New LMEprecious contracts won’t kill off LBMA benchmarks – Chamberlain

Aug 12, 2016 - 3:34 PM GMT
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The success of the new LMEprecious contracts will not make the London Bullion Market Association (LMBA) gold and silver price benchmarks irrelevant, the LME’s Head of Business Development suggested to delegates here in Agra on Friday.

With support from five banks and one proprietary trading house, the London Metal Exchange (LME) and the World Gold Council (WGC) announced on Monday their plans to launch new spot, futures and options contracts for gold and silver in the first half of 2017.

Some have suggested that should the LME gain the liquidity that it strives for from the $5 trillion a year OTC London market, that precious metals contracts across the industry could theoretically be derived on the LME’s settlement prices that are used widely by the base metals industry – potentially rendering the LBMA’s benchmark’s for gold and silver useless.

LME’s Matt Chamberlain however says that the two markets can in fact work in tandem, alongside any other pricing mechanisms, for example the Shanghai Gold Exchange’s (SGE) benchmark launched earlier this year.

“The view of the LME and this is very much driven from what we see on the base metals, is that the exchange and the OTC worlds are always going to be extremely complimentary for each other,” Chamberlain said.

“I don’t think we should be scared about introducing new benchmarks to the market because of fragmentation. This is a hugely vibrant market and the market will ultimately arbitrage out the difference,” he added.

Furthemore, Chamberlain also moved to quell suggestions that the LME is ultimately looking to simply make the LBMA and its OTC market irrelevant. Chamberlain highlighted the work the LBMA is doing to make the OTC market more transparent as being helpful for both the industry and indeed the new products.

“I don’t really worry about price fragmentation – particularly in spot markets – because all of these prices are telling you slightly different things about the market, they all converge through the arbitrage that everybody is undertaking and I think that actually it is really healthy to be able to see a different set of views on the markets, so while we are really excited about what we can offer through LME precious on the exchange side, we absolutely don’t see that as competing with the OTC market, we see it as complimentary,” he said.

The LME has not traded precious metals since the 1990s. The exchange lost out in the race to administer the London gold fix in November 2014 – it is now in the hands of ICE. But it won the administration of the platinum and palladium price fixes in October 2014.

The LME’s only foray into gold futures trading dates back to 1982 when it joined gold industry participants to launch the London Gold Futures Market (LGFM). But the lack of domestic and speculative investors caused the market to close within three years.

LME’s credibility – regarding the exchange’s recent issues with fees, reducing volumes and movement of volume away to other exchanges – is a concern for some. Another worry for the gold market is the fact that the new suite of precious metals contracts – called LMEprecious – does not have the backing of the LBMA – the main authority on the London bullion market and the governor of the good delivery list.

But Chamberlain dismissed this, using the example of the cross-exchange work many do in the base metals industry, despite the LME’s dominance in that sector.

“Base metals is a market that has a very strong exchange presence from the LME, CME, SHFE and others but it is also one of the markets that has the most well developed OTC side – I think they’re complimentary – it is the price discovery, transparent pricing and the price curve that you can generate on the exchange side that gives the OTC market the transparency and credibility that it requires, he said.

“It’s the huge volumes that are happening on the OTC world, some of which are later caught onto exchange or onto clearing, that drives liquidity on the exchange side, so I think they can work together,” he added.