Where's the silver lining? Metals market airs concerns over global benchmark process

Regulation. Regulation. Regulation. Once again it is being blamed for the London Bullion Market Association Silver Price -- operated and administrated by CME Group and Thomson/Reuters -- settling around 6% below the spot price January 28. A matter of some contention across the market.

The jury is well and truly out on whether or not it is the fault of the system, or just another headache embedded by over-regulation.

The LBMA Silver Price settled January 28 at $13.58/oz. When the daily auction process kicked off the spot price was $14.42/oz.

Questions were raised about the process across the metals market January 6, after it took 60 attempts to settle.

One trader said January 28 that he would point the finger of blame at over-regulation of the market.

"I would not say it's anything technical -- the auction was functioning as programmed," he said. "I'd say it's definitely to do with regulations and supervision."

He said that an arbitrage as wide as the spot and settlement, with nobody picking up the slack, "suggests all dealers/market makers, or whoever, were not allowed to input non-client-related orders."

A bullion banker agreed.

"People are too scared to change their orders in the middle of the process so it got stuck," the banker said. "In the old days, banks would step in and take positions in order to balance the process. No-one dares do that anymore, as then they have to answer to compliance etc."

In July 2014, following a market consultation, CME/Thomson Reuters was chosen to provide a technology, administration and governance package for the calculation of the London silver price.

Participants include HSBC, JPMorgan Chase Bank, The Bank of Nova Scotia, Toronto Dominion Bank and UBS.

"The system is broken," said one precious metals dealer. "In the old days, if it was out of line, someone would have bought the fix [now known as the LBMA Silver Price] and then sold the futures. It's a joke -- that's all I know."

One trader jumped to CME's defense: "The CME is not at fault here. They don't charge anything for people to trade on it. Market participants merely have to sign up to be a fixing/agreement member. People can amend orders as the fix is progressing. They don't tell people not to buy. Blame the regulators."

The official line from the CME was:

"The LBMA Silver Price is established through a transparent electronic auction mechanism designed to adjust the price until there is equilibrium between buy and sell orders. Given the orders placed in the auction today by five participants, the buy and sell orders became balanced after 29 rounds and the LBMA Silver price was established at a price of $13.58."

However, an email was circulated, allegedly from the CME to clients, and passed to Platts, saying:

"The platform worked as it should, in fact perfectly. It's as good as the orders the participants enter. If you are a client of a 'participant' I guess you should direct this question at them. If you want individual flexibility, become a participant."

A banking source questioned that argument as "nonsensical."

"If you want individual flexibility, become a participant. As their own rules state:

A participant has to be a Full Member (Ordinary or Market Making) of the LBMA. The participant also needs to have a Loco London Clearing account. Applicants to be a Full LBMA Member must demonstrate that they actively trade spot, options or forwards in the London Bullion Market, pass KYC procedures and declare conformance with the Non-Investment Products Code.

How many producers or consumers meet those criteria?"

The blame game, and guessing, continued January 29. Whatever the case, let's hope this issue doesn't continue, as the end-users of the global benchmark could be the ones that feel the real impact at a time when producers are struggling along at best.