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
3 Clearing and Settlement continued
Loco Zurich also allows market participants to trade, clear, and settle on an allocated and unallocated basis but less flexibly than London. Zurich is a significantly smaller market and is largely dependent on two clearing banks.
A minority of precious metals trades are settled Delivery versus Payment (DvP) or on a pre- funded basis where one or both of the counterparties are uncomfortable with the intra-day settlement risk. However, the majority of precious metals market trades are not settled DvP due to the operational challenges associated with the metals leg and currency leg of each trade being settled at different times. It is understood that the current clearing process works effectively; however, as with other asset classes, there remain potential areas for efficiency gains.
London Precious Metals Clearing Limited (LPMCL), a market utility, supports the Loco London precious metals market as it oversees and manages the daily clearing system. LPMCL has just four members who provide clearing services for the rest of the market. The members of the LPMCL follow a code of practice on clearing 5 , meaning that they may settle trades amongst themselves, because of the guarantees of metals kept in their vaults. This interconnectivity between clearing providers increases efficiency of the post-trade process. LPMCL provides an electronic matching system for trades. The clearing members also provide vaulting services for clients who require custodial services, which may be on an allocated basis (where specific assets are assigned to the client, similar to a safety deposit box) or unallocated basis (where the client maintains a claim to a fixed amount of assets meeting ‘good delivery’ standards, similar to a bank account).
The structure of the London and Zurich markets is also different. Notably:
I. The Zurich market is more focused on the trading of physical metal and is used as a transit point between western and eastern markets; and II. Whilst London is dominated by gold and silver, the Zurich market has higher volumes of other traded precious metals including platinum and palladium.
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