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Rapidly rising volumes on LME back its foray into gold

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Rapidly rising volumes on LME back its foray into gold

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By Peter Hobson BARCELONA, Spain (Reuters) – Open interest on the London Metal Exchange’s (LME) precious metals contracts has topped 3 million ounces of gold, the exchange said, as it tries to muscle into a futures business dominated by rival CME Group. The LME introduced its LMEprecious gold and silver contracts in July, betting that tighter regulation would push London’s $5 trillion (£3.8 trillion) bullion market from over-the-counter (OTC) deals between banks and brokers to centrally cleared exchanges. London’s gold trade is dominated by OTC business. Futures trading is chiefly done on the CME’s Comex market in New York. Gold trading volumes have risen from an average 436,000 ounces a day in July to 680,000 ounces a day in September and on Oct. 11 to a record 1.4 million ounces, Kate Eged, the LME’s head of precious metals, told a conference in Barcelona. By Oct. 11, open interest in gold had increased to more than 3 million ounces, she said. “Things are looking well,” said Marwan Shakarchi, chairman of gold traders and refiners MKS. “We are looking at the LME as a price provider and liquidity provider … It has strong backers. Give it time.” LMEprecious is supported by banks, including Morgan Stanley and Goldman Sachs, who have a 50-50 revenue sharing deal with the exchange and are committed to providing liquidity. The exchange is also working to sign clearing members to trade. It expects three new clearers to join by the end of the year and six more in the first half of next year, which would take the total to 20. Australia’s Macquarie Bank will be the first of these new clearers to join, within weeks, three sources said. Macquarie and did not respond immediately to a request for comment. The LME declined to comment. Sources at several banks and brokerages said they were shifting some of their trades from London OTC to the LME and that volumes on LMEprecious were likely to grow. “It’ll help us manage our forward curve and cut costs, and enable us to have access to an increased pool of liquidity without having to have bilateral relationships with other banks,” a London-based broker said. “The LME takes away credit risk and reduces costs,” said a source at a European trading and refining company. “There’s a reluctance to change, but eventually, the LME could overtake the CME.” Miners and other companies dealing with physical gold, however, are likely to stick with OTC trading, said a London-based banker. “LMEprecious makes sense for the interbank guys because they are going to have huge cost savings, but the retail guys want flexibility and are happy with OTC as it is.”

COMEX RULES The LME’s volumes still pale by contrast with Comex, which traded 35.9 million ounces of gold on average each day in September and had open interest in gold of 52.8 million ounces as of Oct. 13, according to CME. “Comex and London OTC have a nice symbiotic relationship and the market goes where the liquidity is,” said Youngjin Chang, head of metals at CME. “Gold is truly a global trade. Out of all the markets out there, the most liquidity you can tap into in any time zone is Comex.” Comex has seen volumes rise more than 60 percent since the start of 2015, but LME Chief executive Matt Chamberlain said this was a good sign for LMEprecious. “It shows the size of the market opportunity,” he said in a recent interview. “As we build, as we get more arbitrage business, I have to believe some of that volume would like to transact in London but doesn’t at the moment have a venue for that, and we are now providing that. “We in general see other exchanges’ volumes going up as a good thing, because it suggests that the pie is bigger.” Comex and LMEprecious are likely to co-exist, said a brokerage source. “With LMEprecious the benefit is the forward curve. Comex is front-month liquidity. I use one for one thing, one for the other.” (Reporting by Peter Hobson; Editing by Veronica Brown and Larry King)
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