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Market debates whether or not precious metals benchmarks are needed

London — Conversation on the evolution of the London Bullion Market Association Silver Price continued this week, with some questioning whether a benchmark is even needed in an age of 24 hour electronic trading.

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One senior bullion source said, "a benchmark is a nice to have, [however] the market could easily live without it. When we get a viable London based futures exchange, the current benchmarks will die."

The London bullion market is currently in a state of reformation, led by regulation, with a possible outcome being moving from over-the-counter to an exchange.

Conversation around the LBMA Silver Price -- operated and administrated through a partnership of CME and Thomson Reuters since 2014 -- was sparked after a couple of incidents this year led participants to question the effectiveness of the electronic auction.

The LBMA, which does not participate in daily operations, declined to comment on the matter.

Both CME and Thomson Reuters declined to comment, pending an investigation into last week's settlement issues.

"We are investigating the trading activity that took place during the Thursday January 28 auction. It would be inappropriate to provide any further comment at this stage," Thomson Reuters said.

On January 28 the benchmark settled 6% below spot.

It's widely believed a statement from Thomson Reuters is due Thursday.

On the subject of the necessity of a benchmark one banker said, "could the silver market operate without a benchmark? No. Could it operate with a different benchmark? Yes."

The main suggestion this week is for the silver price to go centrally cleared, increasing non-bank participation.

Current participants include HSBC, JP Morgan Chase, the Bank of Nova Scotia, Toronto Dominion Bank and UBS.

One senior precious metals trader said he had heard rumors that some of the banks could be considering stepping away from the entire process, on increasing compliance costs and risk to reputation.

No one else in the market had heard that directly, but one bullion banker said, "the math is heavily against being involved."

The market hasn't pointed the finger at CME's platform being at fault, in fact all seem to defend the platform. Blame is widely suggested to be with the regulators overseeing the benchmarks, the Financial Conduct Authority.

The FCA declined to comment on any matters surrounding the LBMA Silver Price.

"Do we really need a benchmark is the question?," said a banker.

Regarding the possibility of CME centrally clearing the silver price, the exchange declined to comment.

However, one source close to the situation said that, "It is possible, but would need to be agreed by participants."

A fund manager said that he believed that is the only logical step forward.

"You don't need to centrally clear the entire London silver market, just the benchmark," he said.

Another source said that the silver market can use Comex settlement as a benchmark, and always has been able to.

"A broken silver fix will become irrelevant. Any clearing will evolve towards where gold clears," he said.

The LBMA owns the intellectual property of the London gold, silver, platinum and palladium prices.

The gold price is operated/administrated by IBA, the benchmark arm of IntercontinentalExchange, platinum and palladium by the London Metal Exchange and silver by a partnership between CME Group/Thomson Reuters.

Both IBA and LME declined to comment on the matter of central clearing of benchmarks.

Platts has previously reported that LME Clear is already set up and approved to clear precious metals. The exchange included precious in its requests for regulatory approvals when it set up the clearing house.

Not all are convinced of the effectiveness of central clearing as a solution.

"Central clearing is a complete red herring as far as fixings are concerned. I cannot recall anyone ever having a problem with a fixing order because it wasn't centrally cleared," said one banking source.

He said that over-the-counter clearing in London is months, if not years, away.

"What needs to happen urgently is official participants have to be given clear regulatory guidance as to how, under IOSCO principles and whatever other strictures apply, they can accept legitimate changes to client orders during the auction process," he said.

--Ben Kilbey,
--Edited by Alisdair Bowles,