Gold enters collateral race

Gold enters collateral race

While global regulations take shape, pushing derivatives onto exchanges and through clearing, clearing services providers are innovating with a more traditional asset – gold.

The yellow metal is one of SIX Securities Services’ answers to the big collateral management question – how can we do more with what we have and what is already out there? “We are treating gold as a currency backed by the physical precious metal,” explained Thomas Zeeb, CEO of SIX Securities Services. “It gets treated like any other currency code.” The settlement team significantly reduced time-to-market for the product by treating gold both as a settlement and foreign currency (XAU) – the value of one XAU unit is defined as one troy ounce of gold valued in US dollars.

The DvP service, which brings together payment between banks and the transfer of the underlying gold, is being developed at a time of general pressure in the market on other kinds of securities and the need for increased collateralization on transactions. As a result, clients are seeking ways to tap into other asset classes and, in response, SIX Securities Services has successfully piloted with two clients, while the Swiss stock exchange began trading the gold currency on 10 October, attracting interest from dozens of clients, explained Zeeb.

“It is an additional asset class that can be mobilized efficiently; what we have done is made it more transparent and ultimately more liquid, while also taking risk out of the process,” he said. So will there be a copper settlement currency next? Or coffee bean? Although there is nothing stopping SIX Securities Services from making that happen, gold has a historic and emotional appeal that gives it unique qualities. “As a currency, gold is coming into its own. The asset class has always existed but the important thing is that now the market has a low risk, highly efficient way to mobilize it,” said Zeeb. Hot on SIX’s heels, LCH.Clearnet is set to include gold bullion as collateral by the end of October. The service will be available for members clearing OTC gold bullion and gold contracts on the Hong Kong Mercantile Exchange.

For more information on our new service, please contact our Global Sales Team.

Article taken from Asset Servicing Times of 12.10.2011