Shanghai: The London Bullion Market Association (LBMA) could soon take steps to report trades of the over-the-counter gold market, but the prospect of higher costs makes an exchange-traded model unattractive to participants for now, its chief executive said.
The LBMA had commissioned consultancy EY, formerly known as Ernst & Young, to review the London gold market and recommend further developments including the possibility of creating an exchange for gold trading in the city.
More than $5 trillion worth of gold transactions are made over the counter (OTC) in London every year. The OTC market, where trades are executed via dealer networks as opposed to a centralised exchange, exceeds the trading of gold futures.
“Our next step following the EY recommendations, certainly trade reporting is going to be a big first one,” CEO Ruth Crowell said, ahead of the LBMA Bullion Market Forum to be held in Shanghai on Thursday.
Currently no data is available for the bilateral OTC trades, leading to complaints of lack of transparency in the market.
Crowell said while the frequency of revealing the OTC trade data is yet to be determined, the LBMA has got approval this month from the Fair and Effective Markets Review (FEMR) to go ahead with trade reporting.
The FEMR was launched last year by regulators and the British government after British banks were fined billions of pounds in 2013 for trying to rig Libor, a benchmark interest rate, and manipulate foreign exchange rates.
Transparency in financial markets has been under scrutiny in recent years, especially in foreign exchange and commodities benchmarks since the Libor scandal.
London’s bullion price benchmarks, or fixes, were transformed in a matter of months last year as regulatory scrutiny and accusations of market manipulation made price-setting among a handful of banks untenable.
With more stringent regulations and banks being forced by their compliance departments to step away from risky trades, some had suggested that gold could be traded over an exchange, with central counterparty (CCP) clearance.
But LBMA’s Crowell said the feedback from the EY review was different. “The big message we have received from the market via the EY review is CCP just adds to the cost of the existing model. At the moment, there is no demand for a central counterparty,” Crowell said.
“We could see that change, and we are readying ourselves depending on what the regulators say,” she said.
China’s yuan-denominated gold fix, which it plans to launch later this year, is expected to have the Shanghai Gold Exchange act as the central counterparty. The fix would be derived from a contract traded on the bourse for a few minutes, sources have said.
