Q&A with Garry Jones, CEO, London Metal Exchange

By: The WFE Focus Team Oct 2016

Our Q&A with Garry Jones, CEO, London Metal Exchange outlines how LMEprecious will operate, ahead of the planned launch in the first half of 2017.

WFE: What is LMEprecious and what are the drivers behind the initiative?

LMEprecious is an innovative new suite of exchange-traded, loco London precious metals products. It has been developed in partnership with the World Gold Council (WGC), Goldman Sachs, ICBC Standard Bank, Morgan Stanley, OSTC, Natixis and Société Générale, and will provide a solution that addresses the challenges facing the precious metals markets: transparency, regulatory change and market fragmentation. Working closely with the WGC, as the voice of the global gold producer community, along with our six trading partners has enabled us to build LMEprecious with extensive input from the precious metals market, so we are able to offer a solution that fully addresses the requirements of market participants.

Drivers for change in the precious market

WFE: How is this offering different from established listed products in other markets?

The LME is unique among exchanges in that our structure is similar to, and supports, the over-the-counter (OTC) market. We are able to make this structure available to the OTC precious markets, meaning trades previously executed bilaterally can seamlessly be brought on exchange and cleared. Unlike other offerings, both gold and silver will be tradeable on a daily basis, from T+1 (TOM), T+2 (SPOT), through to T+25. LMEprecious also offers standardised monthly futures contracts, out to five years. In this way, the system seamlessly blends the daily structure of the London OTC market, and the monthly futures approach of existing exchange offerings.

Modernising the gold and silver markets to deliver greater choice

WFE: How will the precious contracts be traded and cleared?

This new market segment will offer futures contracts, unlike the LME’s main base metals contracts, which are forwards contracts. This is simply because the futures structure best reflects the precious OTC market. LMEprecious contracts can be traded electronically via LMEselect, and through the 24-hour telephone market. The LME’s telephone market allows trades to be voice-broked, and then brought onto exchange as cleared futures contracts.

LME Clear, as part of its launch authorisation, was permitted to clear OTC gold and silver forwards contracts. LME Clear will, subject to regulatory approval, extend this to cover the new LMEprecious contracts. The precious contracts will be margined using Realised Variation Margin (RVM), providing more readily available trading profits. Delivery will be basis unallocated loco London, which allows for the efficient settlement between LMEprecious and OTC market deliveries.

WFE: Who will be able to access the market, and how?

The LME and its partners agree that a fair and transparent market, including broad market access and efficient price discovery are vital components of the modernisation of the gold market. The LME has transparent membership criteria, with existing members able to simply opt in to this new segment of the market, and they will have the benefit of already being set up from a systems and regulatory perspective. New members can either apply to be members through our usual channels, or may access the market as a client of an existing member. The booking model for the LMEprecious contracts will be a standard T2 model, which will facilitate easier client access to the market.

WFE: How will you ensure market liquidity from day one, and what are the benefits for potential market participants?

LMEprecious will bring many benefits to users, including transparent pricing with a forward curve going out five years and displayed electronic liquidity from day one. The LME’s market-making partners will deliver deep and tight executable prices across the gold curve. Additionally, participants will realise significant capital savings through netting portfolio trades. The launch of LMEprecious will also incorporate necessary MiFID II system changes, so that no further pressure is put on IT delivery for our members.

Distinguishing features for precious metals at the LME

WFE: Are you on track for delivery in the first half of next year?

We are currently working with all our potential users, clearing members and technology providers to ensure technical readiness for launch in the first half of 2017. We are also working closely with our regulators to ensure all regulatory requirements are in place for go-live. We are holding educational events in various locations as well as workshops aimed at operational staff involved in the processing of LMEprecious business.

For more information about LMEprecious, please contact [email protected]