Banks and the gold industry’s leading trade body have decided to explore the idea of establishing a London gold exchange as the precious metal market faces greater guidelines.
According to people familiar with the matter, The World Gold Council, a group of 19 gold miners, and at least five banks are having initial discussions. London’s bilateral over-the-counter gold market has been criticised for lack of transparency. The talks could lead to a move to a centrally cleared market. The WGC had hired several consultants and spent the last few months pitching a business care for an alternative trading infrastructure, the people said.
Members of the London gold market trade with each other directly or on behalf of global clients such as central banks and jewellers. Last month an electronic system of fixing the daily price replaced an auction run between banks that started in 1919. The benchmark came under the regulation of the Financial Conduct Authority on Wednesday.
London’s market faces increasing competition from gold futures traded on the New York Mercantile Exchange’s Comex market and the Shanghai Gold Exchange, which opened its bullion contacts to foreign investors in February. European authorities are set to conclude their Final review of the Markets in Financial Instruments Directive II in the coming months. Regulators want to increase transparency, clamp down on speculation and guard against systemic risk across equity, fixed income and commodity markets.
Recommendations for a review of the UK’s fixed income, currency and commodities market, led by the Bank of England, are due in June. “Our overriding aim is to encourage a transparent, efficient and liquid gold market,” the WGC said. “We are engaged in discussions with a number of individuals and organisations.” London’s over-the-counter gold market does not require members to provide data on turnover, making it impossible to access the volume of trades.
The London Bullion Market Association says the current system provides confidentiality and ensures that risks stay between the two counterparts of the transaction. Some banks are reluctant to support the initiative. Moving on to an exchange would be difficulty because delivery of gold can entail vaults around the world. It is not clear how the London market would be regulation under Mifid II. But a switch to a more transparent exchange-based system could protect against fines and investigations that have raised compliance costs. Barclays was fined £26, last year for allegedly seeking to rig the old gold fix. “It’s likely there’s going to be more oversight,” one market participant said. “The one thing to avoid is having anything imposed on the market.”
Launching a new gold contact will not be easy. CME, the world’s biggest futures exchange, launched a product in Hong Kong this year but liquidity has yet to pick up. Singapore has also tried to launch a gold contract.