New exchange expected to see significant activity from Chinese banks and investors, some of whom have a stake in platform

The launch of London's new gold exchange, LMEprecious, in 2017 could generate more participation from Chinese banks and investors in London's gold trading, analysts say.

The exchange is to be launched by The London Metal Exchange and The World Gold Council. One big China link is that LME has been strategically redeveloped to cooperate more closely with Asian investors since its acquisition by Hong Kong Exchanges and Clearing in 2012.

In addition, China's ICBC Standard Bank is set to cooperate closely on LMEprecious, being one of its stakeholders and founding supporters, alongside four other global investment banks.

ICBC Standard Bank is a London-based bank with a history dating back to 1992, and derived its current name in 2015 when ICBC acquired a controlling 60 percent stake from the South African lender Standard Bank.

In addition, because LME already has three Chinese banks as clearing members - China Merchant Securities, Bank of China and ICBC Standard Bank - these banks are expected to bring more of their existing Chinese clients to trade through LMEprecious, says Harry Knott, head of operations, risk and derivatives at Brady, a trading and risk management software services firm.

"The ability for the Chinese clearing members to clear precious metals contracts in addition to the existing base metals contracts will offer a more comprehensive range of products to both new and current clients," Knott says.

Approximately three-fourths of global bullion dealing takes place in London, but most of it is still done directly between buyers and sellers, as it has been for decades.

Such lack of transparency has attracted market concerns, warning that London could lose gold trading volumes to China, the world's largest gold importer, if it does not introduce more efficiency and transparency.

This year, the Shanghai Gold Exchange launched its own benchmark, the renminbi-denominated Shanghai Gold Fix, which is open to trading by international investors.

Andrew Leyland, a director at consultancy Wood Mackenzie who heads the metals and mining consulting team, says LMEprecious' launch is "really about transparency and future-proofing the London market versus both regulatory scrutiny and a rising challenge in Shanghai."

Historically, London's gold trading is overseen by the London Bullion Market Association, and individual contracts are cleared by LBMA member clearing banks, although no central clearing existed.

Under the LMEprecious arrangement, LME clearing member banks will act as counterparties to clear their clients' trades, and all trades will be cleared by LME Clear, to increase transparency. Such central clearing fits in with Europe's post-financial crisis regulations, which are increasingly strict on central clearing and transparency.

Katarina Cvijovic, head of precious metals for ICBC Standard Bank, says the Chinese banks' close participation in LMEprecious can play a role in "the construction of an integrated global precious metals business".

ICBC's Shanghai precious metals department is a participant in the LBMA gold price benchmark, and also an Shanghai Gold Exchange gold benchmark fixing member, so effectively ICBC Standard Bank and its parent company's gold trading activities link the Shanghai and London markets.

Daisy Liang, director and head of investor relations for Asia-Pacific at Gresham Investment Management, says the establishment of LMEprecious will help LME to diversify into precious metals trading, in addition to the exchange's established base metals trading.

"But because base metals rely heavily on emerging-market demand, such as China's infrastructure construction boom, and now this supercycle is coming to an end with China's slowdown, it makes sense for LME to diversify into sectors like gold, which is less cyclical," Liang says.

Liang also expressed optimism over LMEprecious, as "LME has demonstrated it has the successful capacity to create benchmarks, and to facilitate the trading of contracts as useful, liquid tools."

cecily.liu@mail.chinadailyuk.com

(China Daily European Weekly 08/19/2016 page28)