Intercontinental Exchange has increased its efforts to control the future of London’s $5tn gold market with a plan to launch a daily futures contract next year based on metal held in the UK capital.
The US exchange operator, which last year won the right to host the daily London gold price auction that replaced the almost century-old gold “fix”, said the futures will start trading in February.
The move comes amid efforts to reform London’s gold market as it comes under pressure to give regulators greater transparency. That is being seized as an opportunity by banks and some of the world’s largest exchange operators who want to shift the market on to a centralised exchange.
The London Metal Exchange and the World Gold Council are also set to launch a rival gold futures in London in the second quarter of 2017. That effort is backed by six partners, including Goldman Sachs and ICBC, the Chinese lender.
Currently, central banks, miners and investors trade gold in London over the counter via the large bullion banks. There is little data on how much is traded each year, although estimates put it at around $5tn.
Since the financial crisis, whose scale was partly blamed on the growth of derivatives, regulators have pressed for greater transparency of so-called over-the-counter markets. ICE, which owns the New York Stock Exchange, said its futures will be traded in the US rather than London, but will still be based on London gold and be physically settled in the capital.
Trading and clearing trades in the US could allow traders to avoid European regulations such as the Markets in Financial Instruments Directive, or Mifid 2, which comes into effect in January 2018. It is also an acknowledgment of the uncertainty surrounding Brexit in the UK, according to ICE officials.
“The US has more regulatory certainty around capital and reporting requirements. Not knowing how the regulation is going to pan out is definitely a consideration about getting this up and running,” said Matthew Glenville, chief operating officer of ICE Benchmark Administration.
London’s daily gold pricing fix, which for almost a century was run by a handful of banks, was replaced by an electronic benchmark run by ICE after Barclays was fined £26m for alleged manipulation.
In addition, ICE will also start a gold price auction at 2pm in Singapore to cater for Asian demand for gold. That will allow traders to put orders through during Asian hours, rather than waiting for the London opening, the exchange operator said. The other main Asian benchmark is run by the Shanghai Gold Exchange, which prices at 10.15am and 2.15pm in China.
The London Bullion Market Association, which oversees the London market, said it welcomed ICE’s plans.
“Central clearing is something that we have hoped to see ever since we started transitioning the benchmarks in 2014,” said Ruth Crowell, LBMA chief executive. “Central clearing during the auction will allow the number of diverse direct participants to continue to grow.”
But adding to the complexity, LBMA is also attempting to set up its own platform for the market. Starting next quarter, physical gold trades by LBMA members will be reported to a platform run by Boat Services, a London-based company that provides financial trading technology, and its partner Autilla, another fintech start-up.
The LBMA has said it has greater plans for the platform, including setting up clearing and trading services if the market requires it.
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