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Exclusive-Banks prepare to scrap LME gold and silver contracts, sources say By Reuters


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© Reuters. FILEPHOTO: This undated handout image shows gold bars prior to their delivery to the central bank of Poland, London, Britain. REUTERS – G4S 


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Pratima Desai and Peter Hobson.

LONDON (Reuters] – Three sources close to the situation said that a group of banks had partnered the London Metal Exchange to launch the gold, but in 2017 they were preparing for the end of the project. They did this after the hoped-for volume of production failed to materialize.

This would stop the LME’s attempt to seize a portion of London’s bullion exchange, the largest in industrial metals trading. Last year, gold was worth $17 trillion.

LME negotiated the agreements with Goldman Sachs (NYSE 🙂 Morgan Stanley (NYSE) who agreed that they would promote their trade in return for half of the revenues.

Project partners hoped that tightening regulations would encourage bullion trading to move away from OTC (over-the-counter) transactions between brokers and banks to the exchanges. This is because regulators consider OTC safer and transparent.

The biggest dealers JPMorgan and HSBC (NYSE:) refused to sign the contracts. After Societe Generale (OTC;), one of LME’s partners, had closed the majority of its commodities businesses in 2019, trading slowed down.

Sources at three banks who partnered the LME indicated that they were likely to meet up in the coming months. Zwei of the sources said that if there was no change, they would withdraw from the deal. Third, he said that the LME contract was in jeopardy because the contracts were not conclusive.

Sources said “There hasn’t been anyone who is interested in keeping it,” and that his bank was spending “a couple hundred grand each year” to continue the contracts. He also claimed that he had millions of dollars stored up in a default fund.

LME chief executive Matt Chamberlain stated that the agreement with partners was for a five-year initial term. He stated that “it’s possible they decide to discontinue after 2022.”

Other partners of the LME include Natixis and Natixis as proprietary traders OSTC, ICBC Standard and Natixis.

“The World Gold Council is committed to transparency and increasing investor access to gold. “This is why LME precious has been supported and we will continue to work with industry partners on similar initiatives,” Mike Oswin (WGC’s global head for market structure and innovation), said in a statement.

None of the involved banks would comment. OSTC didn’t respond to our request for comment.

CRITICAL MASS

The contracts started positive with around $14 billion in gold and about $22 billion of silver trading on LME. However, activity began to decline.

Bullion prices rose in 2019 and 2020. Trading on the New York Comex exchange and in London reached new records. Around a half a million ounces of bullion traded hands at each location in March 2020. LME contracts are not being traded since mid 2020.

The LME’s Partners reduced the project’s value from $2.5 Million to zero last year. This is according to the accounts of a partner company.

Chamberlain said that “there wasn’t enough critical mass of banks wanting the market to exchange and be cleared” compared with perhaps other banks who wanted it stay OTC.

Even though the contract failed, people involved with them and banks who did not use them stated that trading in London would eventually move to exchanges because regulators desire that.

One replied, “In just a few years someone will do it again.”



Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.