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By Frank Tang and Clara Denina
NEW YORK/LONDON, April 30 (Reuters) - Deutsche Bank's exit from the London precious metal fixes will leavejust two banks running a century-old system that sets the globalsilver price, likely stirring the debate about regulation of oneof the most volatile commodity markets.
The bank's decision on Tuesday to resign its seat ends anunsuccessful four-month search for a buyer, as U.S. lawsuitsalleging gold price-rigging by the five banks that set thebenchmark turned potential suitors cold, sources said.
"You can't have a silver fixing with just two people, that'sa bit of a nonsense really," a London-based precious metalstrader said, adding just two participants would restrictliquidity and competition.
"It would just be two people talking to each other. I thinkthe regulator should be stepping up a little bit here."
Leaving Scotiabank and HSBC as the onlyremaining members of the silver pricing committee will likelyrenew 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.
Shortly before news of Deutsche's withdrawal on Tuesday,Britain's financial watchdog, the Financial Conduct Authority(FCA), said it could intervene if there were too fewparticipants in commodity benchmarks such as gold and silver.
"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.
The FCA was not immediately available for further comment onWednesday.
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.
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.
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 and Jan Harvey;Editing by Josephine Mason, Steve Orlofsky and Mark Potter)
