EXCLUSIVE Banks prepare to cancel LME gold and silver contracts, sources say

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LONDON, Oct. 13 (Reuters) – A group of banks that have partnered with the London Metal Exchange (LME) to launch gold and silver futures in 2017 are preparing to abandon the project after volumes hopes did not materialize, according to three sources directly aware of the case said.

Such a move would end an attempt by the LME, which dominates the industrial metals trade, to capture part of London’s gold market, which is the world’s largest with gold valued at $ 17 trillion that changed hands last year.

The LME launched the contracts with partners including Goldman Sachs (GS.N) and Morgan Stanley (MS.N), who agreed to promote the trade in exchange for 50% of the income generated.

Project partners hoped that tighter regulation would move London bullion trading away from over-the-counter (OTC) agreements between banks and brokers to exchanges, which regulators see as safer and more transparent.

But the biggest dealers, including JPMorgan (JPM.N) and HSBC (HSBA.L), shunned the contracts, and after Societe Generale (SOGN.PA), one of the LME partners, closed most of its commodity activities in 2019, trade has come to naught.

Three sources from LME partner banks said they would meet in the coming months. Two said if nothing had changed they would withdraw. The third said it was clear that the contracts had failed and the LME deal was on hold.

“There is no one who wishes to keep it,” said one of the sources, adding that his bank was paying “a few hundred thousand dollars a year” to maintain the contracts and had blocked millions of dollars in a fund. default for them.

The deal with its partners had an initial term of five years, LME chief executive Matt Chamberlain told Reuters. “It is very possible that they will choose not to continue after 2022,” he said.

Other LME partners are ICBC Standard (601398.SS), (SBKJ.J), Natixis, the proprietary trader OSTC and the World Gold Council (WGC), an industry body.

“The World Gold Council strongly believes in increasing transparency and investor accessibility to gold. That’s why we support valuable LME and will continue to collaborate across the industry on similar initiatives, ”said Mike Oswin, Global Head of Market Structure and Innovation at WGC. A declaration.

All of the banks involved declined to comment. The OSTC did not respond to a request for comment.

CRITICAL MASS

Although contracts got off to a positive start, with 14.3 million ounces of gold worth around $ 20 billion and 121 million ounces of silver worth around 2 billion dollars traded on the LME in September 2017, activity then began to decline.

In 2019 and 2020, a rally in bullion prices pushed trading in London and the New York Comex to record highs, with around one billion ounces of gold changing hands at each location in March 2020. LME contracts have not been negotiated since mid-2020.

Last year, the LME partners reduced the value of the project from $ 2.5 million to zero, according to the accounts of a company created by the partners.

“There wasn’t enough critical mass from the banks that wanted the market to be traded and cleared versus maybe other banks that wanted it to stay over-the-counter,” Chamberlain said. .

Despite the failure of the contracts, sources involved in them and in banks that did not use them said that the exchanges in London were likely to eventually be traded on the stock exchange, because that is what regulators want. .

“In a few years, someone will try again,” said one.

Reporting by Peter Hobson and Pratima Desai; Editing by Veronica Brown and Alexander Smith

Our Standards: Thomson Reuters Trust Principles.

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