London 17/03/2016 - The Shanghai Gold Exchange's new Chinese gold pricing benchmark - set to launch on April 19 - will aim to attract the interest of foreign participants by allowing foreign price-setting companies and their clients to trade the contract.
And foreign banks' clients will be able to keep their trading activities anonymous - much like the London benchmark - while domestic companies do not appear to enjoy the same privilege, with each having a client code that will be displayed on the system.
Still, the system will differ from the current London benchmark run by Intercontinental Exchange (ICE), according to proposed specifications seen by FastMarkets.
Price-setting members (or core members) - of which the Shanghai Gold Exchange's draft specifications say there are 14, although well-informed sources say there will be 16 - will have five minutes prior to the twice-daily auctions to create the initial price for the first auction.
According to the specifications, the members will be able to input a price per gram for the 'SHAU' auction between 10:09-10:14 and 14:24-14:29 local time, after which an arithmetic average that removes the highest and lowest prices will create the initial price for the first auction round or 'round A' set to start at 10:15 and 14:30 respectively.
For example, should member one input 242 yuan per gram, member two 243 yuan, member three 242.85 yuan, member four 242 yuan and member five 241.00 yuan, the first price to enter auction A at 10:15 would be 242.28 yuan.
In comparison, in London, the initial and any subsequent round prices are selected by an independent chair - who is anonymous - "using their extensive market experience", according to ICE, and is applied based on an agreed pricing framework.
After that, the participating members - of which there are 181 - of the Shanghai Gold Exchange will have 60 seconds to buy and sell at the theoretical price, with an extra 10 seconds added at the end for the core 14-16 market makers to narrow the tolerance level.
Should the net buy-and-sell volume exceed 400 kilograms, the price will not be set and the new price will be input into the auction for the next round.
From the second round onwards - or 'Round B' - the time limit will drop to 30 seconds per round. This compares with London where every round, including the first, lasts for 30 seconds.
Should the volume difference be between 400 and 2,000 kg, the new price will be 0.2 yuan higher or lower depending on which side the tolerance level was exceeded, 0.3 yuan if the volume difference is between 2,000 and 30,000 kg and 0.4 yuan if it exceeds 30,000 kg. In London, the tolerance level is set at 10,000 ounces.
During the 'supplementary' 10 seconds at the end of each round, the 'core' members will not be able to reverse the direction of the buy-and-sell volume; instead, the draft rules suggest that the member will be looking to narrow the imbalance as much as possible.
If the price is set, as with the London benchmark, the intolerance will be shared out but only with the core market makers.
(Additional reporting by Meimei Qin, editing by Mark Shaw)