Nov 262015

Today the Perth Mint and Australian Securities Exchange (ASX), one of the world’s top-10 listed exchange groups measured by market capitalisation, announced that they would be collaborating on developing new exchange traded precious metals products.

The first product is mostly likely to be a gold futures contract deliverable in Perth. Given the focus the gold community has on futures markets, and Comex in particular, I’m sure there will be a lot of interest is this Aussie gold contract. As we are in the process of talking to the market about what features they would like, it is not possible to get into contract specifications at this time but I can make some general comments about the approach ASX and Perth Mint will be taking.

Firstly, the Perth Mint’s role will be solely on supporting the physical delivery part of the contract – we are not issuing the contract or market making on it. ASX will list the contract and market it to their customers in Australia and Asia and traders worldwide.

While this contract will trade 24 hours a day on ASX’s globally connected network, given Australia is the second largest gold producer in the world and that the Perth Mint refines between 300 to 400 tonnes per year, we are sure that there will be a lot of interest in this contract from the physical traders in the Asian region.

The integrated nature of the Mint’s operations also means that unlike other futures contracts, which only offer warehousing, we will be able to offer shorts and longs flexible physical delivery choices that take advantage of the Mint’s refining and manufacturing capabilities.

The Perth Mint’s Western Australian government guarantee will also give comfort to longs who want to stand for physical delivery and store gold with us. In addition, the fact that ASX backs its clearing with its own capital (which is not something all exchanges offer) will reduce counterparty and systemic risk.

The combination of the Perth Mint’s strength in the physical market and ASX’s vertical integration of trading, clearing and settlement will introduce some real competition into the gold futures space. For more information see the official media release here.

  • Bullion Baron

    Will open interest in the futures contracts be limited by metal available for delivery by Perth Mint and if not what does the ‘government guarantee’ guarantee?

    • Bron Suchecki

      The shorts are the ones who have to deliver with a futures contract, our job will be managing receipt and delivery and also fabrication. The government guarantee covers settlement of transactions done with us by a short (looking to get metal to Perth) or a long (looking to take physical) plus anyone who wants to hold metal with us after taking delivery.

      • Bullion Baron

        Yes poorly worded on my part, I meant delivery FROM Perth Mint (presuming that is where the shorts may have metal stored for delivery), as in can open interest exceed stock available for delivery, the same as it does on the Comex many times over.

        Still not sure I understand how this government guarantee is comforting for someone wanting to take physical delivery (at least more so than for other futures markets). I don’t subscribe to the ‘inevitable collapse in the paper gold market’ narratives, but unless Perth Mint can guarantee to provide physical Gold in place of a short ‘coming up short’ on delivery I don’t see it as much of a guarantee.

        • Bron Suchecki

          In any futures contract OI will always exceed stock as you always have speculative traders in the market and without them futures markets don’t really work as it is the specs that take the risk off the hedgers.

          At this time you’re getting into detailed operational questions that we are currently exploring so I can’t answer but those are things I am looking at.

          Once a long has taken delivery they get extra comfort from the guarantee covering the storage, which they wouldn’t have with other warehouses.

        • Joe

          If physical gold cannot be provided, in case a short “comes up short” as you say, well, they can just settle in cash. Same mechanism as the Comex. That’s not a problem for you is it?

          • Bron Suchecki

            No contract rules have been established yet so no idea where you get the idea that “they” can just settle in cash.

          • Joe

            Yes, I realize that the rules have not been established yet. I’m just prophesying what is likely to be in the contract rules. I have an uncanny knack for predicting future outcomes, unlike mr Ben Bernanke (i.e. “nobody could have forseen this…”). However, I forsee other potential worries here that might adversely impact the Perth Mint; i.e. the potential for the gold already stored at the Perth Mint on behalf of other customers, somehow to get tangled up and being used to settle a major failure in this new market. Yes I know, “that this something that will never be allowed to happen, because of all the rules that will be in place.” That is what Jon Corzine used to repeatedly tell people, and it worked a treat for years, until one day, due to circumstances that “nobody could have forseen”, it failed.

          • Bron Suchecki

            Joe, there will be a complete separation legally and operationally between the market operator and clearing, which is what the ASX will do, and the warehouse mechanics of confirming receipt of metal from shorts to the ASX and longs taking delivery ex-Perth, which is what the Perth Mint will do.
            What you are proposing, if applied to the situation of a long failing to settle, would mean that somehow the ASX can just make the bank of the client that defaults hand over cash from other people’s accounts at that bank. It is absurd. Similarly with your TTP “scenario”.
            I do welcome feedback and suggestion, but lets keep it realistic. I can assure you that the Perth Mint and ASX are looking to create a robust contract that will compete with other futures markets and that will require it to have superior features and controls.

          • Bullion Baron

            Joe, the implication in the post was that there should be more confidence in taking delivery, so if it functions the same as the Comex, then what’s to be more confident about? Bron mentioned the contract rules and operational specifics haven’t been established yet so let’s wait to see what it brings.

            It’s unlikely I’d buy contracts in this market, so the product is not aimed at the type of buyer I am, but yes if I bought a contract to take delivery of physical Gold I would have a problem with settling in cash.

          • Joe

            Bullion Baron,
            Even if the Contract rules say that you cannot settle in cash, I wonder if this could be overwritten by the new TPP trade agreement? The TPP gives immense power to foreign companies (include Banks here) to force the hand of foreign governments to do their bidding. Someone smarter than me (not clever with financial instruments, financial trickery & legal documents) can probably conceive of some scenario whereby a big US bank could use TPP rules to force the Perth Mint to send all their physical gold to america. If that did happen, that would be one of those things “that nobody could have foreseen…”

  • disqus_8TzMmBORPq

    Will there be position limits for all participants, and will there be a real time commitment of traders reporting?

    • Bron Suchecki

      As discussed below, that is detail operational aspects we are looking at now and they are good suggestions.

      • disqus_8TzMmBORPq

        Bron if you get the operational aspects right you are onto something big as few competing exchanges can provide on delivery single brand homogeneous good delivery bars.
        Just make sure you exclude the big bullion banks from participating, as they have proven before they don’t want competing contracts to their COMEX/LBMA benchmark (ponzi) to succeed.

      • Norgate Data

        Reporting of warehouse stock levels would be welcomed.

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  • Shane Warne

    Hi Bron.
    So suppose I’m doing some speculative hedging trades. I short one of your gold future contracts for $1700 (or whatever hypothetical price it may be). $1,700 leaves my brokers account and goes to the ASX. What happens now at your end? I don’t understand how this ‘short delivery’ mechanism is suppose to work. Naturally I don’t really want to be shipping gold off to Perth. But if Long I might want to take delivery. So on the short I just send the cash? On the Long I have the option of taking gold delivery? The shortfall from the short-long deliveries will be cash that is then used by the Perth Mint to purchase (/supply) more gold in the warehouse to cover all deliveries? Just wishing to clarify.

    What would potential commissions be on such a service / contract? Or are these still being worked out? I’m just wondering if Perth would charge a commission fee on taking cash short deliveries instead of gold? Naturally postage etc would be required too? Seems the fees could potentially be kind of expensive?

    • Bron Suchecki

      This contract will work like any futures contract. If you short a contract the only thing the broker requires is the margin in your account, nothing goes to the ASX. If you hold the contract to delivery, then you have to have established an account with the Perth Mint, put gold in it, and then instruct the Perth Mint to deliver that gold into the ASX’s account with the Perth Mint for further credit to your account with your broker.

      You “put” gold in by either delivering physical gold to the Perth Mint, buying physical gold from them directly paying them cash, or doing a loco swap. You do not send cash to your broker to buy gold and the Perth Miint will not take “cash short deliveries”.

      Once the ASX gets a notice from Perth Mint that you have delivered gold it will tell your broker. Coming up to contract expiry if your broker has not received any notification from ASX that you have delivered gold to satisfy your short obligation, the broker will close your contract out. It is your responsbility to deliver physical gold.