Clearing of London Gold Forwards
The over-the-counter (OTC) market for gold and silver forwards, based on Loco London delivery, is a vital part of the global bullion market.
CME Group supports this market through our offering of a central counterparty (CCP) clearing service. A clearinghouse, like CME Clearing, is a counterparty for every trade – acting as the buyer for every seller and the seller for every buyer.
Additionally, CME Clearing oversees all aspects of the physical delivery process of unallocated gold and silver.
How Clearing Works
First, let’s look at how CME Clearing works for gold and silver forwards. Upon completion of the OTC transaction, the trade is submitted to CME Clearing through CME ClearPort.
Since these positions are cleared as OTC forwards and not futures, they are held in a cleared OTC account until expiry. Delivery of bullion occurs through Loco London unallocated accounts operated by LPMCL member banks.
As forwards contracts, the clearing process has some features that differ from futures:
- Each transaction is held as an open position until expiry
- Forwards transactions result in value being assigned to the expiry date, and the clearing process respects this valuation process
- CME Clearing offers daily mark-to-market margining in cash for silver and gold. Delivery occurs at the original transaction price, and any accrued mark-to-market is re-credited as part of the payment calculation.
Here are some additional benefits through CME Clearing:
- CME Clearing assumes the role as counterparty to all trades. This includes margin and guaranty fund management – thus freeing up customer credit lines.
- Where there are offsetting positions, CME Clearing’s performance bond for cleared forwards can be offset against the performance bond on the benchmark COMEX Gold and Silver futures contracts.
- Clearing customers can offset their long and short positions –reducing net counterparty exposure and decreasing capital requirements.
- Post-trade operational and documentation requirements are reduced by processing transactions through CME Clearport.
As part of the gold bullion market, CME Group provides solutions and services to its participants interested in clearing their OTC gold and silver forwards.