Leveraging technology
Existing structure
Existing opportunities
Lessons from other asset classes
Introduction
Precious Metals Market Post-Trade Spotlight Review
Integrated vendor solutions? Potential vendor solutions could work in cooperation with LPMCL to make the precious metals market more efficient. As reflected by CLS in the FX market, a vendor working on top of LPMCL could provide DvP and netting solutions for the precious metals market. When trading multiple physical assets, a market participant will have numerous contracts where netting can be used. This could require a significant change to bank processes and operating models as it is technically challenging to capture both the currency leg and metal movement information and use it to create a contract. The vendor solutions applied would need to be consistent across the market and link in with a variety of existing in-house systems. An expanded and more integrated unallocated precious metals market? In addition to Zurich developing more advanced clearing and settlement systems, a single infrastructure solution between London and Zurich could drive additional advantages. Loco London and Loco Zurich dealers already reached an agreement in 1979 to standardise ‘good delivery’ for precious metals. Building on the attributes of the LPMCL model across both markets could be effective when trading on an unallocated basis. The interbank network in the Zurich market is lighter than the existing London network and the liquidity in the Zurich market varies from being more liquid than the London market to less liquid, so could form a good complement.
The existing concentration of the metal vaulting network can make trading across regions difficult in terms of the need for transportation. Theoretically, it may be beneficial to expand the existing vaulting network as trading between regions and countries would be simplified with less need for transport. However, even creating a vaulting network across just Loco London and Loco Zurich metal faces considerable barriers. Most notably, it would result in differential freight costs for participants requiring physical delivery, depending on the location of the metal. Also, across the precious metals market, there is a difference between the physical assets that are traded. For example, in the gold market, there are two main type of physical bars that are traded – the large bar and the kilo bar. Tokenising precious metals? A digital solution whereby physical assets are tokenised may offer the market lower margin requirements, reduce settlement risk and allow for shortened settlement which could be instantaneous and/or allow atomic settlement, where one leg of a trade is settled if, and only if, the other is also settled. T+0 settlement under today’s infrastructure has drawbacks due to the understandable difficulties in trusting that an anonymous market participant can deliver on their side of the trade. Tokenisation, however, would mean that each physical asset has a digital twin, thus allowing an improved infrastructure of less fraudulent activity. This is because all bars traded on the market are registered and traceable on an immutable basis as pledged collateral.
In precious metals, the London Bullion Market Association (LBMA) and the World Gold Council (WGC) are collaborating to develop and implement an international system of gold bar integrity that will create an immutable record of a gold bar’s place of origin and chain of custody 10 . This blockchain-backed ledger will register and track bars, capturing the provenance and full transaction history. While the initial focus of this work is not on confirmation and settlement in the unallocated precious metals market, it may provide a pathway to the significant investment that would be required by all market participants to achieve a tokenized digital market Furthermore, the UK government have acknowledged the significant efficiency gains which may arise from the introduction of tokenisation in markets 11 . However, it is also understood that future regulatory change might be necessary to facilitate a large-scale adoption of this technology whilst preserving market integrity. Final remarks The adoption of automation and other efficiency gains in precious metals market structure has lagged behind other FICC markets. However, there is now an opportunity for the market to make material improvements to the efficiency of its post-trade processes. These improvements could be driven by incremental enhancements informed by the earlier evolution of other FICC asset classes or a more radical change through the tokenisation of the post-trade ecosystem.
5
Leveraging technology: the future for precious metals settlement? Examples from other asset classes, including the case studies above, show that holistic solutions can sometimes solve multiple problems. This section explores potential options for the future which
might deliver one or more of the efficiencies identified in Section 3.
For solutions to be successful, there needs to be a high degree of standardisation across the precious metals market.
11
Made with FlippingBook Online newsletter maker