World Gold Council eyes new London exchange

The gold industry's leading trade body and half a dozen banks have agreed to explore the idea of a gold exchange in London as the existing market faces greater regulation.

The World Gold Council, a group which is made up of 19 gold miners, and at least five banks are participating in initial discussions, according to people familiar with the matter.

That could see a move from London's bilateral over-the-counter gold market, which has been criticised for its lack of transparency, to a centrally cleared market. The WGC has hired a number of consultants and spent the past six months pitching a business case for banks to consider new trading infrastructure, the people said.

The London gold market, whose members trade with each other directly or on behalf of global clients such as central banks and jewellers, moved to an electronic system of fixing the daily price last month, replacing an auction run between a group of banks that started in 1919. The new benchmark came under the regulation of the UK's Financial Conduct Authority on Wednesday.

The change comes as London's market faces increasing competition from gold futures traded on the New York Mercantile Exchange's Comex market, as well as the Shanghai Gold Exchange. Shanghai's exchange opened its bullion contracts to foreign investors in February.

European authorities are also set to conclude their final review in coming months of the Markets in Financial Instruments Directive (Mifid II), the region's flagship markets legislation. Regulators want to increase transparency, clamp down on speculation and guard against systemic risk across equity, fixed income and commodity markets.

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The London Bullion Market Association says the current system provides confidentiality and ensures risks stay between the two counterparts of the transaction.

Some banks remain reluctant to support the initiative. Moving it on to an exchange would be difficult since delivery of gold can happen in vaults around the world, even though the transaction is settled and cleared in London, according to market participants. It is also not clear how the London market will be regulated under Mifid II, they say.

But a move towards a more transparent exchange-based system could provide protection against regulatory fines and investigations that have in recent years raised the compliance cost of transacting in precious metals. Banks had to spend considerable time getting compliance approval before they could participate in the new gold fix.

Last year Barclays was fined £26m last year for allegedly seeking to rig the old gold fix.

"Everyone thinks it more and more likely that there's going to be more oversight," one person said. "I think the one thing to avoid is having anything imposed on the market."

Launching a new gold contract will not be easy. The CME Group, the world's biggest futures exchange, launched a product in Hong Kong this year but liquidity has yet to pick up. Singapore has also had attempts at launching a gold contract.

Some also question whether the WGC is the right one to promote an exchange, seeing it as an attempt to find new sources of revenue. The body did not immediately respond to a request for comment.

The WGC helped set up the SPDR Gold Trust exchange-traded fund in 2004, the first gold-backed ETF, but is likely getting less revenue from it now that volumes and price have come down, according to one analyst. The number of mining members in the body has also fallen.

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