Existing structure
Existing opportunities
Lessons from other asset classes
Leveraging technology
Introduction
Precious Metals Market Post-Trade Spotlight Review
Existing structure of post-trade processes continued
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2 Netting
3 Clearing and Settlement
Trade confirmation
Trade confirmations are used by the parties to a transaction to specify the commercial terms of such a transaction, including pricing terms. The trade confirmation process dates back to the Securities Exchange Act of 1934. There has been a sustained effort to shift trade confirmations to more automated methods to increase speed and reduce errors. Historically, trade confirmations used Telex, where confirmations were sent through Morse code. This was replaced following the introduction of SWIFT in 1973 3 . In the present-day, trade confirmation consists predominantly of SWIFT messages being sent between SWIFT users. As of 2020, more than 11,000 SWIFT members sent over 35 million transactions per day through the network across all asset classes 3 . There are also vendor platforms that allow non-financial institutions to interact with financial institutions via SWIFT, and dealer platforms allowing clients to confirm trades with dealers. However, some market participants are still using paper confirmations being sent through PDF and email or fax.
Netting is the method of reducing credit, settlement and other risks of financial contracts by aggregating (combining) two or more obligations to achieve a reduced net obligation.
Clearing and settlement complete a securities transaction where it is concluded with the discharging of the obligations of the parties to that transaction through the transfer of cash or securities, or both (see Article 2(6), Central Securities Depositories Regulation). The processes include reconciling trade data, recording the transaction, and ultimately delivering the cash and/or securities to the end recipients or their agents. Precious Metals transactions can be settled on a cash-only or physical basis. Currently, the spot settlement period for precious metals is 2 days (T+2) 4 . When trading Loco London metals, the metal must be settled by 3pm UK time while the currency leg (assuming US dollars) can be settled until 10pm UK time as the currency leg is settled in the US. In addition, there are currently two messages sent for the settlement of precious metal trades. Operationally, it is difficult to combine these two messages as they are sent through different systems.
Obligations can be offset, and therefore netting can occur in both unallocated Loco London and unallocated Loco Zurich metal. However, due to the different delivery options, it is not possible to net across markets or contract types. For example, an allocated contract cannot be net against an unallocated contract. Therefore, while netting in unallocated precious metal is possible, there has historically been less netting in the precious metals market compared with other asset classes on both a multi and bilateral basis outside of prime brokerage agreements.
Benefits of netting include:
Reduction of credit risk; Reduction of settlement risk; Reduction of liquidity risk; and Reduction of systemic risk.
Netting agreements, where counterparties agree to net offsetting obligations prior to settlement, promote efficiency by reducing the number and size of settlement obligations. Some participants in the precious metals markets transact through prime brokerage arrangements, whereby a client accesses liquidity from a dealer via a prime broker who intermediates the transaction by entering into offsetting trades with both the client and the dealer. Under prime brokerage arrangements, netting will take place between both the prime broker and dealer and the prime broker and client, where obligations can be offset.
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