LME, banks in deal to propel gold futures
Lenders take stakes in London Metal Exchange gold contracts through new company
The London Metal Exchange has reached a 50:50 revenue-sharing deal with a company founded by a group of banks to promote trade in its new gold futures contracts, sources said, aiming to overcome market scepticism surrounding their launch in June.
Usually, exchanges merely consult potential users about their needs when planning new financial and commodity contracts.
But in this case, the LME has opted for a radical departure from normal practice as it tries to grab a piece of London’s $5 trillion-a-year (Dh18.36 trillion-a-year) gold market.
Sources close to the matter said that the five banks and a proprietary trader which are shareholders in the new company have undertaken to bring guaranteed minimum levels of trade in the gold futures.
Should they meet these levels, the project partners will receive a half share of the revenue under an incentive scheme designed to ensure the contracts have turnover, viability and credibility from the outset.
“We’re all committed market-making and will to at least bring our own trading book,” said a source at one of the banks involved in the project. “It’ll come with some built-in volume.” The sources gave few details of the arrangement.
Incentives
However, one at a different bank backing the contracts said: “Do we have incentives for it to work? Yes.” The LME, which is owned by Hong Kong Exchanges and Clearing Ltd, hopes the arrangement will give its contracts enough business to take off from June 5 despite doubts among many brokers and gold producers.
It also wants to shoulder aside US exchanges CME Group and ICE which launched London gold contracts last month, although they have yet to attract any business.
The LME’s partners from the banking sector are Goldman Sachs, ICBC Standard Bank, Morgan Stanley, Natixis and Societe Generale. They have founded a company called EOS Precious Metals along with commodity trader OSTC and The World Gold Council, an industry market development body.
Together they have invested several million dollars in designing and building the spot, futures and options contracts and formed EOS to receive their share of revenues.
The LME and EOS have also offered the deal to all other market participants. However, London’s two largest gold traders — HSBC and JPMorgan — are missing from the consortium, as is ScotiaMocatta, another big bullion dealer.
Robin Martin, head of market infrastructure at the World Gold Council, said EOS shareholders would not get any preferential treatment in terms of fees paid to use the new LME contracts.
However, he said: “There is a commercial arrangement in place which reflects the fact that the EOS shareholders have co-funded the buildout of this service.” The shareholders had invested in the project in terms of cash and time, “developing the product model and consulting with the LME over a drawn out multi-month process”, he said, without detailing the financial or trading arrangements.