The Shanghai Gold Exchange (SGE) plans to launch over-the-counter gold trading and is in talks with the China Foreign Exchange Trade System to conduct these trades via the interbank market, an official from the exchange said on February 13.
The exchange also has plans to start exchange-traded-funds (ETFs) for gold to tap rising demand in China. It was also considering rolling out palladium contracts, although preparatory work for both products was still in the early stage. "We are working with the China Foreign Exchange Trade System to study ways in which we can work together and start an interbank trading market for gold, that will be conducted outside of the exchange," Gu Wenshuo, president of general office at the SGE, told Reuters.
The Chine Foreign Exchange System (CFETS) is a unit of the People's Bank of China which provides trading systems for foreign exchange, bond, yuan lending as well as exchange rate and interest rate derivatives.
An interbank market is a wholesale market where banks trade between themselves in order to remain liquid and meet customer demands for deposits, withdrawals, and borrowing for many different purposes. Having an over-the-counter (OTC) market would allow clients to trade in large quantities that far exceed the SGE's existing capabilities.
Currently, members who need to trade hundreds of kilograms of gold current have to break up their trades into numerous lots, which prohibits them from fixing a favourable price since such large number of transactions could distort prices.
Gu said rolling out OTC trading via the interbank market platform would be quiet easy, since the exchange's members are already familiar with the gold market and trading among themselves through such a platform.
The existing interbank trading platform would only need minor system upgrades to accommodate a new product, he added, but the SGE was still trying to iron out specification and delivery.
"We are working with market participants and looking at how we can resolve the warehousing and delivery issues," Gu said. Unlike trading on the SGE, which standardises the specifications of gold bars and location for delivery, the characteristics of gold bars for delivery may differ in an OTC market, especially since some of the smaller Chinese banks are not SGE members.
SGE, the country's only physical precious metals exchange, also said it was aiming to extend its night trading hours this year to meet growing client demand.
Gu said the exchange was also looking at launching new products, especially gold ETFs, as such products have seen explosive demand from investors overseas.