LONDON (Reuters) - The London Bullion Market Association (LBMA) believes the gold industry is ready for wholesale reform, including a tailor-made mechanism to report daily turnover and potential clearing following 2014’s shake-up of benchmarks.
The transparency of financial markets has been a focus of global regulators after evidence of price manipulation in lending rates between banks with the LIBOR scandal in 2012.
Both gold and silver were included in a list of seven benchmarks that will be regulated by Britain’s watchdog Financial Conduct Authority (FCA) from April.
New rules on over-the-counter derivatives are expected in Europe by 2016, while a broader review of UK markets is now evaluating the introduction of mandatory clearing and transaction-reporting obligations for precious metals.
More than $5 trillion worth of gold transactions are made over the counter in London every year. The OTC market, where trades are executed via dealer networks as opposed to a centralized exchange, exceeds the trading of gold futures.
“It would be beneficial for the industry to provide regular reporting of over-the-counter gold volume turnover,” LBMA CEO Ruth Crowell told Reuters in an interview. That would enhance transparency and many members would be keen to do it, she said.
The LBMA said that it would appreciate a bespoke reporting regime, such as the European Union’s REMIT (Regulation on Energy Market Integrity and Transparency) system for the gas and power markets introduced in 2011.
London’s bullion benchmarks, or fixes, were transformed in a matter of months last year as regulatory scrutiny made price-setting among a handful of banks untenable. Electronic platforms replaced daily telephone calls between banks to set prices used by consumers, producers, refiners and central banks to value their metal holdings.
Other financial sectors, notably currency markets, may see more business move onto exchanges or cleared venues as part of structural changes already underway. And technology providers are investing heavily in creating exchange-traded FX products.
A similar transformation is seen likely in precious metals too, as new regulation could increase banks’ capital charges to trade bilaterally.
“Some commodity derivatives, such as those for energy and precious metals, are mostly traded OTC via interdealer brokers,” the Bank of England’s Fair and Effective Markets Review (FEMR) consultation document said in October.
“Since many contracts in physically settled forward markets are of a fairly standardized type it is not clear why these OTC markets should not benefit from greater transparency,” it added.
Currently, the LBMA only reports the net volume of London bullion transactions settled between clearing members. The lack of data on how many trades are done through the day makes the market ‘opaque’ and does not give a precise idea of how liquid it is.
Crowell said that the LBMA is been preparing a number of options before the outcome of the FEMR review, due in July.
“We are preparing for what may come from a regulatory point of view and considering a number of options,” she said.
“However, it would be premature at this stage to prejudge the regulators by having formal conversations with service providers.”
Editing by Veronica Brown, Larry King