, settled after four rounds of negotiations at $19.86 an ounce shortly after noon today, exactly where it ended at yesterday’s final fixing. HSBC Holdings Plc, Bank of Nova Scotia and Mitsui & Co. were accredited to participate, the London Bullion Market Association said today. The sale volume offered was 525,000 ounces and 325,000 ounces were sought.
Silver becomes the first of the precious-metals markets to ditch a daily “fixing” procedure where dealers agree to a price over the telephone. Revamps also are planned this year for fixings in gold, platinum and palladium. Scrutiny on how benchmarks are set increased after regulators uncovered price-rigging in everything from interbank-loan rates to currencies. CME Group Inc. and Thomson Reuters Corp. will run the new silver system each day at midday in London.
“The new mechanism allows more direct participation and the automated auction feed ensures that the same real-time information is available to all participants and market users via numerous data vendors,” Ruth Crowell, LBMA chief executive officer, said in a statement distributed today by CME Group.
About $5 trillion of silver circulated globally last year, CPM Group, a researcher based in New York, estimates. The metal rose 1.1 percent in London trading this year, according to Bloomberg generic pricing.
The demise of the silver fixing was set in motion after Deutsche Bank AG said it would no longer participate, as the German company scales back its commodities business. That would have left only HSBC and Bank of Nova Scotia to conduct the ritual.
The first silver fixing took place in 1897 at the London office of Sharps & Wilkins, with former dealers Mocatta & Goldsmid, Pixley & Abell, and Samuel Montagu & Co.
For the first century, traders carried order books to a closed room each day, spending about 10 minutes setting a price. The group’s appointed chairman, from one of the banks, adjusts prices to balance buying and selling. From 1999, traders were permitted to check with clients by telephone to change orders before the price was fixed. Silver trades in the over-the-counter and futures market throughout most of the day.
Under the new system, participants enter orders electronically to trade at a proposed starting price. If there’s no suitable match between buy and sell orders, an algorithm picks a new price for a second round of bidding. Each round should last no more than 30 seconds and data shows bid and ask volumes for each round through to the settled rate.
The company that ran silver fixings announced in May that it would stop administering the process. The LBMA said July 11 that CME and Thomson Reuters would run the new process.
Coeur Mining Inc., the largest U.S. silver producer, has said changing an outdated pricing method would enhance confidence in a benchmark used as a reference for trading and valuing holdings. Metal changed hands at the settled fixing price and will continue to do so under the new method.
“What they have accomplished here in such a short amount of time is very impressive,” Courtney Lynn, Coeur’s treasurer in Chicago, where the company is based, said in an e-mail today. “We hope to have the opportunity to become a direct participant down the road and look forward to working with the LBMA, CME and other silver producers to drive the evolution of this market.”
Not all participants who took part in live trials were accredited by today, due to constraints in signing off necessary credit, legal, compliance and IT requirements, the LBMA said. The organization expects the list of banks, trading houses, refiners and producers to increase in the next few weeks.
While a set daily price has provided a crucial benchmark for mining companies, jewelers and investors, economists and academics say the fixing process was susceptible to manipulation and lacked sufficient regulation.
There was a “lull” in futures trading leading up to the start of today’s auction, with volumes peaking after it ended, compared with increased volumes that have historically occurred before fixings ended, said Andrew Caminschi, a professor at the University of Western Australia of Perth.
“Could it be that the new levels of transparency are actually delivering better (and fairer) market dynamics?” he said in an e-mail today. “It’s looking promising.”
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