* LME works with World Gold Council and five banks
* Aims to launch contracts in first half of 2017
LONDON, Aug 9 (Reuters) - The London Metal Exchange (LME) said on Tuesday it is planning to launch spot and futures contracts for gold and silver in the first half of 2017, adding to its list of products which includes copper and aluminium.
The 139-year old exchange is working in collaboration with the World Gold Council, an industry body backed by gold mining companies such as Barrick Gold and Goldcorp, and is supported by five banks and proprietary trader OSTC, which have committed to provide liquidity.
“The initiative has been driven by the need for greater market transparency, to support and aid ongoing regulatory change, provide additional robustness to the precious metals market, broaden market access,” the exchange and its partners said in a statement.
Financial market transparency has been a major focus for regulators after evidence of price manipulation in lending rates between banks in the Libor scandal in 2012.
As regulators continue to review commodity markets, the bullion industry is braced for further changes that could ultimately include a mandatory central clearing or more expensive bilateral trading.
Banks and bullion operators have looked for ways to preserve London’s role as a major global trading centre, while increasing transparency of a market which can trace its roots back to the 17th century.
The London Bullion Market Association (LBMA), another industry body whose members are mostly banks, refiners and dealers, separately asked exchanges and technology firms in October last year to bid for services such as a gold exchange or a clearing platform.
London currently dominates the global over-the-counter gold trade with an estimated $5 trillion changing hands every year, while New York’s Comex contract sets the benchmark for futures.
The LME plans physically delivered spot, futures and options contracts. The gold will be 100 ounces in size (worth around $133,600 at current prices) and silver 5,000 ounces. All contracts will be cleared through LME Clear, the exchange’s clearing house, which has an annual traded notional value of $12 trillion.
The World Gold Council CEO Aram Shishmanian said that they had initially engaged with around 30 firms, but only Goldman Sachs, ICBC Standard Bank, Morgan Stanley , Natixis and Societe Generale signed up to support the contracts from the launch day.
After the transformation of precious metals benchmarks in 2014, led by a regulatory drive to make them more robust to attempts of manipulation, banks have become more cautious.
Several of them have run into trouble with regulators over misdemeanours in their precious metals trading business.
The benchmarks are widely used by producers, consumers and investors to trade and value the metal. Gold and silver are among the eight major market benchmarks that are regulated by Britain’s watchdog Financial Conduct Authority (FCA).
The LME, which runs the platinum and palladium price benchmarks, will look at extending spot and futures contracts to these two metals, the LME’s chief executive Garry Jones told Reuters.
The world’s oldest and largest market for industrial metals, owned by Hong Kong Exchanges and Clearing had suspended a clearing service for OTC gold and silver trades in 2014, which was run in conjunction with London clearing house LCH.Clearnet, when market-making members including UBS and JPMorgan stopped providing data to participate in price-setting mechanisms.
The exchange also operated a 10,000 ounce silver contract in the 1970s, which was suspended the following decade. (Reporting by Clara Denina, editing by David Evans)
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