CME Allows Gold to Be Used as Collateral for Trading (Update2)
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By Claudia Carpenter

Oct. 19 (Bloomberg) -- CME Group Inc., the world’s largest derivatives exchange, allowed gold to be used as collateral for trades on all its markets as an alternative to debt or equities.

Gold is the first commodity that can be used for margins for CME trades, ranging from crude oil to gold to copper, equity indexes and Treasury bonds, effective immediately, company spokesman Jeremy Hughes in London said today. Bullion must be deposited with JPMorgan Chase Bank in London, and other banks may be added, the CME said in a notice Oct. 16.

“It’s a positive step,” said Martyn Whitehead, head of metal sales at Barclays Capital in London. “It is a lot cheaper to fund with gold than with the dollar.”

The exchange is limiting bullion collateral to $200 million, and fees to hold metal in storage are estimated at 5 basis points of the collateral’s value, according to the notice to clearing members. A basis point is 0.01 percentage point. Gold pays no interest.

Investors last year bought 320.9 metric tons of bullion worth $8.9 billion through exchange-traded products, according to the World Gold Council.

“Within the world of collateral, the mainstream products have been used for 20 to 30 years, and here we are talking about using a new asset,” said Raymond Key, global head of metals trading at Deutsche Bank AG in London. “Gold inherently is probably more volatile than some, but less than others.”

Customer Wishes

Margin payments on CME averaged $2.2 billion a day in 2007 and peaked at $12.8 billion on Jan. 23, 2008, the exchange’s Hughes said. Acceptable collateral also includes foreign sovereign debt, U.S. Treasuries, U.S. government agency securities, letters of credit, stocks and security deposits, according to the exchange.

“We’re doing this in response to customers’ wish to use their gold holdings more efficiently,” Hughes said.

LCH.Clearnet Group Ltd., Europe’s largest clearinghouse, is considering adding gold for collateral, spokeswoman Sophie Major said by e-mail today.

“It’s going to start a whole range of exchanges using gold as collateral,” Key of Deutsche Bank said of CME’s decision.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net