By Peter Hobson and Jan Harvey
LONDON (Reuters) - Intercontinental Exchange (ICE) is set to launch clearing for London's benchmark gold price auction before participants are ready as it races to prevent rivals muscling in on the city's $5 trillion-a-year bullion market, market and banking sources said.
Clearing - where an exchange acts as an intermediary to guarantee and settle trades - is regarded as a necessary progression for the gold trade as tighter regulatory capital requirements increase the cost of trading off-exchange. ICE (N:ICE), the London Metal Exchange (LME) and CME Group (O:CME) are competing to offer services through futures contracts and grab the biggest slice of the new business.
U.S.-based exchange operator ICE has already pushed back the launch of its service by several weeks to allow the banks and brokers who participate in the auction to adapt their IT systems, four sources with direct knowledge of the matter told Reuters. Two of the sources said ICE now planned to introduce clearing from Apr. 3 - the first Monday of the month.
However, at least four of the 14 banks and brokers who participate in the LBMA Gold Price auction - which sets the benchmark for bullion traders around the world - will still not be ready to use the new system, three separate sources said.
When asked by Reuters about any delay in the launch and any lack of readiness among auction participants, ICE declined to comment for this story.
Banks that are not ready would be suspended from the auction until they have the necessary IT infrastructure in place or would have to participate through other players who could clear deals, according to the sources.
ICE's readiness to provoke such disruption illustrates how much it wants to avoid further delays that could torpedo its ambitions to become the dominant exchange in London's vast bullion market, market sources said.
It comes as the LME is preparing to launch its own rival precious metals contracts in June. The LME, owned by Hong Kong Exchanges and Clearing Ltd (HK:0388), has moved aggressively by reaching a 50:50 revenue-sharing deal with a company founded by a group of banks to promote its offering.
If it quickly builds up liquidity, it could mop up a big slice of the market.
The sources said a launch by ICE within weeks could give it time to cement its own position before the LME contract begins trading.
"ICE is obviously of the view that if they go early, before the LME, then they will win long term," said a source familiar with the process of launching the service. "If something already has liquidity, it will tend to attract liquidity."
U.S.-based CME launched a cleared gold contract in January but it has so far struggled to attract business.
DEADLINE
Societe Generale (PA:SOGN), Standard Chartered (L:STAN), ICBC Standard Bank (SS:601398) and China Construction Bank will not be ready to clear the LBMA auction from day one, according to four sources.
"We are trying our best to communicate with our broker to make the clearing possible. But I'm not sure whether we can get ready before deadline as some issues still need to be solved," a spokesman for China Construction Bank said.
Societe Generale declined to comment, while Standard Chartered was unable to provide immediate comment and ICBC did not respond to a request for comment.
The remaining LBMA Gold Price benchmarking participants are Bank of China, Bank of Communications, Goldman Sachs (NYSE:GS), HSBC, JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), ScotiaMocatta, Toronto-Dominion Bank and UBS. INTL FCStone is an indirect participant.
A telephone-based benchmark gold price auction, or gold fix, dates back to 1919. In those days, each representative had a small British flag that they raised after receiving any change from their dealing room. As long as any flag was raised, the chairman could not declare the price as fixed.
This was replaced by the current electronic alternative in 2015 because of regulatory pressure and U.S. lawsuits alleging rigging by the banks that set bullion prices.
Sources at many participant banks said that they were unhappy with the speed at which ICE was seeking to introduce clearing, which require investment in IT processes and back office systems and raise complex compliance issues.
"They are struggling because they've been focusing on getting ready for MiFID," said one source, referring to new guidelines on commodity derivatives which will come into force next year.
ICE says clearing will open the price benchmarking process to new participants by removing the need for them to have bilateral credit lines in place with all other direct participants in the auction.
But it is also a way of bringing more business to the exchange and could be key for the success its gold contract, market participants said.