No, GLD Shares May Not Be Used to Settle COMEX Contracts

• Posted by kid dynamite
• on February 22nd, 2013

As a public service to metal-heads who continue to be misinformed by not only by those writing blogs, but also by others cluttering blog comments sections with more misinformation confidently stated as fact, I want to take a few minutes out of my Friday afternoon to correct a common misconception that metals-noobs may come across: the myth that if you have a COMEX Gold contract, the rules allow the short on the other side of the contract to deliver you GLD shares instead of physical gold.  That is false.  Factually erroneous.

If you’d like to read the delivery criteria for COMEX gold contracts, you can do so here.

The source of the confusion comes from a rule change several years ago regarding Exchange for Physical (EFP) transactions.   When one party holds bullion, another party holds futures, and they wish to exchange positions, they do an “EFP” instead of painting the tape by crossing each leg of the trade in the market and further confusing people with “meaningless” volume.  In other words, instead of Party A selling futures to Party B in the pit and buying bullion from Party B, they do their “swap” via an EFP.   One party exchanges his “cash” positions (read: BULLION) for physical, hence:  “exchange for physical.”   This is not unique to metals markets, by the way – I did tons of these with S&P futures in my prior life.

The EFP is an ex-pit trade, and the numbers show up in the CME daily reports under “PNT volume” – that’s “privately negotiated transactions.”  Most importantly, an EFP is a MUTUALLY NEGOTIATED TRADE.   The two parties are both willing participants – neither one is “plugged” with product that they don’t want.

Anyway, the rule change was that the Exchange allowed members to use substantially equivalent instruments in EFP transactions, rather than just physical bullion.   The exchange specifically mentioned gold-backed exchange traded funds as suitable for the transactions.

Add in uninformed metals investors who want to be pundits themselves, and you get confusion like this:

To be clear: NO -  the ETF shares do not count as satisfying a COMEX delivery.

and then this follow up:

which is what prompted me to write this post.  False information continues to get repeated and spread as fact, and continues to misinform more new (and not so new) members of the precious metals space.

So to answer the question in the second comment: no – you don’t need to worry about being handed GLD or SLV instead of bullion if you stand for delivery on your COMEX contract*.   That’s not how it works, and that’s not at all what the EFP rule says.

The EFP rule simply states that if you are long a COMEX contract and decide that you would rather be long shares of the ETF, you need not sell your contract and buy ETF shares, incurring execution costs and execution risk.  You can call your inter-market broker, ask him where the EFP market is trading, and negotiate a trade with a willing counterparty on the other side.

COMEX Gold delivery rules

CFTC EFP clarification letter

-KD

disclosure: no positions in $GLD, $PHYS, $PSLV, $SLV or any COMEX futures contracts

* at this point I expect someone to mention something about rule 7B14, which is an entirely different topic…

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