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ETF Securities enters race to provide silver price benchmark
By Xan Rice
Financial Times, London
Wednesday, June 4, 2014
http://www.ft.com/intl/cms/s/0/e8fdeabc-ebe6-11e3-8cef-00144feabdc0.html
One of the biggest providers of exchange traded funds has entered the race to develop a new global silver price benchmark when the 117-year-old London silver fix is disbanded in August.
ETF Securities, which pioneered gold-backed ETFs and oversees $19 billion in assets, said on Wednesday that it had submitted a detailed proposal to the London Bullion Market Association, and was consulting market participants.
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The UK company's move highlights the strong competition to provide a new daily reference price for silver. The London Metal Exchange -- which is the world's largest bourse for base metals futures, and has previously quoted silver prices -- is working on its own electronic alternative, as is the Chicago Mercantile Exchange, which oversees the biggest silver and gold derivatives contracts.
On Wednesday, Platts, the benchmark and information provider, confirmed that it had entered discussions as well. It said: "We have held conversations with the LBMA and we look forward to continued collaborative engagement regarding price discovery in the silver market."
Whichever organisation is chosen to run the new silver benchmark will also be in a strong position to take over the under-fire gold fix, if the group of banks that operate this benchmark decide to phase it out.
Participating in a benchmark price process would offer prestige to a company such as ETF Securities, while the exchanges would also stand to gain from transaction fees, commissions, and licensing revenue.
Graham Tuckwell, founder and chairman of the ETF Securities, said his proposed solution for silver pricing would involve the London Stock Exchange's auction platform for shares and result in physically-settled transactions.
"From talking to people in the market, I am absolutely confident that this will be benchmark accepted by the LBMA members," Mr Tuckwell said. "It offers real transparency and the infrastructure is already in place."
Under the current system, banks run an auction system by teleconference, to set a single price that is used by silver miners, jewellers, and financial institutions to trade the metal and value their inventories. However, like the gold fix, the silver benchmark has been criticised as opaque and old-fashioned and has attracted increased regulatory scrutiny following global probes of alleged manipulation of Libor and foreign exchange indices.
A decision to abandon the London silver fix from August 14 was made after Deutsche Bank failed to find a buyer for its seat on the rate-setting body earlier this year -- leaving only HSBC and Scotiabank involved.
The LBMA, the trade association for London’s $1.6 trillion-a-year silver market, launched a consultation in May to come up with a revised pricing mechanism.
ETF Securities' proposed solution would be based on the company's silver fund, which is backed by physical metal and traded on the London Stock Exchange. Market participants wishing to buy or sell metal would deal using the LSE's electronic auction process, which lasts for five minutes and uses algorithms to calculate closing prices for shares at 4.30 p.m. each day. Transfer of silver bars between the buyers and sellers would occur two days later.
Mr Tuckwell said he was still in talks with the LSE about his proposal, and that he wanted the silver auction to occur at noon, in line with current practice. People familiar with the process said that Thomson Reuters has also expressed interest in offering a silver price.
The process is being closely watched by market participants elsewhere in the precious metals industry. If a new silver benchmark is seen as an improvement, it will add to calls for the 95-year-old gold fix to be scrapped.
The twice-daily gold auction process is run by four banks in London. In May the UK's Financial Conduct Authority fined Barclays, one of the four fixing members, L26 million for poor controls after one of its traders used the auction to push down the gold price in order to avoid paying out on a derivatives contract.
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