LONDON -- Fears of inflexibility and rising costs are sapping enthusiasm for the London Metal Exchange's new suite of gold contracts, potentially leaving the exchange reliant on the threat of an increasing regulatory burden to drive uptake.
London's $5 trillion-a-year gold trade has, along with the rest of the City of London, found itself under increased scrutiny since the Libor scandal, with U.S. lawsuits alleging rigging against the banks that set bullion prices.
Regulatory pressure sparked the fall of the near century-old telephone-based gold fix, or benchmark pricing, which was replaced by an electronic alternative in 2015, and reform of the management structure of the London Bullion Market Association.
The LME, owned by Hong Kong Exchanges and Clearing Ltd., says its contracts, which include spot, futures, and options, would bring price-setting out of the back rooms of banks by creating a published forward pricing curve for gold and sliver out to five years.
It also says the contracts' central clearing would free the banks and brokers that dominate London's over-the-counter gold market from increasingly onerous capital requirements, creating savings that could be passed to others in the industry.
But a source at a major gold trading bank said: "There's a lot of caution and probably outright scepticism from market participants whether this will add anything but another cost to the bottom line." ...
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