Existing opportunities
Existing structure
Lessons from other asset classes
Leveraging technology
Introduction
Precious Metals Market Post-Trade Spotlight Review
The opportunity to increase adoption of automation for trade confirmations, leading to greater post-trade efficiencies There is continued use of paper confirmations (PDF via email or fax) for trades settled with non-financial institutions. This becomes problematic as market participants will be using various platforms to confirm trades with different counterparties causing slower trade confirmations. Issues particular to the precious metals market include: P resence of non-financial market participants: Physical trading is common with non-financial institutions, such as miners and refiners, who do not have access to SWIFT and may not be able to adopt SWIFT. F ormat of messaging is limiting for bespoke contracts: SWIFT is not flexible, unlike XML formats, to accommodate the need to add additional fields. Physical transactions for precious metals are bespoke, and different parties engaged in a trade may expect different information due to internal processes. SWIFT leads to the inability of parties to insert information beyond the pre-set fields, which may be key terms of transactions.
L ack of standardisation for required fields: There are no fully adopted standards for inserting additional information into the pre-set fields in SWIFT messages that need to be completed, potentially leading to settlement failures where the information included in the SWIFT message by each counterparty to the trade is not electronically matched. Electronic platforms offer potential solutions to the current inefficiencies that exist with the precious metals trade confirmations. A number of existing electronic platforms are able to sync with SWIFT messaging or offer alternative communication systems to confirm trades. SWIFT alternatives which use JSON or XML formatting would allow for more flexibility in the messaging process, facilitating the inclusion of additional information when necessary. Adopting an alternative system would streamline the precious metals trade confirmations and reduce the use of paper, pdf or fax communication between trade parties.
Despite the benefits of alternative confirmation systems, challenges in implementing these solutions are apparent as adoption cannot be fragmented. All market participants would need to agree on a single solution and/or platforms and transition from existing systems.
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Opportunities in the existing post-trade process This section explores some of the opportunities to improve the efficiency of the existing post-trade process for precious metals. Some, such as the adoption of automation, are acknowledged as positive for the overall market but the cost-benefit analysis may differ for individual market participants. Others are trade-offs, such as between faster settlement timelines versus the liquidity benefits of margin trading and netting. It will be up to the industry to decide if, and when, new standards and conventions are required.
There is insufficient adoption of netting for non-prime brokerage transactions
To net offsetting obligations in unallocated metal, a bilateral agreement must be signed between the counterparties. While this is a standard part of a prime brokerage agreement, a specific bilateral netting agreement is less common in precious metals, compared with other financial assets. Achieving greater netting for precious metals would increase the liquidity of the market by reducing the outstanding settlement obligations that need to be considered against a counterparty default. For comparison, in the equities market an average of $1.7 trillion transactions is recorded every day. The multilateral netting process reduces that number by 98% and the total value of settled trades equates to $38 billion 6 . A greater focus on implementing these netting agreements would therefore increase adoption of netting for non-prime brokerage transactions.
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