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London’s Gold Hub Reputation Threatened By Brexit Negotiations

Kitco News

London’s Gold Hub Reputation Threatened By Brexit Negotiations

(Kitco News) - U.K. capital’s gold dominance is looking shaky, as traders fear new regulations and rising costs amid uncertainty over London’s future relationship with the EU, according to media reports.

The dent in London’s bullion market, which is the largest over-the-counter (OTC) gold and silver trading center in the world, is already visible.

In August, the average net daily volume of gold settled by London Precious Metals Clearing Ltd. dropped 12% in two months to 18.5 million ounces. In comparison, New York – London’s biggest competitor – saw a surge in gold contracts of more than 25% in Q3, led by improved European activity, Bloomberg reported.

Some of the things that worry investors are changes to the EU laws that oversee reporting of transactions, known as the Markets in Financial Instruments Directive (MiFID II), and capital requirements under the Basel III framework. These were passed by the EU to create a single, more competitive financial market.

Market participants are not sure how costs will be affected, as U.K. negotiates its exit from the EU.

“There’s lots of confusion with MiFID II and what’s coming out in January 2018,” Bloomberg cited Young-Jin Chang, global head of metals products at CME Group, as saying.

Also, the London Bullion Market Association warned in a note on Sunday that banks could leave the market because of high costs in the U.K.

“MiFID is just a pain, and it’s not the only one,” according to David Gornall, a former chairman of the LBMA and founder of DG Metal Consultants LLP in London. “People don’t know what’s expected of them.”

One of the key questions for analysts is whether OTC trading of gold will be considered as derivative trading. If it is, then traders will be facing higher costs, making other markets more lucrative.

In the meantime, evidence of London’s eroding reputation as the gold-trading hub has been piling up.

CPM Group released research showing that cleared trading in the U.K. capital dropped below New York’s for the first time in 2016.

Some banks are also moving employees out of London to other European cities.

“They’re moving business out of London,” said George Gero, a managing director at RBC Wealth Management. “If you add everything together, there’s been more volatility and more liquidity on Comex.”

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