Future of London gold market is up for grabs


One might think that central banks would have an interest in that future, and yet there's no mention of them here and no indication of any idea about questioning them.

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By Henry Sanderson
Financial Times, London
Wednesday, October 21, 2015


The annual meeting of the London Bullion Market Association usually involves a light-hearted debate on the outlook for precious metals prices. But this year delegates had weightier matters on their minds -- a battle for the future of London's gold market.

Whether it was on the sidelines of the Vienna Hilton conference hall or at the Liechtenstein Garden Palace -- venue for this year's gala dinner -- the stand-off between some of the world's biggest banks was a subject of debate for the 600 brokers and analysts in attendance.

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The battle could pit banks such as HSBC and JPMorgan who own large bullion vaults -- and who have long dominated the gold trade in London -- against rivals including Goldman Sachs and Societe Generale, who are active gold traders but do not have large gold storage businesses.

The backdrop is a swath of new regulation that could open the London market to new technology and shake up the top participants in the world's gold trading hub. Approximately three-quarters of the world's bullion dealing takes place in London.

The push for greater transparency has been seized on by some banks as an opportunity to push their vision of what the gold market should look like. Millions of ounces of gold a day change hands, and for any bank that can harness the trade flow or help run the new system it could be highly lucrative.

The gold market is being forced to reassess the way its does business because of new rules, many of them introduced in the wake of benchmark rigging scandals in foreign exchange and interest rates.

Until March, the price of gold was still set or "fixed" twice a day by a small group of banks conferring over the phone with clients and declaring if they were a buyer, seller or had no interest. The century-old methodology has now been replaced by an electronic system operated by energy exchange operator Intercontinental Exchange.

The next stage is to bring more transparency to how gold is traded, which is where the split has emerged.

Five banks including Goldman, SocGen and Morgan Stanley are represented by the World Gold Council, which helped launch the world's largest gold exchange traded fund in 2004.

Their proposal is for London gold trading to move fully on to an electronic exchange and to launch a London gold contract, which could reduce the influence of the largest bullion banks over the market.

In the other camp is the LBMA, the official body set up by the Bank of England in 1987 to regulate the bullion market, which has close ties to the vaulting banks. Many of its biggest members want physical gold trading in London to remain off-exchange, but have conceded that a move towards all trades being cleared in one place could add transparency.

"What we're trying to do is put the building blocks to enable the market to develop," said Jeremy East, head of metals trading and commodities at Standard Chartered and a member of the LBMA management committee. "Without that the market will probably fragment. We need to pull together."

The LBMA is expected to make its decision next year on a new technology platform.

A copy of recommendations from an independent report commissioned by the LBMA and seen by the Financial Times recommends the body goes further than just improving trade reporting and position itself for central clearing and exchange services in the gold market.

"An exchange for the bullion market would be beneficial for both price transparency and discovery," says a summary of the report by financial services firm EY.

But many bankers say the current London spot market has enough liquidity, having created hundreds of electronic platforms to buy and sell physical bullion. The CME in the US also already operates a well-traded gold futures market.

"There certainly won't be more liquidity if it goes on to an exchange, it's fixing a problem that nobody has," said Adrian Ash, head of research at online broker BullionVault.

The WGC said it always talks to banks, industry bodies and other market participants and is exploring ways to modernise the gold market.

"Any solution needs to be aligned with regulatory developments, improve liquidity, increase transparency, and mitigate conduct risk even further," it said in an emailed statement.

For now, the market is divided about what direction to go in, and if there could be an agreement between LBMA and the WGC.

Critics say both groups are vying for expansion of their own powers.

"It's challenging at the moment," said Ruth Cromwell, head of the LBMA. "As a marketplace we are getting a lot of attention and we have a lot of offers from people who want to help."

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