LONDON Two contenders have emerged to run London's silver benchmark - gold benchmark operator Intercontinental Exchange (ICE), which offers a model with clearing, and a flexible auction process proposed by the London Metal Exchange (LME).
The London Bullion Market Association (LBMA), which owns the copyright for the LBMA Silver Price, will discuss the two bids on June 15, three sources with direct knowledge of the matter said. It is due to announce a replacement for current operators CME Group (CME.O) and Thomson Reuters (TRI.TO) this summer.
Sources close to the matter say the race is too close to call between ICE, which operates the LBMA Gold Price benchmark, and the LME, which runs the process for platinum and palladium.
"I can confirm to you absolutely, it's ICE and the LME," one source with direct knowledge of the matter said.
"It was open to anyone who wanted to pitch," another source said. "(Now) it is those two."
The LBMA said in March that CME and Thomson Reuters were stepping down from the role less than three years into a five-year contract, citing a review prompted by upcoming European benchmarking regulation.
The existing silver price benchmark has suffered big swings away from the underlying spot price since its inception, in part due to the seven participating banks' unwillingness to adjust buy or sell orders once the auction has begun for fear of accusations of manipulation.
ICE's solution is for a cleared model similar to the existing gold benchmark, according to two sources with direct knowledge of the matter. As this negates counterparty risk, that would theoretically allow a higher number of participants and greater liquidity.
Though ICE was tipped as the early favourite, concern over an uptick in volatility in the gold benchmark after it introduced clearing to the auction process last month has caused some market participants to question that view.
"If this had been done six months ago it wouldn't have even been a two-horse race. It would have been (ICE) romping home to victory," one source close to the process said.
"But given that the clearing has upset some people with the way it's happened ... people are less convinced about ICE than they were."
The LME proposal is for a classic auction system similar to the one in place for its platinum and palladium benchmarks, two sources said. The exchange would encourage banks to take part more freely by assuming more regulatory risk itself.
The silver benchmark could be a loss leader for the operator, two sources close to the process said, earning far less in revenues than it costs to operate. "Nobody makes money out of running the benchmarks," said one.
Rather, the appeal of taking on the administration of a benchmark lies in the profile it offers within the precious metals market.
ICE charges an annual usage fee for the LBMA Gold Price of between $5,000 and $20,000, depending on the type of institution. It charges $25 a month per user to view the price immediately after it is set.
The LME charges a fee of $15 per auction to view platinum and palladium benchmark prices, and a usage fee of $1,000 a year.
The LME said in May it had pitched to provide the silver benchmark. In response to questions on its bid, it said in a statement to Reuters that it was "keen to build on (its) positive engagement with the precious metals market".
ICE declined to comment on whether it was bidding. The LBMA also had no comment on the bidding process.
The global silver benchmark is used to price contracts between producers, refiners, jewellers and fabricators.
It was the first precious metals benchmark to be overhauled in the wake of the Libor scandal in the currency market that boosted regulatory scrutiny of financial benchmarks, after Deutsche Bank, one of three institutions involved in the telephone auction that set the price, pulled out in 2014.
Along with gold, it became a regulated benchmark under the aegis of Britain's Financial Conduct Authority in 2015, despite being a much smaller and less liquid market than others with regulated benchmarks, such as oil and foreign exchange.
(Additional reporting by Peter Hobson; Editing by Veronica Brown and Dale Hudson)