It’s been just over a year since LME launched LMEprecious along with the World Gold Council and a group of leading industry players. Please could you remind Focus readers exactly what LMEprecious is?
LMEprecious provides exchange traded and cleared 100oz gold and 5,000oz silver futures contracts that combine spot liquidity with monthly dates, tradeable on an outright basis or as calendar spreads. The LME launched these products in July 2017 following significant demand from the market and with commitments from the World Gold Council and key precious metals stakeholders to ensure liquidity and market depth for the contracts.
LMEprecious delivers greater choice for participants, and provides additional hedging tools and trading opportunities in a centrally cleared solution. The contracts were designed to enhance market transparency in the precious metals market and offer an additional liquidity pool.
And how has the first year of trading gone?
Our first year of trading has been really promising, with volumes and open interest establishing a stable foundation. Total volume traded in the first year was over 1,250,000 lots, with combined daily volumes of gold and silver averaging about 5,000 lots per day. Open interest goes out to four and a half years, with significant growth in long-dated open interest, which indicates that the contracts are being used increasingly as risk management tools.
LMEprecious has also displayed on-screen liquidity from day one with the LME’s partners providing deep and tight executable prices across the gold and silver curves, out to five years.
In the first year we saw most of our volume coming from Europe and the US, but due to client demand in June 2018 we launched an Asian hours liquidity programme for LMEprecious, providing additional on-screen liquidity from 01:00 to 08:00 London time.
Two new general clearing members (GCMs) joined LMEprecious earlier this year, with more members in the pipeline for the coming months.
How does LMEprecious complement the OTC precious metals market?
While the efficiencies of LMEprecious will make it attractive for inter-bank and hedging business to use the LME contracts, we expect a lot of business to remain bilateral OTC. Significant operational efficiencies can be achieved through executing standardised exchange traded contracts, while more bespoke client needs can be best met OTC. The two complementary trading formats reinforce the London market as the world’s primary international precious metals trading centre. LMEprecious is designed to address increased costs of OTC trading, and pressure on provision of bilateral credit lines through provision of clearing and the associated multi-lateral netting efficiencies, balance sheet improvements, and operational and reporting efficiencies.
The loco London delivery element of the LME’s physically settled precious metals contacts allows for the efficient settlement between LMEprecious and OTC market deliveries. LMEprecious trade execution also supports the OTC market through a 25% fee discount for bilateral telephone trades which are input via LMEsmart, and cleared. Given telephone-based trade execution is the most prevalent in the existing OTC market, this discounted price demonstrates our commitment to working with existing market practices.
The next phase of LMEprecious will deliver platinum and palladium futures, and options contracts across all four metals. What’s the timeframe for this next phase, and what other plans do you have to grow the initiative further?
Yes - following demand from the precious metals community, we are aiming to launch LMEprecious options in early 2019, to complement the LMEprecious futures products. The proposed European-style options will expire into the relevant underlying monthly LMEprecious futures contracts, and go out to 24 months forward. Platinum and palladium futures will be next on the roadmap and we continue to engage with the PGM community to ensure we capture the specific needs of the industry in our contract design and implementation.
Having recently launched our Asian hours liquidity provider programme, we hope to grow the market in this region as well as to increase our client base more generally – which we expect to be able to achieve over the coming months with the planned addition of further clearing members.