Exclusive: London gold rush - ICE to launch clearing before banks are ready

Wed Mar 15, 2017 8:24pm EDT
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By Peter Hobson and Jan Harvey

LONDON (Reuters) - Intercontinental Exchange (ICE) is set to launch clearing for London's benchmark gold price auction before participants are ready as it races to prevent rivals muscling in on the city's $5 trillion-a-year bullion market, market and banking sources said.

Clearing - where an exchange acts as an intermediary to guarantee and settle trades - is regarded as a necessary progression for the gold trade as tighter regulatory capital requirements increase the cost of trading off-exchange. ICE (ICE.N: Quote), the London Metal Exchange (LME) and CME Group (CME.O: Quote) are competing to offer services through futures contracts and grab the biggest slice of the new business.

U.S.-based exchange operator ICE has already pushed back the launch of its service by several weeks to allow the banks and brokers who participate in the auction to adapt their IT systems, four sources with direct knowledge of the matter told Reuters. Two of the sources said ICE now planned to introduce clearing from Apr. 3 - the first Monday of the month.

However, at least four of the 14 banks and brokers who participate in the LBMA Gold Price auction - which sets the benchmark for bullion traders around the world - will still not be ready to use the new system, three separate sources said.

When asked by Reuters about any delay in the launch and any lack of readiness among auction participants, ICE declined to comment for this story.

Banks that are not ready would be suspended from the auction until they have the necessary IT infrastructure in place or would have to participate through other players who could clear deals, according to the sources.

ICE's readiness to provoke such disruption illustrates how much it wants to avoid further delays that could torpedo its ambitions to become the dominant exchange in London's vast bullion market, market sources said.

It comes as the LME is preparing to launch its own rival precious metals contracts in June. The LME, owned by Hong Kong Exchanges and Clearing Ltd (0388.HK: Quote), has moved aggressively by reaching a 50:50 revenue-sharing deal with a company founded by a group of banks to promote its offering.   Continued...

FILE PHOTO: A worker shows gold biscuits at a precious metals refinery in Mumbai, India March 3, 2008. REUTERS/Arko Datta/File Photo