Bullion Banks line up in London to support LME’s Gold Futures

by Ronan Manly, BullionStar: The London Metal Exchange (LME) and World Gold Council have just confirmed that their new suite of London-based exchange-traded gold and silver futures contracts will begin trading on Monday 10 July. These futures contracts are collectively known as LMEprecious.

The launch of trading comes exactly 11 months after this LMEprecious initiative was first official announced by the LME and World Gold Council on 9 August 2016. Anyone interested in the background to these LMEprecious contracts can read previous BullionStar articles “The Charade Continues – London Gold and Silver Markets set for even more paper trading” and “Lukewarm start for new London Gold Futures Contracts”.

This 10 July 2017 launch is itself over a month behind schedule given that LMEprecious was supposed to be launched on 5 June but was delayed by the LME.

Underlying What?

As a reminder, these LMEprecious gold futures and silver futures contracts represent unallocated gold and silver and there is no direct connection in the contracts to physical gold or physical silver, since settlement is via unallocated gold and silver balance transfers across LME Clearing unallocated metal accounts at member banks of London Precious Metals Clearing Limited (LPMCL).

Still, this hasn’t stopped LME from using terminology in the contract specs that attempts to link them by association to real precious metal. For example, the gold contract spec says that the:

“underlying material” is “Loco London Fine Gold held in London and complying with standards relating to good delivery and fineness acceptable to the Precious Metal Clearer of the Clearing House”.

This is similar to how an estate agent (realtor) would describe a house that’s located in a bad area, i.e. that it’s not too far from a good area.

The LME also fails to mention the fact that the LBMA/LPMCL unallocated account system is a fractionally-based paper gold and paper silver trading system, with trading volumes of unallocated gold and unallocated silver that are 100s of times higher than the available physical metal sitting in the London precious metals vaults. Ironically, these gold and silver futures are starting to trade in a month in which the LBMA has still not begun publishing the actual quantities of gold and silver in the LBMA vaults in London, despite promising to.

For both gold and silver, the LME futures contract suite will consist of a daily trade date (T) + 1 contract (T+1), known as TOM, and daily futures from a T + 2 (equivalent to Spot settlement) out to and including all trade dates to T + 25. Beyond this, there are approximately 36 monthly futures contracts covering each month out to 2 calendar years, and then each March, June, September and December out to 60 calendar months (12 more quarters out to 5 years).

All LMEprecious contracts will centrally clear on LME’s clearing platform LME Clear. The contracts can be traded on LME’s electronic trading platform LMESelect between 1am and 8pm London time, and can also be traded 24 hours a day ‘inter-office’ over the blower (voice-based trading). Apart from trading hours differences, the only other difference between LMESelect and phone is that of the daily contracts, only T+1 to T+3 can be traded via LMESelect, while T+1 to T +25 can be traded over the phone.

The LME also plans to roll out options products and calendar spread products based on these futures, but as to when these will appear is not clear.

Banks, Banks and more Banks

The official line is that LMEprecious has been developed by a consortium of the LME, the World Gold Council and a group of investment consisting of Morgan Stanley, ICBC Standard, SocGen, Goldman Sachs and Natixis, as well as prop trading firm OSTC, but to what extent each of the 5 banks and OSTC has had input into the product development and trading rules of LMEprecious is unclear.

On 3 August 2016, the World Gold Council established a UK registered company called ‘EOS Precious Metals Limited’ to house the arrangement between the Council and the aforementioned banks and OTSC. The first director of EOS was Robin Martin, managing director of market infrastructure at the World Gold Council, while the first registered address of EOS was actually the World Gold Council’s London office at 10 Old Bailey in the City of London.

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