After sweeping changes were announced for the London silver fix, the London gold fix will likely follow suit. Gold prices are set twice daily by the London Gold Market Fixing (LGMF) at 10:30 and 15:00 and are expressed in U.S. dollars per fine troy ounce. The silver price is set once daily at 12:00 by the London Bullion Market Association (LBMA) and is expressed in U.S. dollars per troy ounce. The fixes provide benchmarks for mining companies to settle contracts, and more recently, to price exchange-traded funds (ETFs).
The fixing companies began to search for alternatives at the same time regulators have been investigating financial benchmarks in the wake of several investment scandals. In May, Barclays was fined $44.6 million after the U.K. Financial Conduct Authority found one of its traders had manipulated the gold benchmark. London financial benchmarks have felt growing pressure since 2008, when authorities launched an investigation into the rigging of the London interbank offered rate (Libor).
After 117 years, the London silver fix sought and found a solution first. The LBMA announced it would replace the existing daily silver fix, which is set by phone by a small group of banks, with a new system managed jointly by the CME Group (originally known as the Chicago Mercantile Exchange) and Thomson Reuters. The new method, which will begin August 15, offers an auction-based, auditable electronic system that will match buying and selling orders to reach a benchmark for the price of silver.
When Deutsche Bank announced plans to quit trading in most raw-materials markets in December of last year, the London silver fix had to do something. The fixing panel would have only two banks remaining, Bank of Nova Scotia and HSBC Holdings. The LBMA began to search for an alternative and it received proposals from several organizations. To facilitate a smooth transition, Thomson Reuters said there will be no other major alterations for six months. After that, a fee will likely be instated to access data. The fees will be divided among the LBMA, CME and Thomson Reuters. Other financial benchmarks charge fees to access data. The LBMA will retain the intellectual property rights to the data and the audit trail.
The 95-year-old London gold fix is similar to the silver fix except it relies on four banks (Barclays, HSBC Holdings, Bank of Nova Scotia and Société Général) and one of its banks was fined recently for manipulating the price. So it too began to search for a company to take over the benchmark. The LBMA revamped the silver system and it said it will help the LGMF. They will start soliciting proposals and open market consultation in late August with an RFP process with the goal of appointing a third-party to manage the London gold fix. The new administrator could be announced in late September and the new system could be implemented by the end of the year.
The London silver fix found and will soon implement a new solution because one of the banks on the panel withdrew from the commodities business, not because of scandalous behavior. Many believe the proposed silver fix will be a huge improvement as far as transparency and that transparency will prevent future price rigging by banks. With what's happening with electronic trading (i.e. algo trades and front running), it seems people always find a way to game the system.
Steve Fiscor, E&MJ Editor-in-Chief