For the second time in just three years, the format of the London silver fix will change to accommodate a new administrator.
In 2014, Thomson Reuters and the CME Group jointly outbid six other groups for the privilege of administering the fix. This was a departure from the more opaque price-fixing process that had been carried out daily for more than a century previous.
Now, less than three years at the task, Reuters and the CME Group are pulling out of the process and giving up their roles in executing the silver fix. The organizations will stay on until a suitable replacement is found.
Broken Silver Fix
The major shift that accompanied the new arrangement in 2014 was that the price-fixing meeting became streamlined through electronic solutions. Over a conference call, the major banks that participate in the fix—who must be sufficiently large to be categorized as “market makers”—submit bids back and forth to one another in an auction that reflects the available supply and demand of the metal. The price is set when bids come into reasonably close agreement.
Under the current system, Reuters publishes and governs the official LBMA (London Bullion Market Association) silver price, while CME Group provides the electronic platform on which the auction itself is conducted. Despite being determined in London, the price is given in U.S. dollars per troy ounce.
The benchmark price arrived at by the fix is used by global market participants, from traders to refineries to mining firms, as a fair settlement price. For instance, the silver spot price in India or China is often expressed by reference to its premium over the London fix.
In reality, there aren’t expected to be any new rules radically different from how the fix has traditionally been carried out for 117 years. Maintaining continuity in the process is crucial. This could perhaps be more of a cosmetic change, or Reuters and CME Group could be responding to the negative publicity that has surrounded lawsuits alleging the fix has been used in the past by the market-maker banks to manipulate bullion prices. The exact reasons for the shake-up are still unclear.
Although a number of the big banks have vacated their seat on the fix in recent years, Coin World reports that “Seven price participants are accredited to contribute to the LBMA Silver Price: China Construction Bank, HSBC Bank USA NA, JPMorgan Chase Bank, Morgan Stanley, The Bank of Nova Scotia – ScotiaMocatta, The Toronto Dominion Bank and UBS AG.”
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