UPDATE 2-London Metal Exchange offers three alternatives to silver fix

Mon Jun 16, 2014 12:34pm EDT

* LME has made proposal to enhance existing phone method

* Exchange could use its open outcry floor for silver fix

* Third alternative makes use of its electronic platform (Adds details, quotes, background)

By Clara Denina and Eric Onstad

LONDON, June 16 (Reuters) - The London Metal Exchange (LME), competing to offer a replacement for the London silver benchmark, said on Monday it could offer three alternatives including an enhanced telephone-based process and an option for open-outcry price setting.

The 117-year-old London silver price benchmark - or fix - will cease on Aug. 14, its operator - London Silver Market Fixing Limited - said last month, as regulatory scrutiny of price-setting intensifies across markets.

"We are very interested in playing a greater role in the silver and gold markets," LME Chief Executive Garry Jones said.

The LME, owned by Hong Kong Exchanges and Clearing Ltd , had already proposed an alternative to the current telephone-based method, with better auditing and compliance.

This would include an independent chairman from the LME pricing committee, LME executives told a presentation in London.

Matthew Chamberlain, head of business development at the LME said that the market's initial concern was the lack of a benchmark pricing mechanism for silver when the existing system is dismantled on Aug. 15.

The LME would be prepared to offer any one of its three solutions by Aug. 15, depending on what the market prefers, he said.

A ring-based solution came from strong industry demand, but there may be difficulty in finding sufficient liquidity, he added.

"The challenge is to make sure there is sufficient ring representation in the silver ring as in the base metals ring."

Silver market players are in favour of an electronic, auction-based system for setting a benchmark price, the London Bullion Market Association (LBMA) said earlier this month.

Chamberlain said this electronic solution was the "most difficult to achieve in such a short period of time".

The LME would use its electronic platform LME Select, which is already available to LBMA market makers such as JPMorgan and Societe Generale, as they are already involved in base metals.

He said the exchange was working to get "everything ready by mid-July for the market to test".

The fix is set every day at noon by HSBC, Deutsche Bank and Scotiabank, which get together over the telephone to work out the price at which their customers are willing to buy and sell the metal.

The move to disband the silver fix came after Deutsche Bank, a member of the gold and silver fix for two decades, failed to attract a buyer after putting its seats up for sale in January.

PROPOSALS

The LME and the Chicago Mercantile Exchange (CME) both said last month they were working with the LBMA and the precious metals industry to find an electronic-based solution to the silver fix when the system is disbanded.

They are joined by eight other companies interested in administering the silver price benchmark, the LBMA said on its website.

Two sources involved in the talks said the list includes Intercontinental Exchange (ICE), which has been running the LIBOR benchmark since February. The exchange declined to comment.

The LBMA will decide which proposal is adopted. All 10 will be presented at a seminar to market members on June 20, sources said, although the association said it will short-list the best proposals beforehand.

Members of the association, which include the current fixers and other large bullion-trading banks such as JPMorgan and UBS, would also provide feedback on the proposals at the seminar, the LBMA said. (Reporting by Eric Onstad and Clara Denina; Writing by Susan Thomas; Editing by Veronica Brown, Mark Potter and David Evans)

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