Sometimes the best ideas are worth waiting 139 years for.
On August 9, 2016, the World Gold Council and the London Metal Exchange, together with a consortium of banks, announced a planned launch of LMEprecious, a new platform for spot, daily and monthly futures, options and calendar spread contracts for gold and silver, with platinum and palladium planned for down the road.
This will mark the second attempt at a gold futures contract at the 139-year-old LME. The previous one, London Gold Futures Market, launched in 1982 and never really caught on. It was shuttered three years later. In an early-morning interview with LME CEO Garry Jones, I had but one question, “Why now?”
“It’s a lot more than futures,” said Jones. “For the first time we will be offering spot trading, and tom-next trading, and a date structure out to T+25, and then a monthly futures contract from then onwards. So for the first time, banks and others will trade spot, tom-next, short-dated business through a central counterparty.”
Why now? The answer is multifaceted, but a lot of it has to do with the LME’s evolution over the past few years, since its acquisition by HKEx in 2012. The top priorities were to stabilize the base metals business, move to self-clearing with the 2014 launch of LME Clear, update its technology, and then move into product development. Last year the LME launched new ferrous metals contracts – steel scrap and steel rebar – and has now set its sights on the precious markets.
But really, it was the World Gold Council that provided the impetus. Last year, the WGC put out a request for proposal to a number of exchanges, including ICE and CME Group, to look at a London-based gold market. In the end, LME was chosen as the preferred partner.
“It’s an adjunct to what we are doing already, so it’s not a new build completely,” says Jones. “We are already the leading metals exchange. We are using all the things we already have.”
Plus, demand for gold is growing globally in a zero interest rate environment. There is a regulatory angle as well. As new collateral requirements come on line, and precious metals gain in importance as a value storage and transfer mechanism, it is critical to have a robust market at the front end of the term structure. Plus, as regulators continue to push for central clearing of derivatives, a market such as this may well-positioned.
The consortium of banks, including Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Societe Generale, have an economic interest in the venture, though no terms were disclosed. “We start with a coalition of the willing,” said Jones, “and then we aim for a critical mass.” The market is open to others, though, and the partners do not get any special deal on execution or clearing costs. But their economic interest does incentivize liquidity provision from day one.
Jones does not view this venture as a replacement to the existing gold market, but rather a necessary adjunct. And given the recent successes at the exchange, I would not bet against it.