THOMSON REUTERS
Commodities Benchmark Methodologies
LBMA SILVER PRICE
Date: 15 August 2014
THOMSON REUTERS
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CONTENTS
1 - Introduction 4
2 - Methodology 5
3 - Methodology Process 6
4 - Conformance with IOSCO Principles for Financial Benchmarks 11
5 - Glossary of Defined Terms & Acronyms 15
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1 - Introduction
1.1 Overview
The LBMA Silver Price is a benchmark price for spot Silver transactions that are made on a “Loco London” basis.
1.2 Purpose of Document
This document specifies the Methodology established by Thomson Reuters as the Administrator of the LBMA Silver Price.
The Methodology has been developed in accordance with the Thomson Reuters Commodities Benchmark Design & Methodologies policy in consideration of the recommendations of the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks1 and the IOSCO Principles for Oil Reporting Agencies (PRA)2.
1.3 Document Ownership & Approval
The LBMA Silver Price Methodology is owned and approved by the Head of Thomson Reuters Benchmark Commodities business.
1.4 Document Publication
The LBMA Silver Price Methodology will be Published through a Thomson Reuters portal or Made Available to Stakeholders upon request.
1.5 Document Review
The LBMA Silver Price Methodology will be subject to a review by the Administrator at least annually.
1
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf 2
2 - Methodology
The LBMA Silver Price is calculated using a daily auction. In each auction round participants submit bid and offer volumes against a suggested price for the round. If aggregate bids match aggregate offers within a set tolerance the auction will end. If aggregate bids do not match aggregate offers within the set tolerance there will be a subsequent round in with an adjusted price (up if there are more bids than offers, down if more offers than bids). The Benchmark price for the day will be the price in the final round of the auction.
The bids and offers in the final round will be transacted and settled between participants, with any mismatch of aggregate bids and offers shared between the participants.
The auction platform, CME Direct, is provided and operated by CME Benchmark Europe Ltd.
A participant’s input into the auction rounds are the aggregate of the participant’s own orders and those of the participant’s clients.
Participation in the auction is open to all silver market participants who meet the following conditions: a) meet the Benchmark Participant criteria set out by the LBMA;
b) meet the Participation criteria set out by Thomson Reuters as the Administrator; and
c) meet the requirements set by CME Benchmark Europe Ltd to use the technology platform and participate in the auction market place.
The market participants are accredited by the LBMA; access to the auction platform is approved by CME Benchmark Europe Ltd.
2.1 Rationale for methodology
The LBMA Silver Price has been developed in response to the consultation process run by the London Bullion Market Association in May/June 2014 to create a replacement for the “Silver Fix” – the price benchmark historically produced by London Silver Market Fixing Ltd. The consultation received 440 responses from a diverse set of silver market participants and was supplemented by discussion with market, regulatory and industry bodies including the Financial Conduct Authority, Bank of England and ISDA.
The consensus from the consultation was to retain the auction element of the historic “Silver Fix” but to improve transparency, distribution, audit and market confidence by moving to a transaction based price calculated via an electronic platform.
Thomson Reuters and CME Benchmark Europe Ltd, with the support of LBMA and market participants, will continue to review and enhance the methodology over time to increase further the robustness of the Benchmark. Potential actions include initiatives to increase direct participation in the auction, thereby increasing the number of participants, and to introduce clearing of the auction transactions.
3 - Methodology Process
3.1 Overview
The LBMA Silver Price is determined using a daily equilibrium auction that is conducted over any number of rounds within market hours.
3.2 Timing and frequency
Daily: 12:00:00 London time, excluding weekends and UK bank holidays
3.3 Auction procedures and Order Submission
I. Prior to the first round of the auction, the auction platform displays a notification pop up to all participants logged in, indicating that the first round of the auction starts at 12:00:00. The notification phase lasts for 60 seconds. The initial auction price is not displayed to participants during the notification phase.
II. The starting price in USD for the initial round is displayed at 12:00:00 and the auction proceeds as follows: 1) During each auction round each participant is able to place one firm order on either the buy or sell side by entering the quantity they would like to execute. Only one participant per registered entity should enter an order in the auction round.
2) Quantity will be entered into the auction platform in units of Lakhs, where 1 Lakh is 100,000 ounces.
3) Quantity can be entered in increments of 0.25 Lakhs, and will always be displayed with two decimal places.
4) Once an order has been placed it will have a timestamp for the time that the order was placed, and this is displayed on the auction platform audit log for the participant to view. The auction platform uses this timestamp for matching prioritisation, detailed in a following section.
5) Once a participant has placed an order within the auction round they are able to amend the quantity placed, the side they placed the order, or remove their order, until the end of the round. All orders entered are considered firm.
III. When an order has been amended to increase the quantity, the amended order will have an update timestamp that reflects the time it was updated. If an order is amended to decrease the quantity, the original timestamp will remain for this order. The auction platform will use this timestamp for matching prioritization, detailed in a following section.
IV. The auction platform will ensure that an order entered by a participant will not result in that participant exceeding their pre-set credit limit by preventing the order from being submitted and displaying an error message.
V. A participant can place an order in one round and refrain from placing an order in subsequent rounds or vice versa.
VI. However as soon as an order is placed, the participant will become eligible to share the imbalance if the auction closes with an imbalance.
a) View the total buy and total sell quantity entered, that being the sum of all buy orders entered by all participants and the sum of all sell orders entered by all participants. These values are updated in real-time as orders are placed, amended and cancelled by participants.
b) View individual orders entered by participants on an audit log to the extent that they can see the bid/offer side of the order and the quantity, but not see the registered entity/participant name that entered the order. All orders are anonymous to other users.
VIII. In exceptional circumstances, during an auction round, a CME Benchmark Europe Ltd auction platform operator is able to cancel orders on behalf of a participant following verification with the CME Benchmark Europe Ltd Auctions Market Team.
IX. A participant can log into the auction platform after the auction has begun, however they are only able to view auction audit log information from the point after they have logged in.
3.4 End of Round Comparison
At the end of each round the auction platform compares the total buy and total sell quantity entered within the round, with a tolerance value of 3 Lakhs, to determine if the auction is balanced or not:
If the difference between the total buy and sell quantity is less than or equal to the tolerance value, the auction platform determines that the auction is balanced, closes the auction and establishes the LBMA Silver Price
If the difference between the total buy and sell quantity is greater than the tolerance value, the auction platform determines that the auction is not balanced, automatically cancels orders entered in the auction round by all participants, calculates a new price, and starts a new round with the new price.
The auction platform continues to start new rounds until the auction is balanced.
If no buy and sell orders have been entered by any participant in the auction round, the auction platform determines the market balanced.
If orders have only been entered on one side (bid or offer) such that the total volume is less than or equal to the tolerance, the auction platform determines the market balanced.
The Auction platform will process the end of round comparison instantaneously such that either a new round will begin straight away or the auction will be closed as it is balanced.
3.5 Establishing the LBMA Silver Price
Once the auction is balanced, the auction platform closes the auction and uses the auction round price as the LBMA Silver Price.
The auction platform displays the LBMA Silver Price with the time the auction closed.
If a participant logs in to the auction platform after an auction has closed they are only able to see the LBMA Silver Price that was established in the auction; they are not able to see audit log information.
3.6 Technology
Participants must obtain a user-specific login ID from CME Benchmark Europe Ltd. This SMART Click ID is required to access the CME Direct Auction platform by following these steps:
i. Go to the Smart Click ID Registration form - https://login.cmegroup.com/sso/register/
ii. Complete the CME Benchmark Europe Ltd Silver User Registration Form (including Smart Click ID) and email the completed form to [email protected]
iii. Upon receipt and validation CME Benchmark Europe Ltd will configure the system with your details and will email you to confirm your login is active once all other
iv. The CME Direct Auction application requires Microsoft .NET Framework 3.5 Service Pack 1 v. The CME Direct Auction Platform can be downloaded using these URLs:
TEST https://cmedirectauctionnr.cmegroup.com/ LIVE https://cmedirectauction.cmegroup.com/
Participants must have signed the CME Benchmark Europe Ltd participation agreement in order to be granted access to the live platform.
Participants will be able to access the auction platform from 08:00:00-17:00:00 (UK time) every week day except for UK Bank Holidays.
3.7 Starting Price
The auction platform operator (CME Benchmark Europe Ltd) is responsible for operating the LBMA Silver Price auction, including entering the initial auction price.
The initial auction price value is determined by the auction platform operator by comparing multiple Market Data sources prior to the auction opening to form a consensus price based on the individual sources of Market Data. The auction platform operator enters the initial auction price before the first round of the auction begins. The auction platform displays the initial auction price to all logged in auction participants in the first round in USD/ounce displayed to three decimal places.
In exceptional circumstances, if the auction platform operator due to a failure in the 12:00:00 auction starts a second LBMA Silver Price Auction, the same procedure as outlined above is used for the second auction’s initial auction price.
3.8 Manual Price Override
In exceptional circumstances, CME Benchmark Europe Ltd can overrule the automated new price of the next auction round in cases when more significant or finer changes are required.
When doing so, the auction platform operator will refer to a composition of live Market Data sources while the auction is in progress. In addition the auction platform operator is able distribute a pre-formatted message to participants via the auction platform.
The auction platform will only use the manually entered overrule price for the next auction round if:
at the end of the current round, the auction is not balanced (in which case the LBMA Silver Price is established), or
there are no orders entered on both the buy and sell side.
3.9 Matching/Fill Rules
The auction platform automatically matches orders submitted in the last round before the auction is balanced such that each participant’s order is always fully matched/filled.
The auction platform matches submitted orders using time priority until the unfilled quantity on one side is exhausted, which could result in multiple matches against different counterparties for each order entered by a participant.
A trade report is created for each match and the trade counterparty that a participant has been matched with will be revealed to that participant only. The traded price will be equal to the LBMA Silver Price +0.005 (USD/ounce).
3.10 Information distribution during the auction
Participants in the auction (i.e. on the CME Direct auction platform) are able to view the anonymised bid volumes and offer volumes of all auction participants in real-time.
Thomson Reuters simultaneously distributes the details of auction rounds – both the price set for the round and anonymised volume data, which may be accessed in real-time by anybody permissioned via Thomson Reuters systems or through a 3rd party re-distributor.
3.11 Information distribution after the auction
Thomson Reuters stores and makes available for distribution the price and volume data for all auction rounds.
3.12 Allocation of the difference
When the auction platform establishes the LBMA Silver Price with an imbalance, all participants who have placed orders in any round of the auction process will make up the imbalance (shared) by executing against the participant orders causing the imbalance.
This imbalance amount is also referred to as the discretion amount, and will have a maximum amount equal to the tolerance value.
3.13 Benchmark Participant criteria
A participant has to be a Full Member (Ordinary or Market Making) of the LBMA. The participant also needs to have a Loco London Clearing account. Applicants to be a Full LBMA Member must demonstrate that they actively trade spot, options or forwards in the London Bullion Market, pass KYC procedures and declare conformance with the Non-Investment Products Code. Applications are subject to review and ultimate approval by LBMA.
The participant has to accept and implement the Thomson Reuters LBMA Silver Price Participant Code of Conduct. Participation is additionally subject to the requirements set by CME Benchmark Europe Ltd for use of the
technology platform and for participation in the auction (e.g., in respect of credit arrangements).
3.14 Accreditation of Participants
Participants will be accredited by the LBMA based on the Benchmark Participant Criteria. Accredited Price Participants will be listed separately on the LBMA website. In order to ensure wider and integral participation, the LBMA will work with the CME Benchmark Europe Ltd and Thomson Reuters to enhance Benchmark Participation Criteria.
Thomson Reuters is ultimately responsible for monitoring and ensuring participant conformance with the LBMA Silver Price Participant Code of Conduct.
3.15 Technology failure / Disaster recovery process
CME Benchmark Europe Ltd is committed to the protection of the market participants, its employees and stakeholders and has a long history of successfully managing risk. In keeping with those traditions, CME
Benchmark Europe Ltd has a comprehensive business continuity management program in place. CME Benchmark Europe Ltd operates a two data centre model where all production systems reside in the primary data centre and all DR systems reside in the secondary data centre. A catastrophic production data centre failure would cause CME Benchmark Europe Ltd to switch to the DR data centre, however CME Benchmark Europe Ltd has a robust production environment with multiple layers of redundancy to provide protection against smaller interruptions. Participants will be able to contact the CME Benchmark Europe Ltd Auction Markets team using the below contact details: +44 20 3379 3999 (dedicated CME Benchmark Europe Ltd Auction Markets team number),
Phone lines will be monitored during London hours of 08:00:00-17:00:00. For off-hour inquiries, please email [email protected].
3.16 Surveillance procedures
CME Benchmark Europe Ltd, as operator of the Auction Platform/Calculation Agent, will establish and administer the platform rules and will operate each auction. Additionally, CME Benchmark Europe Ltd will conduct limited monitoring of live auction activity for suspicious bids, offers, or trades. CME Benchmark Europe Ltd may address suspicious activity under its authority to administer the platform rules but when suspicious activity is identified, it will also refer the activity to Thomson Reuters Benchmark Services Ltd immediately in accordance with its
4 - Conformance with IOSCO Principles for Financial Benchmarks
4.1 IOSCO Principles
Financial Benchmark design and methodology principles have been developed in consideration of principles 6-15 of the IOSCO Principles for Financial Benchmarks. These principles underpin the Design and Methodologies for the Commodities Benchmarks to which IOSCO principles for Financial Benchmarks apply.
4.2 Financial Benchmarks Design Principles
Reliable representation of the interest: i. Adequacy of the sample:
No sampling - the auction price is determined on bid and offer volumes from all participants in the process.
ii. Size and liquidity of the market:
Trading pool underlying the auction is substantial, representative and liquid. iii. Relative size of the underlying market in relation to the volume of trading
Volumes in the LBMA Silver Price auction are a fraction of the daily volume traded in the silver futures and OTC markets.
iv. Market concentration
Estimated ~500-1000 active trading entities; an estimated 5 market markets at launch date rising to approximately 15 spot market makers in the auction.
v. Market dynamics
“Loco London” trading accounts for ~90% of global spot transactions. Futures volumes (in Oz) are 6x spot traded ~2/3 on SHFE and ~1/3 on Comex (CME Group). Comex and Shanghai typically have peak trading volumes during and around the Silver Fix – the predecessor to the LBMA Silver Price.
Procedure in case of market stress
The CME Benchmark Europe Ltd Auction Market Team may determine whether an emergency exists and whether emergency action is warranted. Events and/or conditions which may constitute emergencies could include attempted or threatened disorderly behaviour, government or regulatory action, actual or
threatened participant insolvency risks, force majeure, or any additional market risks. If an emergency is determined to exist, the auction platform may take actions including suspension of the market, suspension of a participant, or any other action required to address the emergency. These are laid out in more detail in the CME Benchmark Europe Ltd Auction Platform Rules.
Procedures for dealing with error reports
Participants may report errors to the CME Benchmark Europe Ltd Auction Markets team, as noted above. Trades resulting from the auction process are bilaterally settled, and may require direct counter-party discussions to resolve.
Potential limitations of the Benchmark
The main methodological limitation is the presentation of a limited number of net orders to the auction. The roll-up of gross client and “house” requirements to net auction orders means those order represent the net position of a large and liquid market but for transparency and audit purposes it is desirable to increase direct participation and move to gross orders when feasible. Reliance is placed upon the Participant Code
of Conduct for governance and control around potential manipulation with the “roll-up” of client and house orders by auction participants.
4.3 Data Sufficiency
Auction price is determined on all bid and offer volumes in the auction.
4.4 Conformance with the hierarchy of Data Input Guidelines
Data is the best available (2/7) vs. IOSCO hierarchy of data inputs ( “Participants own concluded Arms-length Transactions in the underlying Interest or related markets).
It may be possible than future development of the auction process - with enhanced participation and post-trade process - enables the benchmark to move to IOSCO-preferred (“Regulated Market or Exchange data that has mandatory post-trade transparency requirements”).
4.5 Exercise of Expert Judgement
No expert judgement will be levied – auction-based methodology.
4.6 Transparency of Determination
Prices are published on Thomson Reuters systems, through 3rd party data vendors and on the LBMA website. Methodology document is published.
4.7 Periodic Review
i. Review of the conditions in the underlying Interest - to be performed annually
ii. Review to identify if the Interest has diminished or is non-functioning - to be performed annually iii. Publication of summary of Benchmark reviews where revisions have been made
iv. Any changes to methodology will be published along with the summary of any underlying review findings.
4.8 Methodology Documentation
i. Publication of Methodology
The LBMA Silver Price Methodology will be Published through a Thomson Reuters portal or made available to Stakeholders upon request.
ii. Completeness of documentation
This document has been written in accordance with the Thomson Reuters Commodities Benchmark Design & Methodologies policy.
4.9 Financial Benchmark Methodology Change Principles
Publication of proposed material change in Methodology
Material changes will be notified through a Thomson Reuters Data Notification “DN” to subscribers of the benchmark. A revised methodology document will be published.
Ensuring consistency of Benchmark integrity
The Administrator will ensure that Financial Benchmark material change procedures are consistent with the overriding objective to ensure the continued of the integrity of Benchmark determinations. When changes are proposed, the Administrator will specify exactly what these changes entail and when they are intended to apply.
Procedure and frequency of internal review and approval of the methodology
The Administration Manager will at least annually conduct a review of the methodology including commissioning such reports or expert inputs as are deemed necessary to support the review. A review summary will be made available to the External Oversight Committee.
Scrutiny of methodology changes
Methodology changes will be presented for review by the External Oversight Committee prior to being adopted.
The Administrator will consult with stakeholders in relation to materials methodology changes. This consultation will be, in the first instance, with the External Oversight Committee, and through the LBMA.
4.10 Benchmark Cessation
Publication of Benchmark cessation policies and procedures
The Administrator will publish or make Available clear written Financial Benchmark cessation policies and procedures to Stakeholders, addressing the need for the possible cessation of a Benchmark, due to market structure change, product definition change, or any other condition that adversely impacts the Financial Benchmark that makes it no longer representative of its intended interest.
Proportionate cessation policies and procedures
The Financial Benchmark cessation policies and procedures will be proportionate to the estimated breadth and depth of contracts and financial instruments that reference a Benchmark and the economic and financial stability impact that might result from the cessation of the Benchmark.
Consultation of Stakeholders and relevant Regulatory and National Authorities
The Administrator will take into account the views of Stakeholders and any relevant Regulatory and National Authorities in determining what policies and procedures are appropriate for a particular Benchmark.
Encouragement of Subscribers and Stakeholders to have cessation plans and provisions
The Administrator will encourage Subscribers and other Stakeholders who have financial instruments that reference a Benchmark to take steps to make sure that:
i. Contracts or other financial instruments that reference a Benchmark, have robust fall-back provisions in the event of material changes to, or cessation of, the referenced Benchmark; and ii. Stakeholders are aware of the possibility that various factors, including external factors beyond the
control of the Administrator, might necessitate material changes to a Benchmark.
Considerations for cessation policies and procedures
The Administrator will consider including the following factors in the written Financial Benchmark cessation policies and procedures if determined to be reasonable and appropriate:
Criteria to guide the selection of a credible, alternative Benchmark such as, but not limited to, criteria that seek to match to the extent practicable the existing Benchmark’s characteristics (e.g., credit quality, maturities and liquidity of the alternative market), differentials between Benchmarks, the extent to which an alternative Benchmark meets the asset/liability needs of Stakeholders, whether the revised Benchmark is investable, the availability of transparent transaction data, the impact on Stakeholders and impact of existing legislation;
i.
The practicality of maintaining parallel Benchmarks (e.g., where feasible, maintain the existing Benchmark for a defined period of time to permit existing contracts and financial instruments to mature and publish a new Benchmark) in order to accommodate an orderly transition to a new Benchmark;ii.
The procedures that the Administrator would follow in the event that a suitable alternative cannot be identified;iii.
In the case of a Benchmark or a tenor of a Benchmark that will be discontinued completely, the policy defining the period of time in which the Benchmark will continue to be produced in order to permit existing contracts to migrate to an alternative Benchmark if necessary; andiv.
The process by which the Administrator will engage Stakeholders and relevant Market and National Authorities, as appropriate, in the process for selecting and moving towards an alternative Benchmark, including the timeframe for any such action commensurate with the tenors of the financial instruments referencing the Benchmarks and the adequacy of notice that will be provided to Stakeholders.4.11 Benchmark Participant Codes of Conduct
All participants are required to adopt the LBMA Silver Price Participant Code of Conduct.
Internal Controls over Financial Benchmark Data Collection Principles
The Administrator will ensure that there are appropriate internal controls over its data collection and transmission processes where data is collected from any external source.
This applies to both inputs to the CME Benchmark Europe Ltd auction platform and the transmission of the data from CME Benchmark Europe Ltd to Thomson Reuters via the feed. The former should be covered by the Thomson Reuters Participant Code of Conduct together with the CME Benchmark Europe Ltd
Participation Agreement. The latter will be covered in the OSG between Thomson Reuters and CME Benchmark Europe Ltd.
5 - Glossary of Defined Terms & Acronyms
Capitalised terms used in this document are defined in the following table, some definitions sourced from IOSCO Principles for Financial Benchmarks3 and IOSCO Principles for Price Reporting Agencies (PRA)4.
Glossary of Defined Terms & Acronyms
Term Definition
Administration Includes all stages and processes involved in the production and dissemination of a Benchmark, including: a) Collecting, analysing and/or processing information or expressions of opinion for the purposes of the determination of a Benchmark;
b) Determining a Benchmark through the application of a formula or another method of calculating the information or expressions of opinions provided for that purpose; and
c) Dissemination to users, including any review, adjustment and modification to this process.
Administrator An organisation or legal person that controls the creation and operation of the Benchmark Administration process, whether or not it owns the intellectual property relating to the Benchmark. In particular, it has responsibility for all stages of the Benchmark Administration process, including:
a) The calculation of the Benchmark;
b) Determining and applying the Benchmark Methodology; and c) Disseminating the Benchmark.
Benchmark Prices, estimates, rates, indices or values that are:
a) Made available to users, whether free of charge or for payment;
b) Calculated periodically, entirely or partially by the application of a formula or another method of calculation to, or an assessment of, the value of one or more underlying Interests;
c) Used for reference for purposes that include one or more of the following:
• determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments;
• determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument; and/or
• measuring the performance of a financial instrument.
For the purposes of this document, Benchmarks can also include oil price or other commodity derivative Assessments.
Calculation Agent A legal entity with delegated responsibility for determining a Benchmark through the application of a formula or other method of calculating the information or expressions of opinions provided for that purpose, in accordance with the Methodology set out by the Administrator.
Expert Judgment Refers to the exercise of discretion by an Administrator or Submitter with respect to the use of data in determining a Benchmark. Expert Judgment includes extrapolating values from prior or related transactions, adjusting values for factors that might influence the quality of data such as market events or impairment of a buyer or seller’s credit quality, or weighting firm bids or offers greater than a particular concluded transaction.
IOSCO International Organization of Securities Commissions
IOSCO Benchmarks IOSCO Principles for Financial Benchmarks and IOSCO Principles for Oil Reporting Agencies (PRA). These are
collectively referred as “IOSCO Benchmarks” to differentiate from “Regulated Benchmarks”.
Make Available See “Publish or Make Available”
Market Data The specific volume, concluded and reported transactions, bids, offers and any other market information that are considered in developing a price assessment.
Market Participants Legal entities involved in the production, structuring, use or trading of financial contracts or financial instruments used to inform the Benchmark, or which reference the Benchmark.
Methodology The written rules and procedures according to which information is collected and the Benchmark is determined.
Stakeholder Refers to Subscribers and other persons or entities who own contracts or financial instruments that reference a Benchmark.
3
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf 4
