Editorial: LME shakes up gold world with gold and silver trading

Metal trading in the historic centre of London has had a pretty-clear cut dichotomy in recent years: base metals trading including futures are carried out on the giant London Metal Exchange (LME), while precious metals trading — including administering the iconic “London gold fix” — has been the purview of the relatively smaller and more quaint London Bullion Market Association (LBMA).

This is all changing with the LME’s announcement that it is creating a gold and silver futures exchange in partnership with the World Gold Council (WGC) and a group of financial heavy hitters, including Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Societe Generale.

Perhaps most importantly, this new exchange will have a transparency that the LBMA — where precious metals are privately traded between individuals — has always lacked, whether or not by design.

The more opaque LBMA approach has certainly been successful, though: London ranks as the world’s largest physical bullion market at US$5 trillion a year, and vaults in the city are used by many foreign central banks to hold their gold reserves.

But in the words of the WGC, the partners’ move to create precious metals trading on the LME follows an “extensive engagement with major market participants,” and has been “driven by the need for greater market transparency to support and aid ongoing regulatory change, provide additional robustness to the precious metals market, broaden market access, make trading more capital efficient and trade lifecycle management easier.”

The partners already picked out a Google-friendly name for the exchange: LMEprecious (all one word).

WGC chief executive Aram Shishmanian comments that the new exchange will be “another important step in the modernization of the gold market. It will strengthen London’s position in the global gold market, enabling it to meet the needs of all participants, attract new players and satisfy the highest standards of regulatory compliance.”

As planned, LMEprecious will comprise spot, daily and monthly futures, options, and calendar spread contracts for gold and silver. Platinum and palladium contracts will be added down the road.

All trading will be centrally cleared on LME Clear, the LME’s state-of-the art, real-time clearing house, and leverage the London market’s existing delivery infrastructure.

The LME says the new product suite will complement the bilateral over-the-counter (OTC) market, offering market participants similar levels of execution flexibility, including the ability to bring bilaterally negotiated (phone-based) trades into clearing. Market participants will also benefit, the LME says, from tight on-exchange price discovery and a product model designed to maximize capital efficiencies.

The participating banks are to act as “liquidity providers for the precious contracts to ensure efficient price discovery and establish market depth.”

LMEprecious is to be launched in the first half of 2017, following what the LME calls a “comprehensive process of integration and testing” that is subject to regulatory approvals.

More information on LMEprecious can be gleaned at free breakfast workshops the LME will hold in New York City on Sept. 13 and London on Sept. 21.

The LME hasn’t traded any precious metals since the 1990s, and lost out to the LBMA on an opportunity to administer the London gold fix in November 2014, but did win the administration of the platinum and palladium price fixes in October 2014.

The LME’s previous and so far only attempt at starting a gold futures exchange was in 1982 at a time of peak gold prices, when it joined gold industry participants to launch the London Gold Futures Market, which shut its doors only three years later owing to a lack of domestic and speculative investors.

The LBMA, whose 149 members include some of the world’s biggest banks, isn’t taking this challenge from the LME lying down. While stating it will never become a true exchange, it is responding with its own plans for increased technology use and improved transparency, noting that has been asked recently by the Bank of England to draft a global Precious Metals Code, following the example set by the Forex markets, and it will in time be available for public consultation.