* First of series of precious metals benchmark overhauls
* Not all interested participants ready by Friday -LBMA
* Process done using online 'equilibrium auction'
(Releads, adds comment, detail)
By Clara Denina and Jan Harvey
LONDON, Aug 15 The silver market ushered in a
new era of electronic benchmarking on Friday after a regulatory
drive for transparency brought the 117-year-old silver 'fix' to
Scrutiny of precious metals pricing from European and U.S.
financial watchdogs intensified in the wake of benchmark
manipulation in other financial markets, most notably the
rigging of London Interbank Offered Rate (Libor).
The final conference call in the old process of fixing the
benchmark silver price took place on Thursday between
banker-dealers in the $3 billion-a-day London silver market.
The London silver fix started in 1897, predating the gold
process by 22 years, in the offices of one trading firm and with
three others participating.
At that time, the cash price of silver was 27-9/16 old
pennies. On Friday, the first LBMA Silver Price was set at
$19.86 per ounce.
Beginning in 1999, the process was conducted by telephone,
with HSBC, Deutsche Bank and Bank of Nova
Scotia-ScotiaMocatta as fixing members.
The new price mechanism, operated by the Chicago Mercantile
Exchange and Thomson Reuters in association
with the London Bullion Market Association (LBMA), is an
electronic, auction-based and auditable process and is tradable
with an increased number of direct participants.
Traders were sanguine about day one of the new price.
"Without enough participants in the old system, it seems to
be the best solution available, maybe the way to go for the
other precious metals as well," a European precious metals
The CME Group provides the platform and algorithm, while
Thomson Reuters acts as administrator. The LBMA, which acted as
a facilitator in the quest to find an alternative to the
benchmark, will publish volumes and participants of each daily
settlement on its website.
Volumes on the new benchmark on Friday stood at 525,000
ounces on the sell side and 325,000 ounces on the buy side.
The LBMA said three price participants had been accredited
to contribute to the benchmark from Aug. 15 - HSBC Bank, Mitsui
& Co Precious Metals Inc and The Bank of Nova Scotia.
While a number of banks, trading houses, refiners and
producers have expressed interest in contributing, "the tight
schedule and the time of year has imposed time constraints on
some potential participants seeking internal sign-off on the
necessary credit, legal, compliance and IT requirements", the
At its silver price webinar in July, the CME said that "for
day one participation, we are looking at the LBMA market-makers
with consistent and constant bilateral credit facilities".
Eleven institutions are LBMA market makers for gold and
silver. Credit Suisse said on Thursday that it would
be taking part in the new process, while UBS said in
an email that "it is currently evaluating the feasibility of
becoming an auction member in the near future".
Societe Generale, JPMorgan, Bank of
America-Merrill Lynch, Deutsche Bank and Barclays
declined to comment, while Goldman Sachs did not
respond to a request for comment.
HOW IT WORKS
The new benchmark - used by producers, consumers and
investors - is set every day at noon as an online "equilibrium
auction" conducted over multiple auction rounds.
Like the old process, it starts with a price that reflects
the spot market level. Then within each round of the auction,
participants enter their buy and/or sell orders, which are
compared at the end of each round to determine whether the
market is balanced.
To be balanced, the total of buy versus sell orders entered
by all market participants need to be within a certain
tolerance, which is initially three lakhs, or 300,000 ounces.
If the market is not balanced, a new suggested price is
automatically calculated (moved up or down on the side of the
imbalance) and a new round begins at this price.
If the market is balanced, the LBMA Silver Price is
determined, and market participants then execute trades based on
the buy/sell orders they entered in the last round and any
at-market orders entered.
The operator and administrator will have full transparency
about the names during the auction process, but participants,
who can change the size of their orders at any time, cannot see
the names of others.
The overhaul of the silver fix process is the first in a
series of revamps of all precious metals benchmarks, including
the century-old gold fix and the platinum and palladium fixes,
whose operators earlier this month said were looking for a new
Some of the companies that had proposed alternatives to the
silver fix said they would send their tenders for the gold
market, when the request for proposals process starts at the end
(Editing by Veronica Brown, David Evans and Jane Baird)