NEWS
Precious Metals  

LMEprecious – has the initiative delivered what it set out to for the precious metals market?

The launch of LMEprecious last year aimed to complement and reinforce the existing London precious metals trading market.

It was designed to provide a liquid and transparent venue for precious metals futures trading and clearing, which could settle into the existing loco London settlement infrastructure.

To develop LMEprecious, we worked with a group of leading industry participants who were committed to providing a London based centre of liquidity to reinvigorate the market, remove barriers to trading based on counterparty credit lines, and establish transparency across the forward price curve. 

This was against a backdrop of increased regulatory scrutiny, reporting requirements and cost of trading for the over the counter (OTC) market in a post-2008 financial environment. One year on, has LMEprecious achieved what it set out to?

Transparent pricing

At the heart of the physical gold market, London has always been a financial hub for commodities and the global liquidity centre for precious metals. However, pricing power has been moving away from this traditional pool of liquidity to other markets. Having always held strong and positive relationships with the precious metals community, the LME worked with key stakeholders to create a solution that would bring the bullion market together to provide transparent pricing derived from physical loco London trading activity.

These trusted prices allow participants to directly trade the loco London market and remove basis risks for those using venues in other jurisdictions to hedge outright risk.

A year after launch, LMEprecious provides a real-time five year forward curve (see fig 1). The benefits of trading on-exchange have translated into deep liquidity on-screen, with outright spot gold trading flourishing on LMEselect – our electronic trading platform. We also publish intra-day gold and silver reference prices to help the market manage its price risk throughout the trading day, aligned to periods of peak liquidity. All of this data is free for anyone to access including on the LME’s data service, LMElive.

Fig 1. LME Gold and LME Silver forward price curves as of 6 September 2018.

 

Capital efficiencies of trading on-exchange

Regulators have taken a raft of steps to incentivise the industry to undertake more trading on-exchange and via central clearing because of the security and resilience it can offer to financial markets. Resultantly, costs for trading OTC have increased. Banks involved in precious metals OTC trading are more likely to hold long-dated positions. These are more costly to hold on their balance sheets because of these increasing regulations, particularly regarding capital charges. The costs relate to holding assets on balance sheet and the associated increased credit requirements, as well as increased reporting obligations.

For certain participants, an exchange-traded solution for gold and silver trading and managing exposure to precious metals is more appealing. The cost of holding LMEprecious futures positions, for some, is cheaper partly because of the capital and operational efficiencies central clearing can provide. Participants can offset margin between LME Gold and LME Silver and the number of counterparty credit lines are reduced through netting. As the clearing house has already done know the customer (KYC) checks, costs to carry out due diligence checks on prospective counterparties are also removed.

These capital efficiencies are enabling participants to access the market and do more bullion business. The value of an exchange-traded and centrally cleared solution in London is evident from the significant growth in long-dated open interest on the LMEprecious contracts (see fig. 2).

Fig 2. LMEprecious open interest as of 6 September 2018

Fungibility with the OTC market 

One of the main priorities in developing an exchange-traded solution for the precious metals market in London was its compatibility with the OTC market. LMEprecious is a unique approach of combining vanilla monthly futures of typical precious metals trading, with the unique prompt date structure of the LME base metals contracts. This creates a flexible trading environment for participants that complements the OTC spot market. Both gold and silver contracts can be traded on a daily basis from T+1 (TOM), T+2 (Spot), through to T+25, and then monthly out to five years.

LMEprecious is physically fungible with the OTC market as the gold and silver contracts settle into London’s existing settlement infrastructure. Gold and silver bullion are also physically held in London, allowing for efficient settlement between LMEprecious and OTC market deliveries.

Plans for the LME’s precious metals offering

By providing confidence and stability to the market and bringing together a variety of participants on one transparent and regulated marketplace, LMEprecious helps increase liquidity in the market. It can reduce the frictional costs of trading, broaden access to the market and consequently allow prevailing prices to transparently reflect supply and demand throughout the trading day. The strong start in these contracts demonstrates the appetite from the industry to trade precious metals on-exchange and to centrally clear.

The LME will be looking to improve access for registered intermediating brokers (RIBs) so they can broke trades for clients and members on an anonymous basis and enter the trade details for gold and silver transactions. We’ll also look to introduce a trade-at-settlement functionality, which will constitute separate order books to allow buyers and seller to match and trade at (or at a number of ticks above or below) LME settlement or reference prices. Finally, in 2019 we’ll be launching gold and silver options to build out the product offering.

News No: 2311
Date: 2018/09/30 - 20:41
News Source: LME.COM

LMEprecious  precious metals  Gold  OTC  RIBs 

Comments:

Leave a Comment:

   
   
   
 

Prospero begins phase 2 drilling at Pachuca

Prospero Silver has begun phase two drilling at its Pachuca SE project in Hidalgo State, Mexico, shortly after Fortuna Silver Mines (TSX: FVI; NYSE: FSM) exercised its option to acquire up to 70% of the project in late 2018. Fortuna can earn its interest in Pachuca SE by spending US$8 million on the project, including at least US$1 million in the first year, and completing a preliminary economic assessment.
 

Barrick mulls selling Zambia copper mine over higher taxes

Gold giant Barrick (TSX:ABX)(NYSE:GOLD) said Monday that while it continues to engage with the Zambian government and community stakeholders about a mutually-beneficial way forward for its Lumwana copper mine, it would consider selling the operation given the “challenging conditions” it’s facing.
 

Global Energy Metals buys cobalt project near Tesla gigafactory

In its quest to become a niche supplier of cobalt, Global Energy Metals (GEMC:TSX.V) announced it has signed an agreement with Nevada Sunrise Gold Corp to acquire an 85% interest in the Lovelock cobalt mine and the Treasure Box project, located in Churchill County, Nevada.
 

Slower growth weighs on base metals but constructive for gold, CIBC says

The negative effects of trade disputes on global growth this year will push down demand for base metals and steel-making commodities, while the economic uncertainty will drive gold prices higher, CIBC says.
 

Gold, silver and platinum now printed directly onto fabrics

A team of researchers from Imperial College London developed a technique to print silver, gold and platinum onto natural fabrics.
 

Turquoise Hill reports fourth quarter 2018 production for Oyu Tolgoi, 2019 guidance

Oyu Tolgoi is expected to produce 125,000 to 155,000 tonnes of copper and 180,000 to 220,000 ounces of gold in concentrates this year, Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) reports.
Upcoming Events
Publications
 Mines & Metals

Mine & Business Today

 Scrap & Recycling

Ahangan

Our partners