The End of the Silver Fixing

The announcement of London Silver Market Fixing Limited that it will terminate to administer the London silver fixing with the close of business on August 14, 2014, should not come really as a surprise. After Deutsche Bank already declared to withdraw from the fixings of gold and silver, only two bullion banks remained in the group conducting the silver fixing. When this decision was made public by Deutsche Bank, FCA board member, Mrs. Tracey McDermott, stated that the UK regulator could intervene if there were too few participants left in the London silver fixing.

In the media reports about the announcement, no reason was stated why London Silver Market Fixing made this decision. However, it is quite easy to guess what the major reason behind this move is. The risk of financial penalties by regulators or pending lawsuits – especially outside the UK - just got too high. In the USA, CFTC commissioner Bart Chilton called for investigations into the London fixings for some time already without having provided any evidence for manipulation of the London fixings or for misconduct by the bullion banks involved. Also the head of the German watchdog BaFin, Mrs. Koenig, accused Deutsche Bank of wrongdoing without presenting facts. The London fixing was discredited by foreign regulators. But now, they made a disfavor to many producers and consumers of silver.

In this blog, we have pointed out a few times, that the fixings of gold and silver are not comparable with the setting of the Libor benchmark rates. The London fixings are a price discovery procedure, which is based on real trading activities and not on estimates of what the market price might be. Furthermore, the bullion banks do not know how their clients might change the quantities they commit to buy or sell if a new price will be called in the fixing process. In addition, the procedure applied in the London fixings had also been used in the past at regulated exchanges.

The LBMA issued the following statement: “As part of our role as the trade association for the London Bullion Market, the LBMA has launched a consultation in order to ensure the best way forward for a London silver daily price mechanism. The LBMA will work with market participants, regulators and potential administrators to ensure the London Silver Market continues to serve efficiently the needs of market users around the world. As part of the consultation process, the LBMA will be actively approaching market participants requesting feedback.” Furthermore, the LBMA conducts a survey in the process of market consultations. Thus, the current system of price fixing in the silver market is coming to an end, but the search for an alternative system is taking place already.

What might be possible alternatives to the current London silver fixing? Silver is also quoted by many financial institutions on quote screens at Bloomberg or ThomsonReuters terminals or electronic foreign exchange trading platforms. One possibility would be to use those quotes sampled at a random time within a specified time span. Thus, traders would only know the time span, but not the exact time stamp. Then the quotes in the lower and the upper 25% percentile could be discarded and from the remaining quotes the average would be published as the new benchmark indication. However, such an approach would have the same weaknesses as the Libor benchmark procedure.

From our point of view, any substitute for the current London fixings should be based on real trades and not on quotes. Liquidity in the market is not the same at every point in time but varies during the day. Thus, a new reference price should be found when the liquidity is usually high in the market and this is the case in the afternoon London time. Furthermore, a new benchmark price should be found by trading taking place at one central location. In addition, the price should be set in an auction style procedure.

Spot trading in precious metals is usually OTC trading, but for the fixings, it is concentrated at one place where the price is discovered in an auction style procedure. If the current system has to be replaced without abandoning the advantages of high market liquidity, supply and demand concentrated at one location and auction for price setting, then moving the fixing to a regulated exchange is probably the best solution. This could be an electronic exchange but also an open outcry system. The LME is already fulfilling the requirements for a fair and transparent price setting for cash and forward transactions in base metals. There are ring sessions with settlement prices for transactions in the morning and afternoon. Moving the London fixings of precious metals to the LME ring trading might be the best alternative. Producers and consumers would be able to obtain the best price for larger quantities in trades at a regulated exchange. The procedure would be transparent and the precious metals market would still have benchmarks satisfying the requirements for reflecting the true market price.