April 30, 2014 / 5:09 AM / in 3 years

RPT-And then there were 2: Deutsche exit renews scrutiny of silver fix

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By Frank Tang

NEW YORK, April 30 (Reuters) - Deutsche Bank's exit from the London precious metal fixes will leave just two banks running a century-old system that sets the global silver price, likely stirring the debate about regulation of one of the most volatile commodity markets.

The bank's decision to resign its seat ends an unsuccessful four-month search for a buyer, as U.S. lawsuits alleging gold price-rigging by the five banks that set the benchmark turned potential suitors cold, sources said.

Scotiabank and HSBC, the only remaining members of the silver pricing committee, will likely face renewed scrutiny of a daily system whose roots go back to the smoky, boisterous coffee houses of 19th-century London.

The modern process, which started in the 1960s, is now run by telephones and is largely similar to the twice-daily gold fix.

"This will lend it to more scrutiny over manipulation," said a senior precious metals trader at a mid-sized bank who has worked on Wall Street for 20 years and uses both fixes.

Squeezing billions of dollars of business through a handful of banks that match off orders to arrive at a benchmark price over the phone is seen by detractors as anachronistic and opaque.

Supporters of the fix say the number of members may be shrinking but that order volume that contributes to setting the final price is still healthy.

On Tuesday, Britain's financial watchdog, the Financial Conduct Authority (FCA), said it could intervene if there are too few participants in commodity benchmarks such as gold and silver.

"If there is a risk of dislocation because people are withdrawing and we think that breaches or is a risk to our objectives, then we would set that as one of our activities but it is not entirely straightforward," head of enforcement and financial crime Tracey McDermott said on Tuesday.

UNDER SCRUTINY

The gold fix, along with other commodity benchmarks, has come under increasing scrutiny by regulators in Europe and the United States since the London Interbank Offered Rate (Libor) manipulation case last year.

The International Organization of Securities Commissions issued guidance in July covering all benchmarks that are central cogs in the global economy, from interest rates to equities and gold.

At least a dozen U.S. private plaintiff lawsuits accuse the five banks in the gold fix committee of manipulating the price of the metal.

Those lawsuits have not targeted the silver fix, which started in 1897, about a quarter of a century before gold, and is broadly similar to the twice-daily gold fix.

At the start of each fixing, the chairman announces an opening price to the other members, which relay that to their customers and, based on orders received from them, instruct their representatives to declare themselves buyers or sellers at that price.

The price is adjusted up and down until demand and supply are matched, at which point the price is "fixed."

Even so, the silver futures market, whose prices have gyrated wildly in recent years, is no stranger to regulatory and legal glare.

In a five-year probe, the U.S. Commodity Futures Trading Commission investigated allegations that some of the world's biggest bullion banks including JPMorgan Chase & Co distorted silver futures prices.

After 7,000 staff hours of investigation, the U.S. commodity regulator found no evidence of wrongdoing and dropped the probe last September.

The banks faced similar accusations in a long-running class action antitrust lawsuit that was dismissed at the end of last month by a federal appeals court.

'GOOD OR BAD, WE HAVE TO USE IT'

Whatever the outcome of the latest scrutiny, some users, including mining companies, which hedge production against the benchmark, may have little choice for now but to rely on it even with just two members.

"Whether it is good or bad or if it is down to two members, we have to use it," said Ounesh Reebye, vice president of metal sales at mining company Silver Wheaton, which is expected to produce 36 million ounces of silver this year. (Additional reporting by Josephine Mason; Editing by Josephine Mason and Steve Orlofsky)

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