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Banks wait on sidelines of new silver benchmark

Section: Daily Dispatches

By Neil Hume
Financial Times, London
Tuesday, August 12, 2014

Build it and they will come. Or that is what participants in London's $1.6 trillion-a-year silver market will be hoping.

There are just three trading days before the new, electronic replacement for the 117-year old silver fix goes live and there is still considerable uncertainty over who will be participating on Friday.

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Since there is no centralised clearing for precious metals markets, the initial users of the new benchmark are expected to be the 11 market-making members of the London Bullion Market Association, which include Credit Suisse, JPMorgan, Goldman Sachs, and UBS.

But so far no one has publicly stepped forward to say they will be involved even though testing of the system has gone without a hitch. The CME Group, whose Comex exchange offers the biggest silver futures contract, is providing the electronic price platform and the algorithm that will be used to set the auction's opening price. Thomson Reuters will take care of the governance and administration.

This is only to be expected, according to people familiar with the situation. In the current regulatory climate anything connected to a benchmark gets stuck in a legal and compliance quagmire. As such, it is entirely possible that the list of participants in the London Silver Price, as the new benchmark will be known, will not emerge until Friday morning.

Just to recap, the fix, which has been criticised as opaque and vulnerable to manipulation, is closing because Deutsche Bank failed to find a buyer for its seat, leaving only two other members -- HSBC and Scotiabank.

Its successor retains some of the main features of the silver fixing, in particular the auction-style process used to calculate the price. But the whole system will be brought into the 21st century.

Still, there are reasons to think there will be an adequate number of banks involved and therefore enough liquidity to set a reference price for the global silver market later this week.

Peer pressure will help. The banks that do sign up -- and several are rumoured to have indicated willingness -- could simply refuse to process orders for those who have not bothered. This could place the laggards in the potentially embarrassing situation of not being able to execute a trade for a large, important client of the bank. A client that might use the institution for other more lucrative investment banking services.

Indeed, there are already rumours in the marketplace that some big silver producers and consumers are preparing to pepper the market with orders.

And if the London Silver Price does prove popular, it is likely the system will be used as a template for fixing gold -- a much bigger market whose benchmark should be operational by the end of the year.

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