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

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LONDON (Businesshala) – A group of banks, which partnered with the London Metal Exchange (LME) to launch gold and silver futures in 2017, is preparing to abandon the project as volumes haven’t been as expected. happened, said three sources with direct knowledge of the matter.

FILE PHOTO: An undated handout photo shows gold bars before being sent to Poland’s central bank in London, Britain. G4S via Businesshala

Such a move would end an attempt by LMEs dominated by the industrial metals trade to capture a share of London’s bullion market, which is the world’s largest gold trade with nearly $17 trillion worth of gold last year.

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LME initiated contracts with partners including Goldman Sachs and Morgan Stanley, who agreed to promote trading in them in exchange for 50% of the revenue generated.

Project Partners hoped that tighter regulation would move bullion trading in London away from over-the-counter (OTC) deals between banks and brokers to exchanges, which regulators consider safer and more transparent.

But the largest dealers, including JP Morgan and HSBC, abandoned contracts, and Societe Generale, one of the LME’s partners, closed most of its commodity business in 2019, leaving the business to nothing.

Three sources from banks partnering with LME said they would meet in the coming months. Two said that if nothing had changed they would have moved out. The third said it was clear that the contracts were not successful and the LME deal was up in the air.

“There’s no one who is keen to keep it,” said one of the sources, adding that his bank was paying “two hundred grand a year” to keep the contracts and millions of dollars in default. Funds were closed. Them.

LME chief executive Matt Chamberlain told Businesshala the deal with its partners was struck over an initial period of five years. “It is quite possible that they do not want to continue after 2022,” he said.

Others participating in the LME are ICBC Standards, Natixis, proprietary trader OSTC and the World Gold Council (WGC), an industry body.

“The World Gold Council strongly believes in increasing transparency and access to investors in gold. This is why we support Precious LME and will continue to collaborate across the industry on similar initiatives,” Mike Oswin, WGC’s global head of market structure and innovation, said in a statement.

All the banks involved declined to comment. OSTC did not respond to a request for comment.

critical mass

Although contracts opened on a positive note, activity began to decline in September 2017, with 14.3 million ounces of gold worth about $20 billion and 121 million ounces of silver worth about $2 billion on the LME in September 2017.

In 2019 and 2020, a bullion price rally pushed trading on the Comex Exchange in London and New York to record levels, with nearly a billion ounces of gold turning up at each location in March 2020. LME contracts have not traded since mid-2020.

Last year, LME’s partners reduced the value of the project from $2.5 million to zero, according to the accounts of a company founded by the partners.

“There wasn’t enough critical mass from banks that wanted the market to go on the exchange and be clearer than some of the other banks that wanted it to remain OTC,” Chamberlain said.

Despite the failure of the contracts, sources involved in them and banks that didn’t use them said business in London is likely to eventually go on the exchange because that’s what regulators want.

“In a few years, someone will try it again,” said one.

Reporting by Peter Hobson and Pratima Desai; Editing by Veronica Brown and Alexander Smith

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