Introduction
Existing structure
Existing opportunities
Lessons from other asset classes
Leveraging technology
Precious Metals Market Post-Trade Spotlight Review
With approximately 70% of global notional trading volume 1 , the London OTC market has been and remains the centre of the gold trade. Despite remaining OTC, the London market is highly organised and centralised. Gold, together with silver, platinum, and palladium are the most commonly traded “precious metals” which are capable of being traded on an allocated and unallocated basis. This allows market participants to trade the physical metals without the costs of physical transportation. There are two main locations for facilitating unallocated precious metals trading. Contracts that are settled in London, and underpinned by bullion that is physically held in London vaults, are referred to as “Loco London”. The equivalent structure for Swiss-settled contracts is referred to as “Loco Zurich”. The post-trade structure for commodities differs to that of financially-settled contracts; they are physical assets and delivery takes place in the real world, not on a ledger. Precious metals are further unique as a commodity due to their qualities as a store of value, and the difficulty in re-confirming their quality. As such, there is a sizeable custody market, which provides guarantees of standards, the safe storage of the physical metals, and proof of chains of ownership for previously tested bars.
It is recognised that the precious metals market structure has lagged behind other fixed income, currencies and commodities (“FICC”) markets in adopting automation and other efficiency gains 2 . Notwithstanding the differences in the structure of the markets, certain solutions from other asset classes may be read across to precious metals, and emerging technologies may provide further benefits. This Spotlight Review examines the existing post-trade landscape for precious metals, identifies prevailing structural and technical opportunities for improvement, and considers emerging technologies which could be applied. Whilst much of this paper refers to the precious metals markets in their entirety, some observations will relate only to the unallocated Loco London and Loco Zurich market. Derivatives of precious metals, whilst an important part of the market ecosystem, are traded and cleared like other asset classes and are out of scope of this review.
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Introduction Gold has been traded for millennia across the globe. Its inherent value in industry and as decoration, as well as for investment, means that the market is broad, and many transactions, including between members of the public, will take place Over the Counter (OTC). The role of an effective wholesale market in helping with price discovery is therefore vital to setting a reference price, thus bringing transparency to industrial and retail transactions.
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