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The LME is looking to draw investors away from the $5-trillion-a-year OTC business that dominates London’s gold trade.
After a disappointing launch, almost 80 tonnes of gold changed hands during the first week of trading for the LME’s new LMEprecious futures contracts.
Open interest on the contracts reached 9,380 lots of 100 ounces each in the first week, said the LME. The contracts are the LME’s first gold futures contracts since the mid-1980s, and they aim to draw investors away from the $5-trillion-a-year over-the-counter (OTC) business that dominates London’s gold trade.
As regulatory scrutiny increases, costs for banks that trade gold over the counter are also rising. With its new contracts, the LME offers traders more options and creates additional competition.
“[The contracts were] designed to provide a solution for the London market, faced with challenges such as ongoing regulatory change, increased regulatory capital and transparency requirements, and the overall push for modernisation,” Kate Eged, head of precious metals at the LME, said in a statement.
The new LME contracts compete with other similar efforts launched at the beginning of the year. In February, CME Group (NASDAQ:CME) introduced a contract offering a spread between spot and benchmark US futures, but results have been lackluster. The Intercontinental Exchange (ICE) also started trading futures earlier year, and has pulled in about 4 million ounces so far in 2017.
“This is all about jockeying for position against the CME and ICE as to who might possibly be the one that takes over if and when regulators make it impossible for us to trade interoffice OTC,” David Govett, head of precious metals at broker Marex Spectron, told the Financial Times.
LMEprecious, which includes spot, daily and monthly futures, is backed by the World Gold Council and by giant banks such as Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Natixis (EPA:KN), ICBC Standard Bank, Societe Generale (EPA:GLE) and OSTC.
That said, the biggest bullion trading banks, HSBC (NYSE:HSBC) and JPMorgan (NYSE:JPM), have not so far supported the new LME offerings. According to another Financial Times article, they are backing a rival attempt by the London Bullion Market Association to improve transparency, but may switch allegiances if LMEprecious contracts continue to surge.
The LME also hopes to roll out similar offerings for its copper, aluminum and nickel contracts in order to maintain its dominance in global metals trading.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
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