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London Clearing House Considers Gold as Collateral

Gold
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Gold

LCH.Clearnet, a leading independent clearing house, is considering a plan to accept gold bullion as collateral against margined positions. London is the world’s largest market for over-the-counter gold trading.

"We’re looking at it closely,” confirms David Farrar, LCH.Clearnet Director of Commodities. “It’s something that, subject to regulatory approval, we’d look to introduce later this year." The Financial Services Authority (FSA) is the regulator of the financial services industry in the UK. A source, close to the situation, tells CNBC that nothing is currently pending before the FSA at this time on this matter.

This follows an announcement by J.P. Morgan that it will become “ … the only tri-party collateral manager to accept physical gold as collateral to satisfy securities lending and repo obligations with counterparties.” And according to spokesman Chris Grams, the CME accepts allocated gold at the JP Morgan vault in London as collateral against any asset class position an investor might have at the CME.

Why is this move important? Market watchers say it adds credibility to the argument that gold is an alternative asset, a type of alternative currency.

Banks are always looking at their scarce resources including, cash and gold. Leveraging an increasingly valuable gold inventory would be a natural next step, and likely welcome extension of that process.

“There will be a substantive benefit for all firms active with gold bullion and / or LME registered warrants,” says Mike Frawley, Newedge Group Global Head of Metals. “It is the direction of the overall market to use warehouse receipts and / or bullion for margin purposes.”

And, he says as the London Metals Exchange (LME) gets closer to launching its over-the counter (OTC) contracts for gold traded in London, it will be important for the gold community to lever it’s existing stores for margin purposes. And perhaps in the process, ease the transition to a more transparent, over-the-counter gold market.

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