Exclusive: Bullion banks prepare CME pullback after virus snarl

LONDON (Reuters) - Gold trading banks are preparing to significantly reduce their positions on CME Group’s Comex exchange in New York, nine people familiar with the plans said, shifting more trading to London and raising costs for thousands of investors.

FILE PHOTO: Gold bullions are displayed at Degussa shop in Singapore June 16, 2017. Picture taken June 16, 2017. REUTERS/Edgar Su

Some bullion banks are no longer willing to hold large positions on Comex, the biggest gold futures market, after the coronavirus snarled the supply of gold bars, sending Comex prices vaulting above London rates in March.

The divergence wiped hundreds of millions of dollars off the value of trading books, according to industry sources, with HSBC reporting a $200 million paper loss in a single day.

Many banks have already reduced their day-to-day trading on Comex since the market disruption but they are worried that prices could diverge again and some now intend to reduce their open positions by between 50%-75%, sources at six lenders said.

Facing the threat of lost business, CME is considering amending contracts to allow delivery of gold in London as well as in New York, five industry and banking sources said, adding that no decision had yet been taken.

This would ease banks’ concerns by removing the need to move gold from London to settle Comex contracts. But it would take months or years to implement and may not apply to the most traded contract, sources said, meaning it would not stop a reduction of positions in the short term.

They and the other sources declined to be named because they are not authorised to speak to the media.

“We continue to work with market participants to evolve our offerings and continue to ensure our products deliver the most liquid, cost effective and transparent risk management tools,” the CME said in a statement, adding that trading so far this year was higher than a year ago.


HSBC, JPMorgan, UBS and other lenders use Comex futures to hedge their exposure to the gold market in London. Banks are the exchange’s single biggest user group, accounting for more than a third of all Comex contracts.

At issue are contracts owned by the banks worth as much as $45 billion, equivalent to around 800 tonnes of gold, according to Comex data.

Traditionally, the London-Comex trade was a win-win as it gave banks a cheap and low-risk way to expand their trading books and gave typical Comex investors - such as hedge funds and asset managers - a bustling choice of banks to buy from.

But it relied on the ability of banks to quickly move gold from storage points in London to New York to settle contracts.

A withdrawal by the banks may take months.

Some banks will close contracts by buying them back, if prices on Comex fall below London rates. Some banks also plan to close positions in June when they can use gold they have shipped to New York to deliver against contracts, sources said.

Around 400 tonnes of eligible gold worth $22 billion has been shipped to Comex-registered vaults since late March, according to CME data.

(Graphic: Comex gold stocks - )

Some trading will move from Comex futures to the London over-the-counter (OTC) market, sources said.

Rival exchanges such as the London Metal Exchange (LME) could also pick up customers because banks still want to use a futures market.

“This is an opportunity for someone to step in,” said a source at one of the biggest gold trading banks.

Both the London Metal Exchange and Intercontinental Exchange already offer futures contracts based on gold stored in London, but these are not widely traded.

LME Chief Executive Matt Chamberlain said there was increased interest from banks in its precious metals contracts. ICE did not respond to a request for comment.

Reuters asked 12 banks about their trading plans - HSBC, JPMorgan, UBS, Bank of Nova Scotia, Toronto-Dominion Bank, Citi, Morgan Stanley, Goldman Sachs, BNP Paribas, Standard Chartered, ICBC Standard and Bank of America

An HSBC spokesman said Comex remained one of many trading venues it and its clients use. The remainder either did not respond or declined to comment.


The disruption in March affected both markets.

Daily trading on Comex fell to around 25 million ounces last week from an average of 47 million in the year to March 23, when London and Comex prices moved apart, CME data show.

In London, daily trading was roughly 35 million ounces last week from an average of 40 million in the year to March 24, according to figures from the London Bullion Market Association and Nasdaq.

(Graphic: Gold trading volumes in London and on the Comex exchange - )

With fewer banks selling gold on Comex, investors are already paying more to maintain their positions. Every few months, investors exchange expiring futures contracts for ones with a later expiration. That would usually cost a couple of dollars an ounce. In recent days it has cost around $10-20.

Such a high price tag offers bigger profits for banks willing to trade, which will encourage some to keep trading on the exchange and close fewer positions, sources said.

Even with lower participation from banks, Comex, as the largest gold futures market, will likely remain dominant for the foreseeable future.

“There’s no other alternative,” said an industry source. “Where’s the trading going to go?”

Reporting by Peter Hobson; Editing by Veronica Brown and Carmel Crimmins