CME Eyes London Gold Fixing 

Terry Flanagan

CME Group, the U.S. derivatives exchange, is looking to host the trading platform which provides the global price for gold bullion after it won the bid to launch avenue for the global silver benchmark.

Derek Sammann, global head of commodities and options at CME, said at a media briefing: “Winning the silver benchmark was important as we provided an execution platform for an over-the counter market. We also introduced central clearing which in increasingly important in a credit-constrained world.”

For more than a century the global price for silver bullion had been set in London each day by a small group of banks over the telephone.

Since the financial crisis regulators have fined banks billions of dollars for manipulating benchmarks in other markets, such as interest rates, where prices have also been set by telephone. In the latest penalties, European regulators this week fined JP Morgan, UBS and Credit Suisse a total of €94m for rigging the Swiss franc Libor benchmark interest rate between 2008 and 2009.

In July the London Bullion Market Association, the trade association for the wholesale over-the-counter gold and silver bullion market, announced that CME Group and Thomson Reuters won the bid for an electronic auction to see the silver price that is transparent and provides an audit trail. The exchange developed the trading platform for silver price participants while Thomson Reuters is responsible for administration and governance as the benchmark administrator.

Derek Sammann, CME

Derek Sammann, CME

Harriet Hunnable, executive director of metals products at CME, said at the briefing: “We are investing in futures, options and the over-counter market. London is very important for the OTC market.”

On August 15 CME, LBMA and Thomson Reuters held the first electronic auction to set the silver price.

At noon in London on each trading day the price is set by a series of auction rounds, each lasting 30 seconds, during which participants are required to input buy and sell orders until they are matched by an algorithm to a specified tolerance level. The trades are then centrally cleared and settled through physical delivery two days later.

“We had the resources and worked very hard but I am astounded at what we were able to do in that time,” Hunnable added. “We have a robust platform that is fit for purpose and we were the only company that understood how to construct a new price mechanism.”

The LBMA said in August that it expects the number of price participants to grow as more firms meet the formal requirements to take part in the auction including banks, trading houses, refiners and producers. Sammann said the introduction of a central clearing is critical to get a broader range of participants.

Hunnable said the number of participants had doubled since launch to five with UBS and JP Morgan recently being authorised by the LBMA to join the auction.

“The scale of the gold market is much bigger but we have the only platform that is ready,” she added.

Last month the LBMA and London Gold Market Fixing Limited asked for proposals from third parties to administer the London Gold Fixing. They said in a statement that the winner would be announced this month and implemented by the end of this year.

Ruth Crowell, chief executive of the LBMA, said in a statement: “Having successfully launched the LBMA Silver Price, the market looks forward to the Gold Price RFP. The LBMA acknowledges the uniqueness and importance of the gold market and further consultation will help to ensure market-wide participation and support for the move to third-party administration of the pricing mechanism.”

Feature image via Eefoto/Dollar Photo Club

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