Control for London’s Gold Market Heats Up

The London Bullion Market Association happens to be one of the oldest gold trading platforms, where over $5 trillion worth of gold contracts are exchanged, but it is done through the over-the-counter (OTC) mechanism that has largely become outdated and a big concern for counterparty risk is present since no clearinghouse is involved. It all may change as many major international players such as CME Group Inc., Intercontinental Exchange Inc. and the London Metal Exchange are about to bring positive changes and move to a different age.

Nevertheless, to compete with its rivals, LBMA itself is moving forward to a new trading platform it has been developing and will introduce in the second half of next year with help from its members HSBC and JPMorgan Chase. The system can be a game changer as in London, exchange-traded spot market and the contractual form of trading has never been implemented before, and has bene largely used by their American counterparts.

CME Group Inc. on January 9, will start London gold and silver contracts that rely on a spread between spot prices and benchmark U.S. futures. It will help it compete better with similar planned contracts offered by Intercontinental Exchange Inc. (ICE) and the London Metal Exchange (LME).

The LME happens to be the world’s largest base metals exchange. In August 2016, it announced plans to start offering cleared gold, platinum, palladium, and silver contracts in the first half of 2017. Goldman Sachs, ICBC, Standard Bank Plc, Societe Generale SA, and the World Gold Council will help it develop a market for metal mining and trading.

ICE that owns commodity and financial exchanges globally, will start offering future contracts later in February 2017. It at present runs the daily London gold auction on behalf of the LBMA among 13 authorized participants who set the daily price.

However, the OTC market will always be present as it is in New York. The head of precious metals business development at Industrial & Commercial Bank of China (Asia) Ltd (ICBC), Raj Kumar said, “There will always be an OTC market in London, but much of what currently takes place here will shift to the exchanges. Participating in any new contract incurs set-up costs, and so firms will need to prioritize which venues they are likely to trade.”



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