Will New York usurp London’s ‘undisputed’ gold crown?
london/new york — London is losing its Midas touch.
New rules from regulators, on top of uncertainties over the UK’s future relationship with the European Union (EU), are denting the city’s position as the biggest centre for gold trading in the world. The changes threaten to push up costs, a key competitive advantage of London’s over-the-counter market.
Even before the regulations come in, the average net daily volume of gold settled by London Precious Metals Clearing Ltd fell 12 per cent in two months to 18.5 million ounces in August. In New York, the British capital’s biggest rival, trading in gold contracts jumped more than 25 per cent in the third quarter from the previous three months, with activity during European hours surging 32 per cent.
That’s as traders scratch their heads over how changes to EU rules over reporting of transactions, known as MiFID II, and capital requirements under the socalled Basel III framework will affect their costs in London, where deals are mainly off exchange.
“MiFID is just a pain, and it’s not the only one,” said David Gornall, a former chairman of the London Bullion Market Association (LBMA) and founder of DG Metal Consultants in London. “People don’t know what’s expected of them.”
At issue is whether OTC trading of gold, which is backed by metal in a vault but isn’t typically delivered or allocated, should count as derivative trading. If it is, under the revised Markets in Financial Instruments Directive, then traders may face higher costs, eroding the main advantage of trading off-exchange.
That reduces London’s advantage over New York, where gold is traded via derivatives on the Comex Exchange, perhaps encouraging some to reconsider where they place deals.
On top of such pressures, the UK’s vote to leave the EU has already prompted some banks to consider moving staff from London to other cities in the union.
Cleared trading in London, which makes up only part of total volume, fell below New York’s for the first time in 2016, according to data from research firm CPM Group.
“They’re moving business out of London,” George Gero, a managing director at RBC Wealth Management, said. “If you add everything together, there’s been more volatility and more liquidity on Comex,” he said, also citing increases in high-frequency trading, haven demand and hedging record share prices as positive trends for the exchange.
The city’s greatest challenge may come from tightening of rules governing lenders’ balance sheets as set out in the Bank of International Settlements’ Basel III accord, according to Gornall.
“Trading gold OTC is going to become more expensive and more challenging for certain participants as a result of Basel,” Kate Eged, head of precious metals at the London Metal Exchange, said. — Bloomberg