CME allows gold for trading collateral

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, CME spokesman Jeremy Hughes in London said today. The gold will have to 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 by the CME," said Martyn Whitehead, head of metal sales at Barclays Capital in London. "It is a lot cheaper to fund with gold than it is with the dollar."

The CME is limiting the gold collateral to $200 million and the fees to hold the gold in storage are estimated at 5 basis points of the value of the collateral, according to the CME notice to clearing members. A basis point is 0.01 percentage point. Gold does not pay interest.

Investors last year bought 320.9 metric tons of gold worth $8.9 billion through exchange-traded products, according to the World Gold Council. Payments for margins on CME averaged $2.2 billion a day in 2007, and peaked at $12.8 billion on Jan. 23, 2008, CME spokesman Hughes said. Acceptable collateral also includes foreign sovereign debt, U.S. Treasuries, U.S. government agencies, letters of credit, stocks and security deposits, according to CME.

"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.