New “London Silver Price” Launching In Just Two Days - Confusion Reigns

Uncertainty and confusion reigns in London just two days prior to the launch of the new silver fix - the renamed “London Silver Prices”.

The Financial Times reported overnight on the uncertainty regarding the 117 year old silver price fix:

“Build it and they will come. Or that is what participants in London’s $1.6 trillion a year silver market will be hoping. There are just three trading days before the new, electronic replacement for the 117-year old silver fix goes live and there is still considerable uncertainty over who will be participating on Friday.

Since there is no centralised clearing for precious metals markets, the initial users of the new benchmark are expected to be the 11 market-making members of the London Bullion Market Association, which include Credit Suisse, JPMorgan, Goldman Sachs and UBS.

But so far no one has publicly stepped forward to say they will be involved even though testing of the system has gone without a hitch. The CME Group, whose Comex exchange offers the biggest silver futures contract, is providing the electronic price platform and the algorithm that will be used to set the auction’s opening price. Thomson Reuters will take care of the governance and administration.”

Interestingly, the FT also reports that there may be significant buying of silver in the coming days:

“Indeed, there are already rumours in the market place that some big silver producers and consumers are preparing to pepper the market with orders.”

This creates the possibility of the short squeeze that many market participants and silver analysts have been expecting for some time.

The FT says that the uncertainty is “only to be expected” and the list of participants may simply be released Friday.

However, the uncertainty is creating concern in the silver market amongst many participants who rely on the fix. There is a huge lack of transparency and little information about the pricing mechanism has been provided.

All that is clear is that the 117 year old silver fix is being replaced by a new “London Silver Price” with the handy acronym LSP.

The LSP is due to be administered on behalf of the LBMA by the CME Group and Thomson Reuters.

There is uncertainty as to whether the new price will be made publicly available through data providers, brokers etc.

Here is what the Bullion Desk had to say about the confusing situation:

The terms of the agreement state that the LSP should be equally available live for participating vendors With two days to go, it is far from clear that we – or other vendors – will be able to source the LSP and distribute it to our subscribers and data feed customers.

What we do know is that the LSP will be discovered through an electronic auction process. There will be no chairman; instead, the system algorithm will move the auction price up and down until buy and sell orders are matched to within a reasonable tolerance of 300,000 ounces.

There will be a wider number of participants than the old fix, although we do not who they will be.

In addition to the actual LSP price, it will theoretically be possible to follow the live auction process, observing net supply and demand at the various trial prices. Access to the LSP will initially be free but after an introductory period of six months a fee must be paid.

There are many questions then that still need answering, not least what the auction data will look like and what it will cost to follow the LSP process live or observe the price live. FastMarkets will continue to do everything possible to secure this important silver benchmark for our customers.


Silver in Dollars - 5 Year (Thomson Reuters)

Dan Rees, head of strategy for commodities at Thomson Reuters, said last month that in order to facilitate a smooth transition, there would be no major alterations to the current set up for a period of six months. After that point a fee to access the new silver price is likely to be instated.

The old silver fix ended in April, after Deutsche Bank withdrew from the process after the German financial regulator announced an investigation into the gold and silver fixes. This left only two banks on the fixing panel — Bank of Nova Scotia and HSBC Holdings who also under regulatory pressure may have decided to discontinue the fix.

The LBMA led search for an alternative came as market regulators had been scrutinizing benchmarks across the financial sector in the wake of a scandal involving rigging of interest rates, foreign exchange and other markets.

We have concerns about both the new silver fix and the looming new goldfix.

From our point of view, the replacement of a handful of banks with CME and Thomson Reuters was a positive development. However, the devil is in the detail and it is important that the new price discovery mechanism is transparent and that there is regulatory oversight.

CME are the U.S.' largest and the world's second largest futures and options exchange and we would have a concern that the new fixes are derived solely from futures trading and electronic trading rather than from actual supply and demand in the physical market.

Our concerns are due to the abuses that have been seen with regard to rogue traders, 'darkpools' and high speed computer trading. The CME themselves have acknowledged that markets are manipulated via high speed computer programs. Market participants need reassurance that such manipulation will not affect the new London Silver Price.

We believe that the recent rigging of the gold price, as seen in the FCA's findings against Barclays, means that there should be financial regulation and oversight of the new fixing process by regulatory authorities.