Mechanics of the Shanghai International Gold Exchange

by BullionStar, via Gold Seek: In September 2014, the Shanghai Gold Exchange (SGE) established a physical gold trading and custody platform aimed at international gold investors, launching this platform as the “Shanghai International Gold Exchange (SGEI)“.

The Shanghai International Gold Exchange can be viewed in a number of ways. Organizationally, the SGEI it is a fully-owned subsidiary of the SGE and is registered in the Shanghai Pilot Free Trade Zone (FTZ)[1]. The SGEI’s offices are also located in the Shanghai Pilot FTZ in the Bank of China Tower, 200 Yincheng Road Central, Pudong, in Shanghai.

From a trading perspective, SGEI refers to the “International Board” of the Exchange. On this Board, a number of physical gold contracts (products) specifically designed for international gold investors are listed and traded. Since these products are physically delivered gold contracts, the SGEI infrastructure also encompasses a certified precious metals vault where the physical metal backing this gold trading is stored. This SGEI certified vault is also located in the Shanghai Pilot FTZ and is ring-fenced from the SGE’s network of gold vaults that serve the domestic Chinese gold market. The gold in the SGEI vault can be freely imported into and exported from the FTZ since the FTZ is deemed to be outside of China for customs purposes.

From a corporate perspective, the SGEI’s remit spans “international market development, international members’ management and offshore investor services“[2].

The SGEI and SGE are physically separate entities, but they operate under the same umbrella (‘The Exchange’). Since the SGEI is known as the International Board (IB)[3], the SGE is sometimes referred to as the Main Board (MB) of the Exchange.

Contents

1. Introduction 2. SGEI Aims 3. SGE – SGEI: Renminbi Link 4. SGEI Gold Trading Products 5. SGEI Contract Trading Volumes 6. Membership of the SGEI 7. Certified Vault of the International Board 8. Settlement Accounts 9. International Advisors to the SGE 10. References and Links

Highlights

The Shanghai International Gold Exchange (SGEI), located in Shanghai’s Free Trade Zone, is the international trading division of the eponymous Shanghai Gold Exchange (SGE).

Three gold contracts are listed on the SGEI, the most popular of which is the iAu99.99 contract. However, most trading of the iAu99.99 is executed bi-laterally over-the-counter and merely settled through the Exchange.

Many of the large Western bullion banks are international members of the Exchange including HSBC, ANZ, JP Morgan, Scotia and UBS, as are some of the world’s best known gold refineries such as MKS (PAMP), Heraeus, and Metalor.

The gold backing trading of SGEI contracts is held in a distinct gold vault within the Shanghai FTZ that is operated on behalf of the Exchange by Bank of Communications. This vault has a storage capacity of 1000 tonnes of gold.

International members of the Exchange can trade on both the SGEI and SGE. Likewise, domestic members of the Exchange can trade in SGE and SGEI contracts, but gold related to SGEI trading cannot move out of the Free Trade Zone.

SGEI Aims

The stated aims of the SGEI at launch[4] in September 2014 were as follows:

to internationalise membership of the Exchange (given that international members can trade both international and domestic contracts on the SGE) to introduce offshore Renminbi and other convertible currencies into SGE trading activity to improve gold price discovery, trading volumes and liquidity on the Exchange, and to strengthen exchange trading in advance of the launch of an RMB Gold Fixing (the Shanghai Gold Fixing auction was launched in April 2015) to boost internationalisation of the Chinese currency to enhance Shanghai as a gold re-export center and ultimately make Shanghai Asia’s premier gold re-export center to boost activity in the Shanghai FTZ and the Shanghai International Financial Center

SGE – SGEI: Renminbi Link

The SGEI offers 3 Renminbi-denominated physical gold contracts to international members and their customers. Since the Chinese gold market is not yet fully liberalised (and exports of gold out of China are generally prohibited), the gold underlying these international products has to be segregated from the domestic Chinese gold market. Hence the SGEI is located in the Shanghai FTZ, a zone which is considered to be outside of China for customs purposes and where the underlying gold can be imported into and exported from the SFTZ without needing to comply with domestic Chinese customs procedures.

In general, a free trade zone is a designated area within an economy that allows goods to be imported, stored, processed and re-exported with little customs intervention.

International members of the SGEI and their customers can also trade Main Board SGE products, however, gold related to the Main Board contracts has to stay in the Chinese domestic market and is prohibited from being withdrawn from SGE certified vaults by these international members / customers.

Likewise, domestic members of the SGE and their customers can trade International Board gold contracts, but these domestic members and their customers cannot withdraw the gold related to these contracts from the Shanghai Free Trade Zone (i.e. from the SGEI certified vault) unless they hold a license from the People’s bank of China (PBOC) which allows them to import gold into the domestic Chinese gold market.

The Chinese currency, the Renminbi, trades in two versions which are known as onshore Renminbi (CNY) and offshore Renminbi (CNH). Onshore Renminbi (CNY) is traded in the domestic Chinese market and the PBoC sets the reference rate for CNY each day and aims to control its fluctuations within a 2% band through intervention if necessary.

CNH is the code for the Renminbi when it trades in offshore accounts, and CNH is fully convertible into other currencies. The PBoC also at times intervenes to try to influence the rate of the offshore Renminbi. CNY and CNH are not two separate currencies, they are just two versions of the same currency. However, CNY and CNH have different exchange rates against other currencies (such as against the US Dollar).

Both International Board and Main Board gold contracts can be traded using onshore and offshore Renminbi. Therefore following the launch of the SGEI, the Exchange (SGE and SGEI) now offers a connection between the onshore and offshore Renminbi markets. Domestic SGE members and their customers can trade SGE and SGEI products using either onshore or offshore Renminbi, and likewise, international members of the SGEI and their customers can also trade SGEI and SGE products using either onshore or offshore Renminbi.

SGEI Gold Trading Products

There are 3 physical gold product contracts listed on the SGE’s International Board:

iAu99.5 12.5 kg gold ingot with a fineness no less than 99.5% iAu99.99 1 kg gold ingot with a fineness no less than 99.99% iAu100g 100g gold bar with a fineness no less than 99.99%

All 3 contracts are denominated in Renminbi and can be traded using onshore or offshore Renminbi. Unlike the opaque London Over-the-Counter (OTC) gold market and the COMEX gold futures market, the Shanghai Gold Exchange is a marketplace for physical gold. In contrast, the vast majority of trades in the London OTC gold market are denominated in unallocated gold which merely represents fractional claims on bullion banks for a quantity of gold (i.e. the bullion bank has a gold liability to the claim holder). Critically, there is very little physical gold in the London system backing the enormous volume of OTC gold trading. Likewise, there is very little physical gold in COMEX approved gold vaults in New York to back up the enormous volumes of COMEX gold futures trading.

However, on the SGE, trading parties must hold the full amount of physical gold (seller) or the required funds (buyer) before transacting. Settlement is on a T+0 basis. As per the above list, each of these contracts has an ‘i’ prefix to distinguish it from the similarly named contracts that trade on the domestic SGE[5].

There are also OTC variants of the 3 International Board contracts which trade under the following product codes:

iPAu99.5 iPAu99.99 iPAu100g

With these OTC products, trading parties trade bilaterally off-exchange, and then clear their trades through the SGE[6].

International members can also trade 8 gold products that are listed on the Main Board, but can only deposit and withdraw metal for the 3 International Board products.

There are 3 trading session on the SGEI (and the SGE)each day from Monday to Friday (excluding public holidays). These trading sessions are

Night session: Previous day 20:00 – 2:30 Morning session: 9:00 – 11:30 Afternoon session 13:30 – 15:30

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