London to lose gold crown on MiFID
16 Oct 2017 - 0:21
Bloomberg: New rules from regulators, on top of uncertainties over the UK’s future relationship with the European Union, are denting the city’s position as the biggest center for gold trading in the world. The changes threaten to push up costs, a key competitive advantage of London’s over-the-counter market.
Even before the regulations come in, the average net daily volume of gold settled by London Precious Metals Clearing Ltd. fell 12 percent in two months to 18.5 million ounces in August. In New York, the British capital’s biggest rival, trading in gold contracts jumped more than 25 percent in the third quarter from the previous three months, with activity during European hours surging 32 percent. That’s as traders scratch their heads over how changes to EU rules over reporting of transactions, known as MiFID II, and capital requirements under the so-called Basel III framework will affect their costs in London, where deals are mainly off exchange.
“MiFID is just a pain, and it’s not the only one,” said David Gornall, a former chairman of the London Bullion Market Association and founder of DG Metal Consultants LLP in London, which dispenses advice on coping with legislation. “People don’t know what’s expected of them.”
At issue is whether OTC trading of gold, which is backed by metal in a vault but isn’t typically delivered or allocated, should count as derivative trading. If it is, under the revised Markets in Financial Instruments Directive, then traders may face higher costs, eroding the main advantage of trading off-exchange.
That reduces London’s advantage over New York, where gold is traded via derivatives on the Comex Exchange, perhaps encouraging some to reconsider where they place deals.
On top of such pressures, the UK’s vote to leave the EU has already prompted some banks to consider moving staff from London to other cities in the union.
Cleared trading in London, which makes up only part of total volume, fell below New York’s for the first time in 2016, according to data from research firm CPM Group.
The city’s greatest challenge may come from tightening of rules governing lenders’ balance sheets as set out in the Bank of International Settlements’ Basel III accord, according to DG Metal Consultants’ Gornall. Efforts by the LBMA to lobby for the BIS to recognize gold as a high-quality liquid asset were thwarted by a lack of reliable data on trading volumes.
The LME and a group of banks have launched gold and silver futures contracts in a bid to make trading in the city more transparent.
The LBMA is seeking to overhaul the OTC market before new regulations are set to hit early next year.
The association and financial technology firm Boat Services Ltd. are launching a trade repository to register volumes, with a total of 13 market making banks. It has also convinced vault operators to publish figures on their holdings.