London Silver Fix to End in August

By Dow Jones Business News, 
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London Silver Fix to Go Electronic in August


The silver market is about to undergo a historic makeover as the switch is flicked on a new price-benchmarking system that will allow, at a price, an unprecedented glimpse into the workings of the silver fix.

The London Bullion Market Association said Friday that the existing daily fix, which is set over-the-phone by small group of banks, will be replaced Aug. 15 by a new system provided jointly by CME Group Inc. and Thomson Reuters Corp.

The new method offers an auction-based, auditable electronic system that will match buying and selling orders to reach a benchmark for the price of silver.

Dan Rees, head of strategy for commodities at Thomson Reuters, said to facilitate a smooth transition there will be no other major alterations for a six-month period. After this point, however, a fee to access the data is likely to be instated. Mr. Rees said this is likely to be "sensible, rather than excessive."

Any income from this fee will likely be split between the LBMA industry group, CME Group and Thomson Reuters, but the level at which that fee may be set hasn't yet been decided, according to people with knowledge of the matter. Other global financial benchmarks charge for data packages--Euribor-EBF, for example, offers annual licensing packages for its interbank lending rates priced in a range of EUR500-EUR40,000, dependent on the type of institution buying the data and in how many locations it will be used. IntercontinentalExchange Inc. charges for use of Libor data.

The LBMA, which will retain intellectual property rights to the data, access to the price, and the audit trail, will keep a check on how much was being charged to access the data, said people with knowledge of the matter.

A spokeswoman for CME Group declined to comment on whether the exchange would charge participants a fee to take part in the auction process that sets the fix. Under the existing system that will end Aug. 14, the banks tasked with determining the price benchmark gain a small commission on each transaction.

The crowning of CME Group and Thomson Reuters as the new custodians of the silver fix brings to a close a 117-year-old City of London institution that is used to price, for example, mining sales contracts and exchange-traded funds, totaling billions of dollars each year.

The old silver fix was effectively killed off in April when Deutsche Bank AG withdrew from the process as part of a wider retrenchment of its commodities business. This left only two banks on the fixing panel--Bank of Nova Scotia and HSBC Holdings PLC--rendering the process unviable, according to people familiar with the matter. The LBMA-led search for an alternative came as market regulators have been scrutinizing benchmarks across the financial sector in the wake of a scandal involving rigging of interest rates.

CME Group and Thomson Reuters shook off competition from a range of exchanges and information providers to host the new fix. Alternative proposals had been submitted separately by Bloomberg LP, ETF Securities, IntercontinentalExchange Inc., commodities-information firm Platts, the London Metal Exchange and Autilla. The latter two made a late, unsuccessful joint bid Wednesday.

The final selection was made through a combination of two industry surveys, an external consultation from G Cubed Metals Ltd. and numerous market meetings.

"This is a big win for the CME," said Courtney Lynn, treasurer of Coeur Mining Inc., the largest listed U.S. primary- silver producer. "Prior to the LBMA seminar [in which each proposal was pitched], many expected that the LME would win this business. The CME came in as the dark horse and walked away with not only the silver fix, but a strong likelihood that they will also have the gold fixing business eventually as well."

The future of the London gold fix, which dates back to 1919, is shrouded in uncertainty. It is determined twice-daily via a conference call between four banks, one of which--Barclays PLC--was fined in May after one of its traders manipulated the benchmark at the expense of a client. The World Gold Council, a gold-mining industry body, recently hosted an industry forum to discuss possible alternatives to the London gold fix.

"If we can sort out getting an acceptable benchmark for cash silver, we should be able to get it for gold," said Brian Lucey, finance professor at Trinity College Dublin who has studied the gold market and has written academic papers on the subject.

Write to Francesca Freeman at francesca.freeman@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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This article appears in: Commodities

Referenced Stocks: BNS , CME , HSBC , TRI

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