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On Friday 3 March 2017, in a surprise announcement with implications for the global silver price, the London Bullion Market Association (LBMA) informed its members that the current administrator and calculation agent of its recently launched LBMA Silver Price auction, Thomson Reuters and the CME Group respectively, will be pulling out of providing their services to the problematic London-based silver price benchmark within the near future. Thomson Reuters and the CME Group also issued statements on 3 March identical to that of the LBMA.
The exit is surprising because Thomson Reuters and the CME Group only began administering / calculating the LBMA Silver Price auction two and a half years ago in August 2014, when, amid much hubris, the duo were awarded the silver price contract after a long-drawn-out and high-profile tender process. Notably, the Thomson Reuters / CME contract with the LBMA was for a 5-year term running up to and into 2019. So the duo are now pulling out mid-way through a contract cycle.
More surprisingly, in their statements on 3 March, the LBMA / Thomson Reuters and CME allude to a new European Benchmark Regulation being in some way responsible for the hasty departures. However, given that the units of CME and Thomson Reuters that are parties to the LBMA contract are the benchmark subsidiaries “CME Benchmark Europe Limited” and “Thomson Reuters Benchmark Services Limited”, which specialise in administering and calculating benchmarks, this excuse about a European Benchmark Regulation makes no sense.
In essence, the exit of CME and Thomson Reuters is a major embarrassment for all concerned, and could lead to further reputational damage for the parties involved. It also now re-focuses market scrutiny on an area which the LBMA and its associates could well wish to forget, i.e. the former London Silver Fixing run by the infamous London Silver Market Fixing Limited, a company which itself is still one of the defendants, along with HSBC, Bank of Nova Scotia and Deutsche Bank, in a live New York class action suit that is scrutinizing what plaintiffs describe as manipulation in in the London silver market.
LBMA Silver Price: A Regulated Benchmark
Note that the LBMA Silver Price benchmark is now a “Regulated Benchmark” under United Kingdom HM Treasury Legislation, and is one of 8 financial market benchmarks regulated by the UK’s Financial Conduct Authority (FCA). So this is not some backwater obscure benchmark that we are talking about. This is a benchmark with far-reaching effects on the global precious metals markets and is a sister reference price to the LBMA Gold Price benchmark. The reference prices from these benchmarks are used from everything from valuing Exchange Traded Funds (ETFs) to being the price reference points in ISDA swaps, and bullion bank structured products such as barrier options.
According to the LBMA’s usual public relations mouthpiece Reuters, which relayed the CME - Thonson Reuters news to the broader market on 3 March, the LBMA will be:
“looking to identify a new provider in the summer, and have the new platform up and running in the autumn”
This dramatic “exit stage right” by Thomson Reuters and the CME Group is a far cry from their initial and persistent corporate spin of being "committed" to the silver price auction, which they claimed both at auction launch in August 2014, and also as recently as 2016 when they grovelled with promises of process improvement and wider participation in the auction in the wake of the silver price manipulation fiasco in the LBMA Silver Price auction on 28 January 2016.
It was on 28 January 2016 that the midday silver auction took a whopping 29 rounds to complete and the price derived in the auction was manipulated down by a massive 6% under where silver spot and silver futures prices were trading at that time. See the beginning of BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for further details about the 28 January auction fiasco.
Where is the Commitment?
On 15 August 2014, the day the LBMA Silver Price auction was launched, the CME professed its long-term commitment to the silver markets, with William Knottenbelt, MD at CME Group stating:
“Through our existing relationships with market participants and the broader silver marketplace we are uniquely positioned to provide a seamless transition for the spot silver benchmark in London.”
“CME Group has a long and successful history of offering benchmark risk management and price discovery solutions for the global precious metals markets.”
More recently, on 22 March 2016, when CME and Thomson Reuters introduced changes to the silver auction in the wake of the 28 January 2016 auction price manipulation, both parties released more spin about their continued commitment to the auction. Thomson Reuters’ Head of Benchmark Services, Tobias Sproehnle, in a statement that now looks to be hollow, said:
“these changes together with a comprehensive consultation with the broader silver community - producers, intermediaries and consumers - are a further demonstration of Thomson Reuters and CME Group’s commitment to providing innovative, market leading benchmarks for the Silver market.“
While Gavin Lee, the head of CME Benchmark Services, led with an equally hubristic statement that:
“in consultation with Silver market participants, we are always looking for new ways to develop this benchmark further“
These statements from CME and Thomson Reuters, less than a year ago, run totally contrary to the fact that they are now going to abandon the LBMA Silver Price auction ship, which will necessitate the appointment of a replacement administrator and calculation agent. Where is the continued “commitment” to the silver benchmark that they were we eager to espouse last March?
Even last October 2016, less than 5 months ago, when Morgan Stanley joined as a handful of other bullion banks as the only direct participants in the auction, CME and Thomson Reuters were out in force with a press release espousing their continued commitment to the LBMA Silver Price benchmark,with Head of Benchmarks for Thomson Reuters, Tobias Sproehnle, professing that:
“we continue to welcome new participants to this essential mechanism for the markets"
Why the Hasty Departure?
The Reuters News report last Friday 3 March was short on information about the rationale for the departure :
“A spokesman for Thomson Reuters confirmed the company was stepping down from the process. CME could not immediately be reached for comment.”
Not very informative or cooperative from either party,when one of the providers was not even available to explain its exit rationale, and the other merely confirms a known fact to its in-house news arm.
However, if you look at the CME Group website, a short announcement was added to its website on 3 March 2017, which stated that:
“The forthcoming European Benchmark Regulation, due to be implemented in January 2018, prompted a review of the existing LBMA Silver Price administration arrangements and, in consultation with the LBMA, CME Group and Thomson Reuters have decided to step down from their respective roles in relation to the LBMA Silver Price auction.“
This statement was also added to the Thomson Reuters website on 3 March.
Before briefly looking at the relevance of this “European Benchmark Regulation”, which the Reuters news article even failed to mention, its notable that the CME / Thomson Reuters early withdrawal was also covered on 3 March by the MetalBulletin website.
According to MetalBulletin (subscription site):
“CME is looking to streamline its precious metals division, with contracts in this area being its fastest growing asset. The exchange wants to focus on its core products, Metal Bulletin understands.”
What MetalBulletin means by this I don’t know. The logic doesn’t make any sense, and the sentence doesn’t even make sense. Benchmarks are a core product of CME group. CME even states that it offers:
“the widest range of global benchmark products across all major asset classes”
CME Benchmark Europe Limited was specifically set up in 2014 to provide the calculation platform for the LBMA Silver Price. Furthermore, CME has just launched a suite of silver and gold futures contracts for the London market (launched in late January 2017), the silver contract being the “London Spot Silver Futures (code SSP)“. Even though these CME contracts have had no trading interest so far, the CME claims that it is currently “working with major banks to synchronize their systems to start trading” these contracts (London Spot Silver Futures and London Spot Gold Futures).
So why would CME want to voluntarily ditch the provision of a high-profile London silver benchmark, when it could attain trading synergies between the LBMA Silver Price and its new London silver futures contracts, or at the very least improve brand recognition in the market? And not to forget that CME and Thomson Reuters claim a”commitment to providing innovative, market leading benchmarks for the Silver market“.
News agency Platts, in a story dated 8 March 2017, touches on what are likely the real reasons for the CME / Thomson Reuters departures:
“CME and [Thomson] Reuters opted to give up their respective duties of the price management due to internal differences"
"many have called for the LBMA Silver Price to be centrally cleared to boost participation"
"A producer source recently said steps were being taken by CME to clear the price discovery mechanism centrally before the announcement to step down"
"Sources agreed the main issue was the lack of participation in the number [auction]"
"A senior source agreed 'I don't think anyone would want it [silver price] in its current form. It needs a minimum to be cleared to attract further participation"
The topic of central clearing and wider participation is briefly explained below.
European Benchmark Regulation
Turning to the new “European Benchmark Regulation”, what exactly is it, and why would it be relevant for the LBMA and CME and Thomson Reuters to mention the European benchmark Regulation in the context of them pulling out of the LBMA Silver Price auction?
At its outset, the European Benchmark Regulation was proposed by the European Commission. The Commission’s proposal was also issued in coordination with a range of entities and initiatives such as MiFID, the Market Abuse Directive, the benchmark setting processes of the European Securities and Markets Authority (ESMA) and European Banking Authority (EBA), and also the IOSCO financial benchmark principles.
According to law firm Clifford Chance:
” The new [EU] Regulation is a key part of the EU’s response to the LIBOR scandal and
the allegations of manipulation of foreign exchange and commodity benchmarks“
“The Regulation imposes new requirements on firms that provide, contribute to or use a wide range of interest rate, currency, securities, commodity and other indices and reference prices.”
“Most of the new rules will not apply until 1 January 2018″
“The new Regulation imposes broad ranging and exacting requirements
on a wide range of market participants. It may reinforce the trend to discontinue benchmarks and reference prices“
According to law firm Simmons & Simmons:
The Regulation seeks to:
- improve governance and controls over the benchmark process, in particular to ensure that administrators avoid conflicts of interest, or at least manage them adequately
- improve the quality of input data and methodologies used by benchmark administrators
- ensure that contributors to benchmarks and the data they provide are subject to adequate controls, in particular to avoid conflicts of interest
- protect consumers and investors through greater transparency and adequate rights of redress.
The Regulation aims to address potential issues at each stage of the benchmark process and will apply in respect of:
- the provision of benchmarks
- the contribution of input data to a benchmark, and
- the use of a benchmark within the EU.
All of these goals aspired to by the legislation of the European Benchmark Regulation seem reasonable and would benefit users of the LBMA Silver Price auction, so given the above, it seems very bizarre that CME and Thomson Reuters and the LBMA stated last Friday 3 March that:
“The forthcoming European Benchmark Regulation, due to be implemented in January 2018, prompted a review of the existing LBMA Silver Price administration arrangements…“
Remember that the CME and Thomson Reuters service providers to the LBMA Silver Price are their specialist benchmark units “CME Benchmark Europe Limited” and “Thomson Reuters Benchmark Services Limited”. That is what these units do, administer and calculate benchmarks. That is all that they do. The European Benchmark Regulation has been on the radar of the markets for a few years now, especially on the radars of the benchmark units of CME and Thomson Reuters. The Regulation didn’t suddenly appear out of nowhere last week, as the above statement is appearing to hint at.
The statement from CME, Thomson Reuters and the LBMA was also bereft of any explanation as to what their "review of the existing LBMA Silver Price administration arrangement" found. Why so? Why not share this review with the global silver market instead of keeping it secret. Assuming that is, that there actually was such a review undertaken.
Is this European Benchmark Regulation just an excuse being thrown out to distract from other issues that might really be behind CME and Thomson Reuters stepping down.
Or perhaps CME and Thomson Reuters are aware of issues within the current administration of the LBMA Silver Price that would make it difficult to comply with the new legislation or that would make it too onerous to comply? But such rationale doesn’t make sense either because why are CME and Thomson Reuters not bailing out of the all the benchmarks that they are involved in? Furthermore, if the European Benchmark Regulation is a factor, why would any other benchmark service provider such as ICE Benchmark Administration (IBA) or the London Metal Exchange (LME) bother to take part in the LBMA’s forthcoming tender process to find a replacement for Thomson Reuters and CME?
Perhaps CME and Thomson Reuters are worried about future reputation damage of being associated with the LBMA Silver Price due to some brewing scandal? Or perhaps the powerful bullion banks within the LBMA wanted to scupper any change that there will ever be wider participation or central clearing in any future version of the auction?
I will leave it to readers to do their own research on this and draw their own conclusions.
A Banking Cartel vs. Wider Auction Participation
A major issue that has dogged the LBMA Silver Price auction since launch is that it never gained any level of “wider participation” or market representative participation. There are only 7 bullion banks authorised by the LBMA to be direct participants in the silver auction, and there are zero direct participants from the silver mining, silver refineries, and silver users sectors.
This is despite the LBMA, CME and Thomson Reuters all misleading the global silver market on this issue on many occasions, and claiming that there would be very wide participation in the auction after it was launched. See BullionStar blog “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing” for a huge amount of factual evidence to back up this statement, including webcasts by CME, Thomson Reuters and the LBMA, and an interview by Reuters with LBMA consultant Jonathan Spall, formerly of Barclays. Here are a few examples:
The LBMA’s Ruth Crowell was claiming back in July and August 2014 that they were interested in having at least 111 direct participants:
“clear demand for increased direct participation, and we had 25% of those 444 coming back saying they would be interested, and we’re still interested in having all of those participants on board”
“The advantage with centralised clearing, particularly for the pricing mechanism, is that we can really exponentially grow the amount of direct participants“
Jonathan Spall, LBMA Consultant stated that:
“The hope of course is that we get many more participants in the new benchmark process….while it is likely that we will start by having banks involved it is ultimately hoped that the wider market will participate, be they refiners, miners etc.“
“Ultimately – and as I said before – the intention is that there is much wider participation. So yes, refiners, miners etc.“
Harriett Hunnable, then of the CME Group, stated:
“So this is really the new world, this is not the old fixing…..this is wider participation…and the London bullion market is really encouraging that…this is the new world, or the LBMA Silver Price!”.
According to the CME / LBMA / Thomson Reuters presentations, there was supposed to be a “phase 3 introduction of centralised clearing”
“Central counterparty clearing will enable greater direct participation in the London Silver Price“
In summary, central clearing would allow direct participants to participate directly in the auction without the need for bi-lateral credit lines. Currently, only large banks that can set up bi-lateral credit lines with each other can even begin to think of being direct participants. However, after the initial spin in July and August 2014 prior to the benchmark being launched, the plan for central clearing was quietly dropped by the LBMA / CM and Thomson Reuters.
The CME and Thomson Reuters have now had 32 months in which to introduce central clearing into the silver auction and it hasn’t happened. Nor will it now. The fact of the matter is that the LBMA banks do not want wider participation and they don’t want central clearing of auction trades either. These banks, which at the end of the day are just costly intermediaries, essentially want to monopolise the silver auction and prevent wider participation, and prevent true silver price discovery. Could it be the banks through their LBMA front that have sabotaged the contract with CME and Thomson Reuters so as to reset the contract and re-start another tender process (choosing ICE or LME) that will ensure that no wider participation can ever see the light of day?
It’s also important to note that there is no way for miners and refiners to be direct participants in the silver auction. This is because the LBMA has designed the auction participant rules to keep out refiners and miners (and anyone else that is not a bullion bank). The rules are specifically designed so that only bullion banks can satisfy the LBMA’s Benchmark Participant criteria. See section 3.13 of the LBMA Silver Price auction methodology document accessible here.
Currently only 7 bullion banks are direct participants in the auction, namely HSBC, JPMorgan Chase, Bank of Nova Scotia (ScotiaMocatta), Toronto Dominion, UBS, Morgan Stanley, and China Construction Bank. Most of these banks are very influential on the LBMA Management Committee. HSBC, Scotia and Mitsui were in the auction from Day 1 on 15 August 2014. UBS joined the auction on 26 September 2014, JP Morgan Chase Bank joined on 14 October 2014, Toronto Dominion Bank joined on 6 November 2014. Mitsui left in either late 2015 or January 2016 (the exact date is unclear). China Construction Bank only joined the auction on 6 May 2016.
As mentioned above, Morgan Stanley only joined the LBMA Silver Price auction on 25 October 2016 (which is just 4 months ago), at which point the LBMA / CME and Thomson Reuters had the audacity to spin that 7 LBMA bullion banks trading in a shadowy auction of unallocated silver accounts in London somehow represents the global silver market:
CME: “The addition of another member brings greater depth and diversity to the market and underlines the ongoing globalisation of the Silver Price as a leading, liquid precious metals benchmark.”
Thomson Reuters: “With the addition of Morgan Stanley to the panel, the LBMA Silver Price provides even deeper insight into the global silver market. We continue to welcome new participants to this essential mechanism for the markets.”
LBMA: “They [Morgan Stanley] add depth and liquidity to the auction and I look forward to other market participants joining in the future.”
LBMA Silver Price is NOT Representative of Silver Market
But, to reiterate (and as was stated previously in this blog), the LBMA Silver Price auction is not representative of the global Silver Market whatsoever, and it does not meet some of the simplest IOSCO benchmark requirements:
“IOSCO benchmark principles state that a benchmark should be a reliable representation of interest, i.e. that it should be representative of the market it is trying to measure. Interest is measured on metrics such as market concentration. In the Thomson Reuters methodology document (linked above), on page 11 under benchmark design principles, the authors estimate that there are 500-1000 active trading entities in the global silver market.”
The Thomson Reuters methodology document from August 2014 also admitted that “volumes in the LBMA Silver Price are a fraction of the daily volume traded in the silver futures and OTC markets”.
Why then are 7 LBMA bullion banks allowed to monopolize the representation of 500 – 1000 active trading entities from the global silver market within the auction, an auction that its worth remembering generates a silver reference price which is used as a global silver price reference and pricing source?
Refiners and Miners
Based on the current LBMA Silver Price auction rules, the vast majority of the world’s silver refiners cannot directly take part in the silver auction since only Full Members of the LBMA can even think of becoking a direct participant.
However, only 8 precious metals refiners are even Full Members of the LBMA, while there are another 25 refiners that are Associates of the LBMA. Of the 8 full members, 5 of these refiners are on the LBMA refiner Referee panel, namely, Argor-heraeus, Metalor and PAMP from Switzerland, Rand Refinery from South Africa, and Tanaka Kikinzoki Kogyo from Japan. These refiners were added to the panel as LBMA Associates in 2003, and were only made Full Members in 2012. The only reason they happened to be fast-tracked as Full Members of the LBMA was due to their status as Referees for the LBMA good delivery list. Even the other major Swiss based refinery Valcambi is still not a Full Member of the LBMA.
Based on the current participant criteria of the Silver auction, where only full LBMA members could conceivably become direct participants, 25 of the refiners that are LBMA Associates cannot directly take part in the auction even if they wanted to. Candidates for Full LBMA Membership also have to jump through a number of hoops based on sponsorship by existing members, business relationships, due diligence, and involvement in the precious metals markets.
For a refiner to even become a LBMA 'Associate', the refinery must have already attained Good Delivery Status for its silver or gold bars. There are about 80 refineries on the LBMA’s current Good Delivery List for silver, most of which are not even Associates of the LBMA The chance of the vast majority of these refiners taking part in the LBMA silver auction is nil since not only are they not LBMA Full Members, they are not even LBMA Associates.
Based on the current auction criteria, it’s without doubt literally impossible for nearly all silver producers / silver miners on the planet to directly participate in the LBMA Silver Price auction. Precious metal mining companies are not normally officially connected to the LBMA, and would more naturally be members of the Silver Institute or World Gold Council or another mining sector organization. Mining companies cannot be silver auction participants since there are no mining companies that are Full Members of the LBMA. The only mining companies that are even “Associates” of the LBMA are Anglogold Ashanti and Coeur Mining.
In 2014, Coeur Mining’s treasurer, referring to the LBMA Silver auction said:
“We hope to have the opportunity to become a direct participant down the road and look forward to working with the LBMA, CME and other silver producers to drive the evolution of this market.”
The unfortunate Coeur Mining now looks like it has been strung along by the LBMA with empty promises that it can somehow someday participate in the silver auction, but this is literally a fiction given the way the auction rules are currently set up.
Conclusion
In its announcement on 3 March, the LBMA said that it will shortly launch a tender process to appoint a replacement provider. The LBMA told Reuters News:
“We would be looking to identify a new provider in the summer, and have the new platform up and running in the autumn”
However, given the abysmal track record of the LBMA Silver Price, the question that should really be asked at this time is why the bullion bank controlled LBMA is even allowed to be in charge of such an important “Regulated Benchmark” as a global silver price benchmark, a benchmark that has far-reaching effects on global buyers and sellers of the physical metal silver.
Take a brief look back at how the last tender process run by the LBMA for the London silver price was handled.
A Silver Price Seminar held by the LBMA on 19 June 2014 was not even open to the wider bullion market. As Ruth Crowell, CEO of the LBMA, told the publication MetalBulletin in an October 2014 interview:
“Not just our members, but ISDA members, and any legitimate members of the market were invited to the seminar. We also had observers from the FCA and the Bank of England. We wanted to keep [attendance] as wide-ranging as possible but to avoid anyone who perhaps would be disruptive“
What is this supposed to mean? To prevent anyone attending the seminar who might have a different view on how the global silver price benchmark should be operated that doesn’t align with the view of the LBMA?
The actual process of selecting the winning bid from the shortlist of tender applicants was only open to LBMA Full members and Seminar attendees via a 2nd round voting process. The independent consultant review that was part of the selection process, was conducted by someone, Jonathan Spall, who was not independent of the former fixings and so should not have been involved in the process.
Promises of wider participation involving refiners and miners were abandoned by the CME, Thomson Reuters and the LBMA. Promises of central clearing of auction traded were thrown out the window by these same people. Prior to launch, the auction platform was hastily built by Thomson Reuters and CME without an adequate market-wide solution for clearing silver trades. Another of the bidders, Autilla/LME, had a working auction solution which would have allowed wider market participation at August 15 2014 go-live, but this solution was rejected by the LBMA Management Committee, LBMA Market Makers and the LBMA Data Working Group at a closed meeting in July 2014 These groups had the ultimate say in which applicant won the tender.
There were only 3 participants in the LBMA Silver Price auction (all of them banks) when it was launched in August 2014, and two of which, HSBC and Scotia, were parties to the former London Silver Fixing. The LBMA Silver Price auction was therefore an example of same old wine in a new bottle. The same 2 banks, HSBC and Scotia are now defendants in a silver price manipulation class action suit in New York. There are now only 7 direct participants in the LBMA Silver Price. These are all bullion banks. Ludicrously, this is 32 months after the auction has been launched. The LBMA accreditation process specifically prevents refiners and miners from joining the auction. Since there are 500 – 1000 trading entities of silver globally, even a village idiot could see that the LBMA Silver Price mechanism is totally unrepresentative of the global silver market and that it cannot faciliate proper silver price discovery.
The defection of CME and Thomson Reuters now provides a one-off opportunity for the global silver market to insist that the current scandal ridden current auction be scrapped and taken out of the hands of the bullion bank controlled London Bullion Market Association (LBMA). It is also an opportunity to introduce a proper silver price auction in its place that is structured to allow direct participation by hundreds of silver trading entities such as the world’s silver refiners and miners, an auction that employs central clearing to allow this wider participation, and an auction that is based on trading real physical silver and not the paper credits representing unallocated claims that the participating London bullion banks shunt around between themselves each day. This could help lead to real silver price discovery in the global silver market. However, the chances of this happening with the LBMA still involved in the new tender process are nil, and either the London Metals Exchange (LME) or ICE Benchmark Administation (IBA) will probably ride to the rescue of the LBMA bulion banks in the not too distant future and pick up the pieces from CME / Thomson Reuters.
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