CME And LME Eye Silver Price Fixing
In April, London Silver Market Fixing Limited announced that it will stop administrating silver prices in August this year. Meanwhile, the prices will continue to be administrated by members of the London Silver Market Fixing Limited – Deutsche Bank (NYSE:DB), HSBC and Bank of Nova Scotia. This news came at a time when a number of U.S.-based investors and traders have filed up to 20 different antitrust claims against Deutsche Bank, HSBC, Barclays (NYSE:BCS), Societe Generale (EPA:GLE) and Bank of Nova Scotia, for collaborating to manipulate gold prices. [1] Subsequently, Deutsche Bank resigned from its seat on London gold fixing after failing to find buyers for the seat. [2] The German bank has also planned to resign from silver price fixing starting May, since it failed to attract a replacement on the silver fix seat. As a result, the London Silver Market Fixing Limited decided disband the three-member institution and Deutsche Bank postponed its resignation to mid-August.
The London Bullion Market Association (LBMA) will conduct a seminar later this month for its members to give feedback on the proposal for changes to the price fixing mechanism. Last week, both the London Metals Exchange (LME) and the CME Group (NASDAQ:CME) made their interest known in silver price fixing. [3] The LBMA is yet to announce which among the two would administer the fix, or if a third-party will be involved.
See our full analysis for CME Group
What To Expect From Metal Derivative Trading
CME has witnessed a 20% decline in average trading volumes of metal derivatives in 2014 (through May), compared to the year ago period. [4] The company announced its intention to start trading aluminum contracts last year, in an attempt to improve trading volumes of metal derivatives, when large aluminum companies including Alcoa (NYSE:AA) and Rusal (HKG:0486) criticized aluminium trading conducted by LME. Earlier this year, a U.K. court ruled against LME, in favor of the Russian aluminium giant Rusal, which aided CME in its plans to start aluminum trading (see CME To Gain From UK Court Ruling Against London Metal Exchange). Going forward, the launch of CME Europe could be crucial for the company’s metal derivatives volumes.
CME management mentioned that the company is looking for a solution to reduce disruptions in the market by providing a transaction-based method to fix the daily spot price of silver. [5] Given that the precious metal fixing has come under increased scrutiny over the last couple of years, especially after the global scandal that involved the rigging of interest rates, a global benchmark should help improve investor confidence on silver trading.
When CME launched physically delivered aluminum contracts last month, it got a lukewarm market response mainly because commodity traders have traditionally been resistant to adopting new metal contracts. [6] The company seeks to change that image as it takes on the Hong Kong Exchanges and Clearing Limited-owned LME, in different metal derivative sub-classes. If the company is chosen to fix and administer silver prices, it could be a huge symbolic victory for CME over the world’s largest trading venue for metals – LME. Moreover, it could have a multiplying effect on metal trading on CME’s platform, even if it doesn’t directly contribute to the trading business. Among all derivative classes, metals generate the highest revenue per contract for CME at more than $1.60 per contract. Metals and agricultural commodities derivatives combined contribute over 18% of our $66 price estimate for CME’s stock. The indirect impact of an increase in metal trading would be an increase in the combined rate per contract (RPC) of metals and agricultural commodities (currently around $1.45 per contract). An aggressive 8-10% gain in the average RPC of agricultural commodities and metals combined with a 5% increase in volumes by the end of our forecast period would translate to a 4-5% upside to our price estimate for CME.
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Notes:- U.S. Lawsuits Hobble Deutsche Bank’s Bid To Sell Gold Fix Seat, Reuters, April 2014 [↩]
- Deutsche Resigns Gold And Silver Price-fix Seats, Financial Times, April 2014 [↩]
- CME, LME Compete To Provide Alternative To London Silver ‘Fix’, Reuters, May 2014 [↩]
- CME Monthly Volumes, CME Investor Relations, June 2014 [↩]
- CME Group, LME Separately Work On Hosting A New Silver Fix, Wall Street Journal, May 2014 [↩]
- CME May Have Tough Time Attracting Interest In Aluminum Contract, Wall Street Journal, May 2014 [↩]