BSE prepares technology to launch electronic gold receipts

The ESB is ready with the technology to introduce Electronic Gold Receipts (EGR) on its platform. This will help create a uniform pricing structure for the precious metal across the country, ESB Commercial Director Sameer Patil said on Sunday.

The exchange will get the required internal approvals and ask market regulator Sebi to launch the new security class on its platform, Patil told PTI. He added that the exchange has been working on the technology for a very long time and is awaiting approval in principle to go further.

This comes after Sebi’s board of directors on Tuesday approved a gold swap proposal, in which the yellow metal will trade in the form of EGR and help have a transparent price discovery mechanism at the national cash. India currently only trades gold derivatives and gold ETFs, unlike several other countries that have spot exchanges for physical gold trading.

Instruments representing gold will be referred to as Electronic Gold Receipts (EGR) and will be notified as securities, with trading, clearing and settlement functionality similar to other securities currently available in India.

The ESB has made several presentations to government and regulators on how the process will work. These were about how various participants including banks, vaults, wholesalers, retailers, importers, exporters, etc., will participate in this ecosystem.

Like stocks, these EGRs will be held as demat and can be converted to physical gold if necessary, Patil said. To enable physical gold trading, EGRs (backed by physical gold) will be traded and settled on an exchange.

The business manager of ESB said that the whole negotiation will take place in three stages, including converting physical gold to EGR, negotiating EGR and again converting EGR to physical gold. For starters, the ESB could consider launching EGR denominations of 1kg and 100g and these can be converted to physical gold. To attract retail investors, EGR with smaller denominations of 50g, 10g and 5g will also be phased in.

The source of supply of the physical gold to be converted into EGR will be the new gold deposit, entering the vaults either through imports or through national refineries accredited by the exchanges. A customer can also convert physical gold to EGR by depositing physical gold at the designated delivery center. The exchanges will bring together VSPs based on guidelines prescribed by Sebi.

Likewise, customers can convert EGR to physical gold and the process is complete. An interface will be developed between the managers of (physical gold) safes, the depositaries (who hold the EGRs on deposit) and the exchanges and clearing companies which clear the transaction.

This move is expected to reduce existing market inefficiencies in bullion trading and could serve as a gateway to integrate spot gold trading with derivatives markets and create a transparent platform for bullion trading.

In addition, a single point of trading for both spot and derivative products would provide scale, liquidity and better pricing to all market participants by significantly reducing costs and cycle time.

Additionally, trading in EGR will contribute to existing gold monetization programs such as the Gold Monetization Program (GMS), Gold Bonds and Gold Deposits.

In the Union budget 2021-2022, Finance Minister Nirmala Sitharaman announced the establishment of a spot gold exchange and Sebi will be the appointed regulator for the proposed gold exchanges.

(With PTI inputs)

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