July 10, 2015 / 8:20 AM / 4 years ago

London's domination of precious metal benchmarks at risk

* Metals benchmarks administrators start charging for data

* Shanghai to set yuan-denominated benchmark by year-end

By Clara Denina

LONDON, July 10 (Reuters) - Operators of the new precious metals benchmarks, historically run from London, face a challenge to ensure they not only remain relevant globally but are also profitable just as Shanghai is gearing up to launch a rival gold benchmark of its own.

After banks were fined for trying to rig Libor rates and currency markets, Britain now requires major market benchmarks, including those for precious metals, to be run by an independent administrator.

Historically, the use of these benchmarks, formerly known as “fixes”, were available for free. But the new administrators, who have replaced a live telephone auction with an online process on electronic platforms, have to make the benchmarks pay.

That will be even more of a challenge as alternatives emerge. The Shanghai Gold Exchange (SGE) said last month it is hoping to launch a yuan-denominated gold fix by the end of 2015.

China is the world’s largest producer and consumer of gold, making a Chinese fix potentially highly visible.

“London’s role in price making had partly moved to Comex (gold biggest futures contract) many years ago ... and is now being challenged by Shanghai, which is by far the biggest metal consumer,” said Gerhard Schubert of SC Consultancy DMCC.

“Given the move eastwards of the market, China could ultimately combine both the price making and the clearing, which is the other important role that London plays at the moment.”

Some traders point out that the lack of renminbi convertibility limits the relevance of an Asian “fix” outside China. However, the People’s Bank of China has been pursuing renminbi convertibility for some time, meaning that could change in future.


Three gold market makers said plans to charge for the benchmarks could mean people needing reference prices look for alternatives.

Operators argue that, as benchmarks are now regulated, the cost of administering them is greater than it was. As volumes and participation in the benchmarks increase, their value in the marketplace is secured, they say.

IBA, part of the Intercontinental Exchange, has been running the LBMA (London Bullion Market Association) gold price since March and will start charging from October. Financial institutions will pay $20,000 per year for a usage licence fee and $25 per end user each month for real-time data.

The Chicago Mercantile Exchange and Thomson Reuters run the silver benchmark and charge $20 per subscriber, per month, for real-time data. A 15-minute delayed price is free.

“Thomson Reuters believes the industry on a global level should be prepared for the fact that the necessary changes in benchmarks and indices not only make them more robust tools for the marketplace but also mean fee liability and increasing costs,” said Tobias Sproehnle, global head of benchmark services at Thomson Reuters.

The London Metal Exchange, which administers the twice-daily platinum and palladium auctions, charges $10 per end user per month. Free data would be only available next day.

The prospect of alternative benchmarks emerging means the global relevance of the old fixes risks being tempered.

“I don’t know how many people in the market are prepared to use an auction structure against those who prefer to source them in other ways,” Clare Hatcher, a partner at law firm Clyde & Co, said. “There is obviously the risk that (these benchmarks) lose their relevance.”

Thousands of jewellers, coin and bar dealers, miners and central banks currently use the benchmarks.

“How many of those will pay? My gut feeling is that there are fewer people interested than they think,” bullion broker Sharps Pixley’s chief executive Ross Norman said.

“When you stop seeing the fixings being quoted by data vendors, then their significance will become diluted over time.”

The British regulator is planning to cap the fees administrators can charge. (Reporting by Clara Denina and Jan Harvey, editing by Pratima Desai and David Evans)

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