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* Precious metals benchmarks revamped in 2014
* Bullion market transformation at infant stage
* Clearing trades on exchanges could be next step
By Clara Denina
Nov 9 (Reuters) - Calling time on London's century-old gold"fix" could mark the beginning of an even wider industryoverhaul that may ultimately dilute the dominance of the highlyprofitable bilateral over-the-counter trading.
London's bullion price benchmarks, or fixes, weretransformed in a matter of months this year as regulatoryscrutiny and accusations of market manipulation madeprice-setting among a handful of banks untenable.
The overhaul spawned electronic price setting platforms forgold, silver, platinum and palladium, with gold's fate sealedjust last week when Intercontinental Exchange were announced asadministrators for the prized bullion benchmark in early 2015.
So, no more telephone calls between four banks twice a day,but an automated and audited process that should guarantee thatcustomers, including producers, refiners and central banks,continue to have a reference price that values their holdings.
The changes were brought in to reduce any risk of pricemanipulation, such as that found in lending rates between bankswith the LIBOR scandal in 2012.
More than $5 trillion worth of gold transactions are madeover the counter in London every year. The OTC market, wheretrades are executed via dealer networks as opposed to acentralized exchange, exceeds the trading of gold futures.
But as regulators investigate the transparency of globalfinancial markets and banks recoil from investigations, sourcessay the industry is now open to more drastic reforms.
"No-one would have believed a year ago that within 2014 themarket would have changed so completely ... you can now imaginethe market also contemplating certain changes they would havenever previously looked at," Jonathan Spall, managing directorof GCubed Metals, said.
"The market could go to a cleared model on exchanges, forexample," he added.
OTC IN SPOTLIGHT
The precious metals OTC market went through a period ofcaution in late 2008, when traders struggled to make businessbilaterally because credit lines were blocked after the collapseof U.S. investment bank Lehman Brothers and the subprimemortgage-induced financial crisis.
Bullion banks felt the need to curb counterparty risk,fearing a surge in company defaults. So the London MetalExchange (LME) and the Chicago Mercantile Exchange rushed to provide clearing facilities for gold forwards.
But the perception of reduced credit risks and the idea thatthe switch to a cleared central counterparty (CCP) frombilateral trades would be more expensive cooled London bullionbanks' enthusiasm for such a service.
Volumes have barely grown on the platforms available.
Six years on, however, the desire to move to a clearedsolution seems stronger as regulation becomes more stringent andbanks are forced by their compliance departments to step awayfrom risky trades and transactions.
New rules on OTC derivatives are expected in Europe by 2016,while UK gold and silver are likely to become regulated marketsin the first few months of 2015.
"I think there will be changes, depending on how theregulation comes in," the London Bullion Market Association CEORuth Crowell said.
"My hope with that is that the changes can be something thatultimately grows the market, not that over-regulates it.Otherwise we would see people exiting and going to otherjurisdictions due to the cost of doing business in London," shesaid, adding that Asia does not have the same regulatory burden.
The LBMA, which is consulting with its market makers membersincluding JP Morgan, Barclays and HSBC and others about what infrastructure should provide the industrygoing forward, said it has not yet considered whether it wouldbe responsible for a cleared model.
SHIFT TO ASIA
While Western banks continue to exit the commodity space,mostly consolidating bullion on their foreign exchangeplatforms, China started to allow foreign banks to importbullion, hoping to make Shanghai a price-discovery centre thatmight eventually rival London.
State-run Shanghai Gold Exchange launched an internationalexchange this year, allowing foreign participants to tradedirectly, and is also in talks to launch gold forwards andoptions.
The launch of the SGE's yuan-denominated contracts is thefirst in a slew of bullion contracts expected in Asia, includingSingapore and Hong Kong, before the end of the year as theregion aims to have pricing power as the top consumer of themetal. (Reporting by Clara Denina. Editing by Veronica Brown and TomHeneghan)
