In anticipation of the launch, Brady plc (BRY.L), the global provider of trading, risk management and settlement solutions to the metals and commodities sectors, has announced a new capability to support the trading and clearing of the OTC gold forward contracts. The new functionality is set to be launched in November 2010 through Bradyâs LMEsmart interface (the System for Matching and Registering Trades from the London Metal Exchange).
Martin Abbott, chief executive at the LME, is on record as saying the LME ââ¦believe that this initiative will improve OTC precious metals trading and bring synergy to all parties involved, namely LCH.Clearnet, the LME and members trading on the OTC London gold market.â
LCHâs post-trade service will allow bilateral OTC trades to continue to be negotiated and executed as per current market practices. Bradyâs LMEsmart interface allows gold forward contracts to be captured and routed through to LMEsmart, which submits matched bilateral trades to LCH.Clearnet for clearing. Physical delivery of London Good Delivery gold will continue as it is for these contracts. Organisations which are not members of the LME, but which plan to trade the new, cleared, gold forward contracts, will now have an easy-to-implement solution which will connect them to LMEsmart. It can also be used by existing members of the LME who wish to extend their market coverage.
Gavin Lavelle, CEO of Brady, comments: âClearing of OTC-traded contracts is another key step in allowing organisations to reduce their credit exposure. Further benefits will be gained by margin offsets and lower operational costs. We are providing support for this process through our existing applications and are making this facility available to firms, whether or not they are members of the LME.â
Initially, clearing will be available for OTC gold forwards for daily value dates; it is intended that this will be followed by traded options on gold and then forwards on silver, platinum and palladium, which are all to be priced in USD.
Introducing clearing to the wholesale London gold market will provide the potential to minimise systemic risk and create straight-through processing efficiencies for market participants.
Members of the London bullion market typically trade with each other and with their clients on a principal-to-principal basis, thereby rendering the exposure to bilateral counterparty risk inevitable. This systemic risk is minimised by clearing through the use of margin offsets, increased liquidity, improved collateral management and lower operational costs.