The London Metal Exchange has reached a 50:50 revenue-sharing deal with a company founded by a group of banks to promote trade in its new gold futures contracts, sources said, aiming to overcome market scepticism surrounding their launch in June.
Usually, exchanges merely consult potential users about their needs when planning new financial and commodity contracts. But in this case, the LME has opted for a radical departure from normal practice as it tries to grab a piece of London’s $5 trillion-a-year gold market.
Sources close to the matter told Reuters that the five banks and a proprietary trader which are shareholders in the new company have undertaken to bring guaranteed minimum levels of trade in the gold futures.
Should they meet these levels, the project partners will receive a half share of the revenue under an incentive scheme designed to ensure the contracts have turnover, viability and credibility from the outset.
“We’re all committed to market-making and will at least bring our own trading book,” said a source at one of the banks involved in the project. “It’ll come with some built-in volume.”
The sources gave few details of the arrangement. However, one at a different bank backing the contracts said: “Do we have incentives for it to work? Yes.”
The LME, which is owned by Hong Kong Exchanges and Clearing Ltd (0388.HK), hopes the arrangement will give its contracts enough business to take off from June 5 despite doubts among many brokers and gold producers.
It also wants to shoulder aside U.S. exchanges CME Group (CME.O) and ICE (ICE.N) which launched London gold contracts last month, although they have yet to attract any business.
Source: UK Reuters
