London 27/05/2016 - Bullion market participants are divided on the future of London's gold market while the London Bullion Market Association (LBMA) mulls ideas for its improvement.
The group last year issued a request for proposal (RfP); the LME, CME Group, the Intercontinental Exchange (ICE), Autilla/Cinnobar and Markit/ABS are the five parties it is believed to have shortlisted to submit reform proposals.
"There are two groups of bidders - exchanges and technology providers," Ross Norman, CEO of Sharps Pixley, said. "It will be quite a big shift one way or the other."
A clearing platform or an exchange are two solutions that could increase liquidity in the London gold market, many market participants noted.
On the exchange side, the LME is "doable", one market participant said. "They are ready to roll it out anytime plus they have a clearing house ready."
LME Clear, the exchange's clearing house, is already approved to clear precious metals.
"The CME is specifically interested in it they are recruiting people to help launch the gold contract, and I've heard the LME is doing the same thing," he added.
Still, the LME had a gold contract before and it failed, another participant noted. Its 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.
"Even if LME is not a fit [for the project], I think it will decide to go ahead [with gold trading] anyway as it is looking to increase its contracts," another market participant said.
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.
"I'm less convinced about the CME," another one said. "Their recent hiccup with the silver fix makes me doubt if it reflects market's reality."
The silver market was thrown into disarray late in January after the LBMA silver price was set 84 cents below the spot and futures price.
Since then, it has introduced new measures to develop the LBMA silver price benchmark further, including a blind auction, sharing the imbalances in the auction and increasing the predefined threshold.
Still, the fact that the CME is already operating a successful gold contract is in its favour, another participant noted.
On the technology side, "both of the parties understand the market very deeply, which could be an advantage", another market observer noted.
But recently many have been speculated that the LBMA might decide to divide the outcome between different providers. How that would work with the parties involved unlikely to be willing to work with each other remains open to question, many said.
And there are fears that this could lead to a fragmented London bullion market, some noted.
The LBMA owns the intellectual property of the London gold, silver and platinum and palladium prices. The gold price is operated by ICE Benchmark Administration, silver by a partnership between the CME and Thomson Reuters and platinum and palladium by the LME.
(Editing by Mark Shaw)