Is An LBMA Silver Benchmark Overhaul Coming After Price Discrepancy?

February 8, 2016

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(Kitco News) – In response to a divergence in the London Bullion Market Association’s silver benchmark price to the actual spot price last week, CME Group and Thomson Reuters alongside the independent LBMA Silver Price Oversight Committee have announced that they are working to ensure that this won’t happen again.

In a statement released Thursday, the organizations said that they will “further develop” the benchmark in order to prevent any future inconsistencies or compromise its integrity.

“We are committed to maintaining the integrity of the LBMA Silver Price,” said Neil Stocks, chairman of the Oversight Committee, in the release. “We are introducing enhancements and are consulting on further developments with the many users who rely on this important benchmark.”

The statement was put out following a discrepancy in the auction system late last week, when the benchmark price, which is used by producers and traders to settle silver products and derivatives contracts, was set at $13.58 an ounce, off by 84 cents from the actual silver price on that day. A CME representative told Kitco News at the time that it took up to 29 rounds before a settlement price was reached.

Two “extraordinary” meetings have been held since Jan. 28 in order to address concerns over the benchmark, and one of the main changes includes an intervention protocol that wasn’t there before. Since Jan. 29, the Oversight Committee gave CME and Thomson Reuters the green light to intervene and “suspend an auction if they believe the integrity of the auction or participants is threatened,” the press release said.   

Although no precise date is mentioned, the three organizations intend to present details of new measures – including potentially introducing centralized clearing of all auction trades – to be discussed at the “earliest opportunity.” 

Other potential changes, the statement continued, include: “a blind auction, where only prices and not volumes are disclosed to participants until after the auction has closed; increasing the settlement tolerance where necessary to maintain the integrity of the auction; change the structure for sharing the differential to encourage full participation; and a package of measures to increase participation in the benchmark process and to encourage non-banks’ participation.”
The LBMA Silver Price is calculated daily on a transparent electronic auction platform operated by the CME Group, and Thomson Reuters is responsible for administration. HSBC, JPMorgan Chase Bank, The Bank of Nova Scotia, Toronto Dominion Bank and UBS are the banks involved with the daily silver price fixing mechanism. Media reports released in October suggested that China Construction Bank would also join the benchmark, however, CME refused to comment on the matter.

By Sarah Benali of Kitco News;
Follow me on Twitter @SdBenali

Category: Gold