UPDATE 1-And then there were 2: Deutsche exit renews scrutiny of silver fix

Wed Apr 30, 2014 10:08am EDT

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By Frank Tang and Clara Denina

NEW YORK/LONDON, April 30 (Reuters) - Deutsche Bank's exit from the London precious metal fixes will leave just two banks running a century-old system that sets the global silver price, likely stirring the debate about regulation of one of the most volatile commodity markets.

The bank's decision on Tuesday to resign its seat ends an unsuccessful four-month search for a buyer, as U.S. lawsuits alleging gold price-rigging by the five banks that set the benchmark turned potential suitors cold, sources said.

"You can't have a silver fixing with just two people, that's a bit of a nonsense really," a London-based precious metals trader said, adding just two participants would restrict liquidity and competition.

"It would just be two people talking to each other. I think the regulator should be stepping up a little bit here."

Leaving Scotiabank and HSBC as the only remaining members of the silver pricing committee will likely renew scrutiny of a daily system whose roots go back to the smoky, boisterous coffee houses of 19th-century London.

The modern process, which started in the 1960s, is now run by telephones and is largely similar to the twice-daily gold fix.

Shortly before news of Deutsche's withdrawal on Tuesday, Britain's financial watchdog, the Financial Conduct Authority (FCA), said it could intervene if there were too few participants in commodity benchmarks such as gold and silver.

"If there is a risk of dislocation because people are withdrawing and we think that breaches or is a risk to our objectives, then we would set that as one of our activities but it is not entirely straightforward," head of enforcement and financial crime Tracey McDermott said on Tuesday.

The FCA was not immediately available for further comment on Wednesday.

UNDER SCRUTINY

The gold fix, along with other commodity benchmarks, has come under increasing scrutiny by regulators in Europe and the United States since the London Interbank Offered Rate (Libor) manipulation case last year.

The International Organization of Securities Commissions issued guidance in July covering all benchmarks that are central cogs in the global economy, from interest rates to equities and gold.

At least a dozen U.S. private plaintiff lawsuits accuse the five banks in the gold fix committee of manipulating the price of the metal.

Those lawsuits have not targeted the silver fix, which started in 1897, about a quarter of a century before gold.

Even so, the silver futures market, whose prices have gyrated wildly in recent years, is no stranger to regulatory and legal glare.

In a five-year probe, the U.S. Commodity Futures Trading Commission investigated allegations that some of the world's biggest bullion banks including JPMorgan Chase & Co distorted silver futures prices.

After 7,000 staff hours of investigation, the U.S. commodity regulator found no evidence of wrongdoing and dropped the probe last September.

The banks faced similar accusations in a long-running class action antitrust lawsuit that was dismissed at the end of last month by a federal appeals court.

Whatever the outcome of the latest scrutiny, some users, including mining companies, which hedge production against the benchmark, may have little choice for now but to rely on it even with just two members.

"Whether it is good or bad or if it is down to two members, we have to use it," said Ounesh Reebye, vice president of metal sales at mining company Silver Wheaton, which is expected to produce 36 million ounces of silver this year. (Additional reporting by Josephine Mason and Jan Harvey; Editing by Josephine Mason, Steve Orlofsky and Mark Potter)