Search for solutions to modernize gold trading gets kicked into high gear

The London bullion market could be moving closer to finding a solution to what it needs -- in order to increase transparency and liquidity in the face of tighter regulation -- with both the London Bullion Market Association and World Gold Council throwing their hats in the ring in order to seek out the best solution for the wider market.

The market has been rife with chatter lately regarding what solution is needed, although little agreement has been made. However, one thing is apparent: central clearing is a logical step forward.

October 9 the London Bullion Market Association said that it has issued a Request for Information, inviting potential "solution providers" to submit proposals.

So far those providers look likely to be an exchange, as the cost of the LBMA setting up its own system would be costly to its members.

One source close to the situation said that it is likely that any solution will be administrated by an exchange under the LBMA umbrella/brand, owing to the costs of setting up fresh technology to supply central clearing services.

Blog post continues below...

Request a free trial of: Metals Daily
	Platts Metals Daily offers prices, news and analysis for the aluminum, copper and molybdenum value chains. It contains hundreds of metals prices across base, minor, light and precious metals assessed by editors globally.

An LBMA spokesperson told Platts that it’s important for the body, which represents refiners and acts as a proxy regulator of the industry, "to understand what options are available in order to ensure that what is delivered satisfies the requirements of the whole bullion market particularly in the context of Fair and Effective Markets Review."

The main aims of the RFI are greater transparency, increased liquidity and to lower costs of doing business, ensuring the on-going strength of the London market.

In August 2014, FEMR -- established by the UK government -- made recommendations to regulate a further seven major UK based benchmarks, including those for the LBMA Gold and Silver Prices, which subsequently became regulated.

Martin Watkins, EMEIA Co-Head of Exchanges and FMI at EY, said that, "in order to make sure that London remains central to the international precious metals market, and that the existing liquidity is maintained or enhanced, it's going to be important to assess how the rapid evolution of trading technology can be leveraged to drive the future evolution of the LBMA and the wider London bullion market."

October 9 the LBMA said that the RFI is to investigate opportunities for greater market transparency through, for example, trade reporting and also increased trading efficiency via enhanced IT solutions.

Separately the World Gold Council confirmed via email October 8 that it is in talks to "modernize" the gold market although would not confirm if that would be in the form of a central clearing hub in London, as market sources have previously suggested.

"The WGC is exploring a number of ways to modernize the gold market, with the aim of meeting the needs of all participants, including those within the gold mining industry," the industry body, which represents mining companies said.

It noted that, "any solution needs to be aligned with regulatory developments, improve liquidity, increase transparency, and mitigate conduct risk even further."

One producer said that the WGC should "come out publicly saying that they are eager to work with the LBMA and support their efforts and represent their mining constituents rather than indicate that they are pursuing their own efforts.  I think that a unified and organized approach is the only way that this doesn’t get messy.

Platts recently reported that the bullion market is seemingly unfazed by industry discussions to establish a central clearing system for gold trade Loco London, although all agreed that any move in that direction would be welcomed.

There was talk that a handful of banks are looking to introduce a central clearing system for over-the-counter trades in light of increased regulation.

Many mining companies say they feel they lack unified visibility and require a market-focused body to be better represented in talks and any resolution finally implemented.

One senior mining source said that for any new system to work the producers have to be integral.

"While banks play an important role in the market, they are middle men at the end of the day. We need for this to be a democratic process that involves miners and end users," the source told Platts.

However, a banker argued that "at the end of the day it's the miner's job to dig the stuff up and sell it. Why do they need so much involvement?"

There was chatter last week that CME are front-runners to be appointed as the official exchange to administrate any potential gold clearing.

A senior source close to the talks simply said: "The CME always aims to be in front." A banking source said that logistically it would make sense for CME as they already have the world's largest gold contract on Comex in the US.

CME declined to officially comment on the matter.

Rival the London Metal Exchange acknowledged it is engaging the market.

"LME Clear is already authorized by the Bank of England to clear gold and silver forward contracts, and stands ready to work with the industry to facilitate any possible market-led solution for the clearing of OTC gold," an LME spokeswoman said by email.

Still, one senior banking source aired concerns that the LME could be an expensive option in light of the fact that it has been increasing fees to its customers related to other exchange functions.

The wheels are in motion, change is on the horizon. The bullion market is ablaze with conversations, what the outcome will be is anyone's guess?

The only hope is that it is for the good of the market and not just a means to line pockets; although at the end of the day money talks. Or should that be gold?