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EXCLUSIVE Banks prepare to scrap LME gold and silver contracts, sources say

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LONDON, Oct 13 (Reuters) – A bunch of banks that partnered with the London Metal Exchange (LME) to launch gold and silver futures in 2017 is getting ready to abandon the venture after hoped-for volumes didn’t materialise, three sources with direct information of the matter mentioned.

Such a transfer would finish an try by the LME, which dominates industrial metals buying and selling, to seize a part of London’s bullion market, which is the world’s largest with gold value some $17 trillion altering arms final yr.

The LME launched the contracts with companions together with Goldman Sachs (GS.N) and Morgan Stanley (MS.N), who agreed to promote commerce in them in return for 50% of revenues generated.

The venture companions had hoped tightening regulation would push bullion buying and selling in London away from over-the-counter (OTC) offers between banks and brokers to exchanges, which regulators see as safer and extra clear.

But the largest sellers, which embody JPMorgan (JPM.N) and HSBC (HSBA.L), shunned the contracts, and after Societe Generale (SOGN.PA), one of many LME’s companions, closed most of its commodities enterprise in 2019, buying and selling dwindled to nothing.

Three sources at banks partnered with the LME mentioned they’d meet in coming months. Two mentioned if nothing had modified they’d pull out. The third mentioned it was clear the contracts had not been profitable and the LME deal was up within the air.

“There’s not been anyone who is keen on keeping it,” one of many sources mentioned, including that his financial institution was paying “a couple of hundred grand a year” to keep the contracts and had hundreds of thousands of {dollars} locked up in a default fund for them.

The take care of its companions had an preliminary time period of 5 years, LME chief government Matt Chamberlain advised Reuters. “It’s very possible they choose not to continue after 2022,” he mentioned.

Others that partnered the LME are ICBC Standard (601398.SS), (SBKJ.J), Natixis , proprietary dealer OSTC and the World Gold Council (WGC), an business physique.

“The World Gold Council strongly believes in increasing transparency and investor accessibility to gold. This is why we support LME precious and will continue to collaborate across the industry on similar initiatives,” Mike Oswin, WGC’s world head of market construction and innovation, mentioned in an announcement.

All of the banks concerned declined to remark. OSTC didn’t reply to a request for remark.

CRITICAL MASS

Although the contracts had a constructive begin, with 14.3 million ounces of gold value round $20 billion and 121 million ounces of silver value about $2 billion buying and selling on the LME in September 2017, exercise then started to fall.

In 2019 and 2020, a bullion worth rally pushed buying and selling in London and on New York’s Comex change to report ranges, with a few billion ounces of gold altering arms in every venue in March 2020. The LME’s contracts haven’t traded since mid-2020.

Last yr, the LME’s companions wrote the worth of the venture down from $2.5 million to zero, the accounts of an organization arrange by the companions present.

“There wasn’t enough critical mass from banks who wanted the market to go on exchange and go cleared compared to perhaps some other banks who wanted it to stay OTC,” mentioned Chamberlain.

Despite the failure of the contracts, sources concerned in them and at banks that didn’t use them mentioned buying and selling in London was possible to finally go on change as a result of that’s what regulators need.

“In a few years, someone will try this again,” one mentioned.

Reporting by Peter Hobson and Pratima Desai; Editing by Veronica Brown and Alexander Smith

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Traders work on the floor of the London Metal Exchange in London, Britain, September 27, 2018. REUTERS/Simon Dawson//File Photo

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