London 26/02/2016 - Major changes are afoot in the London gold market, with the London Bullion Market Association (LBMA) seeking to improve gold trading while the London Metal Exchange (LME) is planning to launch a gold contract, industry sources told FastMarkets.
London's gold market is primarily over-the-counter (OTC), with trades taking place privately between counterparties rather than on an exchange.
But market liquidity has dropped over the past year - many banks have pulled out of commodities and exited precious metals due to the advent of tighter regulation following the 2008 financial and banking crisis.
The LME, the CME and Intercontinental Exchange (ICE) are among the five companies that have been shortlisted by the LBMA to submit proposals for a planned reform of the London gold market, FastMarkets understands.
Responses to the RfP are requested by mid-March, with a decision on the chosen provider expected in the second quarter and a target delivery date of the new services in the second half of 2016, the LBMA said.
The issuing of the RfP came after 20 companies responded to LBMA's Request for Information (RfI) in November last year with ideas for how the trade group can deliver an appropriate degree of transparency, attract greater liquidity through technology and increase efficiency and lower costs for institutions doing business.
Separately, the LME and the World Gold Council (WGC) are in talks about rolling out a gold contract, according to sources close to the matter. The LME has been in discussions for months with the LBMA and its members regarding a new contract, FastMarkets understands.
"[The LME] are ready to do it with or without the LBMA," one source said.
The LME has already approached potential market makers in the Far East ahead of the contract launch, FastMarkets understands.
The LME declined to comment. LME Clear, the exchange's clearing house, is already approved to clear precious metals.
The LME has not traded precious metals since the 1990s. FastMarkets reported in January 2015 that the exchange was mulling the launch of dollar-denominated monthly gold and silver futures contracts.
The LME 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.
(Additional reporting by Ian Walker, editing by Mark Shaw)