2nd UPDATE: Bid To Use Gold as Collateral Advances

Investors are closer to being able to use gold as a trading security after a European parliamentary committee approved a proposal to allow clearing houses to accept gold as collateral, the World Gold Council said Wednesday.

The European Parliament's Committee on Economic and Monetary Affairs Tuesday agreed unanimously to allow clearing houses to accept gold. The proposal, under the European Market Infrastructure Regulation, will be passed to the European Parliament and the Council of the European Union for another round of voting in July.

Gold's strong price gains in recent years have seen its appeal as collateral increase. Clearing houses and other institutions have looked at introducing new sources of collateral since the financial downturn in 2008 highlighted inadequacies in counterparty risk management in the global over-the-counter market. The G20 said it wanted to try to reduce financial market risks by putting more products into clearing houses, increasing the demand for collateral as security against risks.

At the same time, many traditional collateral assets, such as European government bonds, have continued to see a deterioration in credit quality as a result of the sovereign-debt crisis.

In October 2009, CME Group Inc. said it would allow physical gold to be used as collateral for margin requirements, a move that was followed by rival IntercontinentalExchange Inc. in late 2010.

In February this year, JP Morgan Chase & Co. announced its decision to accept physical gold as collateral in some financial transactions.

"It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of gold make it an ideal form of high quality liquid collateral," said Natalie Dempster, director of government affairs at the World Gold Council.

-Write to Francesca Freeman at francesca.freeman@dowjones.com

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