Chinese Banks Like Silver

October 14, 2014

Several Chinese banks have expressed interest in participating in the new global price setting mechanism for silver, according to the head of the London Market Bullion Association.

The LBMA ushered in a new era of electronic benchmarking for London’s precious metals market in August when an algorithm was used for the first time to set the benchmark price for silver.

But so far only five participants have signed up to the new process, with JPMorgan Chase joining on Monday. The LBMA Silver Price replaces a closed teleconference run by member banks that was criticised for being opaque and vulnerable to manipulation.

Banks and traders have become wary of committing to financial benchmarks following several alleged rigging scandals. In May, Barclays was fined £26m for attempting to manipulate the London gold fix, which is used to value billions of dollars of derivatives contracts annually.

In an interview Ruth Crowell, chief executive of the LBMA, said several Chinese banks were also interested in joining the Silver Price alongside JPMorgan, HSBC, UBS, Mitsui & Co Precious Metals and the Bank of Nova Scotia.

“It will take some time from a controls perspective for them [Chinese banks] to get where they need to be. But I would imagine they will look to do both gold and silver simultaneously,” said Mrs Crowell. “It will make the London market that much more international.”

The progress of the LBMA Silver Price is being closely scrutinised by market participants and regulators because it is likely to be used as a replacement for London’s century-old gold fix. It should be in operation by the end of the year.

The process to find a new administrator for gold is also being overseen by the LBMA, which has previously focused on accrediting refiners and checking the quality of physical gold.

This has resulted in an increased workload for the association which Mrs Crowell describes as a hybrid of a trade association and a market infrastructure consultant.

In spite of recent benchmark scandals, Mrs Crowell said she was confident London would remain at the centre of physical trading of gold.

The UK capital has dominated physical trade in bullion for hundreds of years but it is now facing competition from Asia where three big financial hubs are planning to launch gold contracts.

“Ultimately you have the experience and perspective here in London, particularly from a physical vaulting perspective, and it would be very difficult to unsettle that,” said Mrs Crowell. “There’s an advantage to having the metal here if you ever want to sell it in times of stress,” she said.

For that reason, many market participants also think London will remain the centre of physical gold trading, even though China is now the biggest producer and consumer of the precious metal.

“For the large institutional investor, London still holds good – I don’t see metal flooding out of London,” said Ross Norma, chief executive of Sharps Pixley, a London-based bullion dealer.

“It’s not a case of Asia winning at London’s expense, it’s a case of enriching the market by giving banks more access to more clients,” he said.


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