LCH.Clearnet Limited (LCH.Clearnet), the global leader in clearing, today launched clearing for the over-the-counter (OTC) wholesale London gold market in a joint initiative with the London Metal Exchange (LME).
London is the world's largest market for OTC gold. In October 2010, the average daily turnover in London was 532 tonnes, equivalent to almost a quarter of the world's annual gold supply, and in 2009, total OTC trading turnovers equalled approximately $5 trillion.*
The post-trade service allows bilateral OTC trades to continue to be negotiated and executed as per current market practices. Transactions are captured via LME's trade capture system, LMEsmart, with matched bilateral trades submitted to LCH.Clearnet for clearing through its multi-asset clearing system, Synapse. The contracts will be marked to market using the LBMA forward curve, providing participants with a transparent and reliable source for margining their forward positions.
Introducing clearing to the wholesale London gold market enables participants to mitigate counterparty risk and benefit from straight-through processing efficiencies. In addition, market participants are able to benefit from margin offsets with other metal contracts listed on the LME, improved collateral management, enhanced balance sheet management and lower operational costs.
Initially, clearing is available for OTC gold forwards for daily value dates from spot out to 10 years. Cleared trades will be priced in $US and it is intended that LCH.Clearnet and the LME will also develop similar OTC clearing services for silver, platinum, palladium and gold options
Roger Liddell, Chief Executive, LCH.Clearnet said: "We wanted to bring all the benefits of clearing to the bullion market, whilst enabling them to preserve the OTC nature of the business which makes it such a success. Together with the LME, we look forward to supporting the future growth of the bullion market."
Martin Abbott, Chief Executive, LME said: "We have been working closely with LCH.Clearnet to give the London bullion market participants a smooth route to clearing through our trade capture platform. Gold traders can now send booked trades through LMEsmartrt to clearing enabling them to mitigate counterparty risk and cross-margin against other LME products they may be trading such as copper and aluminium."
*sources: London Bullion Market and World Gold Council