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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 twobanks running a century-old system that sets the global silverprice, likely stirring the debate about regulation of one of themost 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 goldprice-rigging by the five banks that set the benchmark turned potential suitors cold, sources said.
Scotiabank and HSBC, the only remainingmembers of the silver pricing committee, will likely facerenewed scrutiny of a daily system whose roots go back to thesmoky, boisterous coffee houses of 19th-century London.
The modern process, which started in the 1960s, is now runby telephones and is largely similar to the twice-daily goldfix.
"This will lend it to more scrutiny over manipulation," saida senior precious metals trader at a mid-sized bank who hasworked on Wall Street for 20 years and uses both fixes.
Squeezing billions of dollars of business through a handfulof banks that match off orders to arrive at a benchmark priceover the phone is seen by detractors as anachronistic andopaque.
Supporters of the fix say the number of members may beshrinking but that order volume that contributes to setting thefinal price is still healthy.
On Tuesday, Britain's financial watchdog, the FinancialConduct Authority (FCA), said it could intervene if there aretoo few participants in commodity benchmarks such as gold andsilver.
"If there is a risk of dislocation because people arewithdrawing and we think that breaches or is a risk to ourobjectives, then we would set that as one of our activities butit is not entirely straightforward," head of enforcement andfinancial crime Tracey McDermott said on Tuesday.
UNDER SCRUTINY
The gold fix, along with other commodity benchmarks, hascome under increasing scrutiny by regulators in Europe and theUnited 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 centralcogs in the global economy, from interest rates to equities andgold.
At least a dozen U.S. private plaintiff lawsuits accuse thefive banks in the gold fix committee of manipulating the priceof the metal.
Those lawsuits have not targeted the silver fix, whichstarted in 1897, about a quarter of a century before gold, andis broadly similar to the twice-daily gold fix.
At the start of each fixing, the chairman announces anopening price to the other members, which relay that to theircustomers and, based on orders received from them, instructtheir representatives to declare themselves buyers or sellers atthat price.
The price is adjusted up and down until demand and supplyare matched, at which point the price is "fixed."
Even so, the silver futures market, whose prices havegyrated wildly in recent years, is no stranger to regulatory andlegal glare.
In a five-year probe, the U.S. Commodity Futures TradingCommission investigated allegations that some of the world'sbiggest bullion banks including JPMorgan Chase & Co distorted silver futures prices.
After 7,000 staff hours of investigation, the U.S. commodityregulator found no evidence of wrongdoing and dropped the probelast September.
The banks faced similar accusations in a long-running classaction antitrust lawsuit that was dismissed at the end of lastmonth 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 thebenchmark, may have little choice for now but to rely on it evenwith 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 metalsales at mining company Silver Wheaton, which is expected toproduce 36 million ounces of silver this year. (Additional reporting by Josephine Mason; Editing by JosephineMason and Steve Orlofsky)
