NEWSBREAK - LME, WGC to launch precious metals contracts

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Ewa Mantheyewa.manthey@fastmarkets.comCorrespondent+44 (0) 20 7337 2146

London 08/08/2016 - The Wold Gold Council (WGC) and the London Metal Exchange (LME), together with a group of six industry participants, will launch a set of new precious metals products, they said today.

Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis, OSTC and Societe Generale will participate in the initiative and will act as liquidity providers, the WGC and the LME said.

The new suite of precious metals products - called LMEprecious - will launch in the first half of 2017 and will comprise spot, daily and monthly futures, options and calendar spread contracts for gold and silver. All trading will be centrally cleared on LME Clear, the LME’s clearing house.

Future developments will include platinum and palladium contracts.

"Over time this will be viewed as a new era for the London gold market," Aram Shishmanian, the CEO of the WGC, told FastMarkets. "Gold has become a financial asset again - the underlying message is gold needs to be mainstream."

Both gold and silver will be traded on a daily basis, from T+1, T+2, through to T+25. LMEprecious will also offer standardised monthly future contracts, out to five years.

They will be traded electronically via LMEselect and through the 24-hour telephone market.

Both gold and silver contracts will be dollar-denominated and will have a lot size of 100 troy ounces for gold and 5,000 troy ounces for silver.

"With most new efforts you need the 'coalition of the willing' to get things moving. You can't get everyone there on day one," LME's CEO Gary Jones said. He added that there are many more players interested.

"I think we might see more committing before we go live," Shishmanian added.

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.

"It’s the end of the beginning for the WGC", Shishmanian, said. "The issue is about being able to bring the necessary change and we were the catalyst to get things started."

The initiative does not put the WGC in a competitive position with the London Bullion Market Association (LBMA), he said. "It could be complimentary to what they do and doesn’t compel everyone to move from the OTC to the exchange."

"We would like the LBMA to be part of this. We engaged with them continuously and informed them about everything we were doing but they have been unable to commit to doing this," he added.

The LBMA - the international trade association that represents the wholesale over-the-counter market for gold and silver - last year issued a request for proposal (RfP) aimed at reforming London's gold market.

From the 20 parties that responded to the initial request for information the LMBA is believed to have whittled the list down to five parties to submit their suggested reforms. But frustration is growing over the pace at which the LMBA is moving forward.

"The LBMA is a difficult organization in a sense that it has so many members so getting consensus with everybody is going to be tricky," Jones said.

"[LMEprecious] is not replacing what there is already, it is an addition to," Jones added.

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.

"It seems the LME is heading in the right direction. The key will be the opening spread, depth and liquidity to ensure this contract gets off to a promising start," Spencer Campbell of Kaloti Precious Metals said.

(Additional reporting by Ian Walker, editing by Kathleen Retourne)



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