Tag Archives: LBMA Board

From Bank of England to LBMA: The ‘independent’ Chair of the LBMA Board

In a recent article titled “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)“, I charted the extremely close historical and contemporary relationship between the LBMA and the Bank of England. This article highlighted that:

  • the LBMA was established in 1987 by the Bank of England
  • the original bullion bank founding members and steering committee members of the LBMA represented 6 commercial banks active in the London Gold Market, namely, N.M. Rothschild, Mocatta & Goldsmid, Morgan Guaranty Trust, J. Aron, Sharps Pixley (former Sharps Pixley), and Rudolf Wolff & Co.
  • the Bank of England has been involved in the affairs of the LBMA from Day 1 in 1987, and continues to this day to have observer status on the LBMA Management Committee
  • the Bank of England has observer status on not just the LBMA Management Committee, but also on the LBMA Physical Committee and in the LBMA Vault Managers group
  • the Financial Conduct Authority (FCA) also has observer status on the LBMA Management Committee
  • although there are 2 other London financial market committees closely aligned with the Bank of England, and populated by bank representatives, that publish the minutes of their regular meetings, namely the Foreign Exchange Joint Standing Committee, the Sterling Money Markets Liaison Committee, the LBMA Management Committee does not publish the minutes of its meetings, so the public is in the dark as to what’s discussed in those meetings

Note that “observer status” does not mean to sit and observe on a committee, it just means that the observer has no voting rights at committee meetings. Note also that the structure of the LBMA Management Committee has recently changed to that of a Board, so the Committee is now called the LBMA Board.

One of the most interesting points in the previous article referred to the very recent appointment of a very recently departed Bank of England senior staff member, and former head of the Bank of England Foreign exchange Division, Paul Fisher, as the new ‘independent‘ chairman of the LBMA Management Committee / ‘Board’. Paul Fisher has also in the past, been the Bank of England’s representative, with observer status, on this very same LBMA Management Committee (now LBMA Board) that he is now becoming independent chairman of. Fisher is replacing outgoing LBMA Board chairman Grant Angwin, who if from Asahi Refining (formerly representing Johnson Matthey).

‘Independent’ Non-Executive Chairman

This article continues where the above analysis left off, and looks at the appointment of Fisher as the new ‘independent’ Non-Executive Chairman of the LBMA Board, considers the ‘independence’ of the appointment given the aforementioned very close relationship between the Bank of England and the LBMA, and examines the chairman’s appointment in the context of the UK Corporate Governance Code, which now governs the Constitution and operation of the LBMA Board.

As I commented previously:

Arguably, the pièce de résistance of these Bank of England / FCA relationships with the LBMA Management Committee, is the fact that Paul Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, a.k.a. LBMA Management Committee, has already previously been the Bank of England’s “observer” on the LBMA Management Committee.”

This was confirmed in Fisher’s speech to the 2004 LBMA Annual Conference in Shanghai, Fisher, when then Head of Foreign Exchange at the Bank of England, he stated:

I am glad to be invited to the LBMA’s Management Committee meetings as an observer.”

Fisher was Head of Foreign Exchange Division at the Bank of England from 2000 to 2009, so could in theory have been a Bank of England observer on the LBMA Management Committee throughout this period. The Foreign Exchange Division of the Bank of England is responsible for managing the Sterling exchange rate, and for managing HM Treasury’s official reserves held in the Exchange Equalisation Account (EEA), including HM Treasury’s official gold reserves. One would think that when the LBMA announced in a press release in July of this year that Fisher was being appointed as the new LBMA chairman, that the fact that he had previously attended the LBMA Management Committee meetings would be a fact of relevance to the appointment. However, surprisingly, or maybe not so surprisingly, this fact was omitted from the press release.

The LBMA press release, titled “Dr Paul Fisher to be the new LBMA chairman“, dated 13 July 2016, begins:

The LBMA is delighted to announce the appointment of Dr Paul Fisher as the new Chairman of the Association, effective from 5 September, 2016. Paul is due to retire from the Bank of England at the end of July.”

The press release goes on to say:

“Paul brings with him a wealth of financial market experience following his 26 years at the Bank of England. Prior to joining the LBMA, his last role was as Deputy Head of the Prudential Regulation Authority. Paul was selected by the LBMA Board following an independent Executive search procedure.”

“Previously, from 2002, he [Paul Fisher] ran the Bank’s Foreign Exchange Division where he had a constructive relationship with the LBMA and developed a working knowledge of the bullion market.”

Notwithstanding the capability of the appointment, there is absolutely zero mention in this press release of the fact that Paul Fisher used to be the Bank of England observer on the LBMA Management Committee, a committee that he is now being made chair of. Why so? Was it to make the relationship appear more distant that it actually was, thereby reinforcing the perception of ‘independence’?

In addition, the recently added bio of Paul Fisher on the LBMA Board listings features text identical to the press release, with no indication that Fisher previously attended the LBMA Management Committee meetings.

Notice also the reference to an “Executive search procedure” being used to support the new chairman’s appointment.

LBMA Board

At this point, it’s instructive to examine what drove the re-definition of the LBMA Management Committee to become the LBMA “Board”, and the appointment process to that board of an ‘independent‘ Non-Executive Chairperson. It can be seen from the LBMA website archive that until July of this year, the entity providing oversight and strategic direction to the LBMA was the ‘LBMA Management Committee':

mgt

Only in July following a LBMA General Meeting on 29 June did the website description change to LBMA Board:

 

board

The new Board structure of the LBMA allows it to have 3 representatives from LBMA Market Making firms, 3 representatives from LBMA Full Member entities, 3 ‘independent’ non -executive directors (inclusive of the ‘independent’ chairman), and up to 3 representatives from the LBMA Executive staff, including the LBMA CEO.

One of the first references to a future change in governance structure at the LBMA came in October 2015 at the LBMA annual conference, held in Rome. At this conference, Ruth Crowell, CEO projected that in the future:

“To enhance its governance, the new Board will include for the first time Non-Executive Directors whilst giving more power to the Executive so as to ensure any conflicts of interest are eliminated.”

On 29 April 2016, a LBMA “Future Events” summary document confirmed that a General Meeting (akin to an EGM) of LBMA members would be convened on Wednesday 29 June 2016 in London so as to “update the LBMA’s legal structure and governance“.  The same “Future Events” summary also highlighted a change in schedule to the LBMA’s Annual General Meeting (AGM), which due to the 29 June General Meeting, would now be held on 27 September 2016 with an agenda item to “incorporate, into the constitution of the LBMA, the governance and legal structure changes agreed at the General Meeting in June“. 

It would be quite presumptuous for any normal organisation of members, in the month of April, to not only assume that resolutions that were only being put to its membership in the month of June would be passed, but to also actually hard-code these assumptions into the agenda of a scheduled September meeting. However, this was what was written in the “Future Events” document and appears to be the pre-ordained roadmap that the LBMA Management Committee had already set in stone.

On Thursday 30 June, the day after its General Meeting in London, the LBMA issued a press release in which it confirmed (as it had predicted) that “Members of the LBMA approved by an overwhelming majority a number of important changes to its Memorandum & Articles of Association“.

As well as endorsing the LBMA’s expansion to acquire the responsibilities of the London Platinum and Palladium Market (LPPM), which was the first motion for consideration at the meeting, the press release confirmed that the membership had endorsed the appointment of an independent Non-Executive Chairman:

“The second change was to further enhance the governance of the Association. The UK Corporate Governance Code was incorporated and will govern both the Constitution as well as the operation of the Board. While it is vital for the Board to have a strong voice for its Members, it is important that any actual and perceived conflicts between these parties are balanced by having independence on that Board. This independence protects the interests of the wider membership as well as the individuals themselves serving on the Board. To address this, the LBMA has added an independent Non-Executive Chairman as well as two additional Non-Executive Directors (NEDs).”

Notice the reference to 2 other independent non-executive directors. Nine business days later, on 13 July 2016, the LBMA issued a further press release revealing that ex Bank of England Head of Foreign Exchange and former observer on the LBMA Management Committee, Paul Fisher had been appointed as the “independent Non-Executive Chairman“.

Executive Search Procedure

Recall also that the 13 July press release stated “Paul was selected by the LBMA Board following an independent Executive search procedure.””

Nine days is an extremely short period of time to commence, execute, and complete an ‘independent Executive search procedure‘.  It immediately throws up questions such as which search firm was retained to run the independent Executive search procedure?, which candidates did the search firm identify?, was there a short-list of candidates?, who was on such a short-list?, what were the criteria that led to the selection of the winning candidate above other candidates?, and how could such a process have been run and completed in such a limited period of time when similar search and selection processes for chairpersons of corporate boards usually take months to complete?

How independent is it also to have a former divisional head of the Bank of England as chairman of the London Gold Market when the Bank of England is the largest custodian of gold in the London Gold Market, and operates in the London Gold Market with absolute secrecy on behalf of its central bank and bullion bank customers.

Since the LBMA voluntarily incorporated the UK Corporate Governance Code into the operations of its Board following the General Meeting on 29 June, its instructive to examine what this UK Corporate Governance Code has to say about the appointment of an independent chairman to a board, and to what extent the Corporate Governance Code principles were adhered to in the LBMA’s ‘independent‘ chairman selection process.

 UK Corporate Governance Code

The LBMA is a private company (company number 02205480) limited by guarantee without share capital, with an incorporation filing at UK Companies House on 14 December 1987. Stock exchange-listed companies in the UK are required to implement the principles of the UK Corporate Governance Code and comply with these principles or else explain (to their shareholders) why they have not complied (called the “comply or explain” doctrine). In the world of listed equities, monitoring and interacting with companies about their corporate governance is a very important area of  institutional and hedge fund management. It has to be so as the share owners are able to monitor and grasp if any governance issues arise at any of companies held within their institutional / hedge fund equity portfolios.

Non-listed companies in the UK are also encouraged to apply the principles of the Code, but are not obliged to. When a private company chooses to incorporate the UK Corporate Governance Code to govern its Constitution and operation of its Board, one would expect that it would also then ‘comply’ to the principles of the Code or else ‘explain’ in the spirit of the Code, why it is not in compliance.

comply-or-explain

The UK Corporate Governance Code is administered by the Financial Reporting Council (FRC). The April 2016 version of the Code can be read here. The main principles of the Code are divided into 5 sections, namely, Leadership (section A), Effectiveness (section B), Accountability (section C), Remuneration (section D), and Relations with Shareholders (Section E).

One of the main principles of Section B is as follows:

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board. “

Section A also addresses the independence of the chairman, and Section A.3.1. states that:

“The chairman should on appointment meet the independence criteria set out in B.1.1″

Section B.1.1, in part, states that:

“The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement. The board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director:

  • has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
  • represents a significant shareholder;”

It goes without saying that the Bank of England has a material business relationship with the commercial banks which are represented on the LBMA Board, and I would argue that although the LBMA has no share capital, because the Bank of England has a material business relationship with the LBMA, and because since Paul Fisher was a senior employee of the Bank of England until July of this year, then the LBMA should “state its reasons as to why it determines that this director is independent“.

Furthermore, although the Bank of England is not a ‘significant shareholder’ of the LBMA, it is the next best thing, i.e. it has a significant and vested interest in the workings of the LBMA and interacts with LBMA banks through the London vaulting system, the gold lending market, and in its regulatory capacity of the LBMA member banks. The Bank of England also established the LBMA in 1987 don’t forget, so the extremely close relationship between the two is of material concern when a senior employee of the former suddenly becomes chairman of the latter.

Section B.2 addresses ‘Appointments to the Board':

“Main Principle

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board

Section B.2.1.:

“There should be a nomination committee which should lead the process for board appointments and make recommendations to the board. A majority of members of the nomination committee should be independent non-executive directors.

The nomination committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. [7]

[Footnote 7]: The requirement to make the information available would be met by including the information on a website that is maintained by or on behalf of the company.

Was there a nomination committee? As of the time of appointing the new chairman to the LBMA Board, there were zero independent non-executive directors on the Board. And, excluding the newly appointed chairman, there are still zero other independent non-executive directors on the LBMA Board.

If there was a nomination committee, notwithstanding that it couldn’t by definition have a majority of independent non-executive directors when overseeing a search process for an independent chairman, then did it “make available its terms of reference” “on a website that is maintained by or on behalf of the company.” Not that I can see on any part of the LBMA website.

Section B.2.4. of the UK Corporate Governance Code includes the text:

Where an external search consultancy has been used, it should be identified in the annual report and a statement made as to whether it has any other connection with the company.

The company here being the LBMA (which is a private company). There has been no public identification as to the identity of the external search consultancy that the LBMA state was used in the appointment of Paul Fisher as ‘independent’ non-executive chairman.

Section  B.3.2. states:

“The terms and conditions of appointment of non-executive directors should be made available for inspection.[9]

[Footnote 9]: The terms and conditions of appointment of non-executive directors should be made available for inspection by any person at the company’s registered office during normal business hours and at the AGM (for 15 minutes prior to the meeting and during the meeting).

There is no reference on the LBMA website as to the terms and conditions of appointment of non-executive directors being made available for inspection by any person at the company’s registered office, nor was this communicated in the LBMA’s press release wherein it announced the appointment of the ‘independent’ non-executive chairman. It is one thing to claim to incorporate the UK Corporate Governance Code into a Board’s operations, but an entirely different matter to actually implement the principles into the operations of the Board. Given the above, I can’t see how the LBMA has done much of the latter.

Bank of England

Further ‘Independent’ Non-Executive Director Appointments

Given the opacity in the appointment of the Bank of England’s Paul Fisher as the new ‘independent’ non-executive chairman, it is therefore not unreasonable to suggest that the entire appointment process was a pre-ordained shoo-in. Without substantially more transparency from the LBMA, this view is understandable. Nor have there been any announcements about the appointment of “two additional Non-Executive Directors (NEDs)” that was claimed in the LBMA’s 30 June press release.

The LBMA held its Annual General Meeting this past week, on Tuesday 27 September. During the AGM, the outgoing chairman, Grant Angwin commented in his speech that:

I’m delighted to have by my side Dr. Paul Fisher who will be replacing me as the first Independent Non-Executive Chairman of your Association – Paul will introduce himself to you in a moment. Paul and I will Co-Chair the Board until the end of this year. This is the first major step to making the Board more independent, Paul will be joined by up to 2 other Independent Directors in the near future.

“The Board will now comprise of 6 representatives from the market – three each in the categories of Market Markers and Full Members, up to 3 Independent Non-Executive Directors (of which one will be the Chairman) and up to 3 LBMA Executive Directors. We expect to make further announcements on these roles very shortly.”

Given that the new chairman has been appointed, it is odd, in my view, that the 2 other independent directors have yet to be appointed and their identities announced. Likewise, for the 2 new directors from the LBMA Executive, who, if and when they join the Board, will give the LBMA Executive 3 seats on the Board.  Surely the AGM would have been the ideal venue in which to make these announcements, since other board changes were being voted on at this meeting.

The New Board Profile

For completeness, the changes to the LBMA Board’s composition that did take place at the AGM, based on Board member resolutions that were put to a vote, are explained below:

Prior to the AGM last week, the LBMA Board consisted of the following members:

  • Grant Anwin – Asahi Refining (co-chairman of Board)
  • Paul Fisher (new chairman of Board)
  • Ruth Crowell – Chief Executive of LBMA
  • Steven Lowe – Bank of Nova Scotia-ScotiaMocatta (and vice-chairman of Board)
  • Peter Drabwell – HSBC Bank
  • Sid Tipples – JP Morgan Chase
  • Jeremy East – Standard Chartered
  • Robert Davis, Toronto Dominion Bank
  • Philip Aubertin – UBS (‘Observer’ status)
  • Alan Finn, Malca-Amit
  • Mehdi Barkhordar, PAMP

Notice that there were 5 LBMA Marking Making reps on the Board, namely from HSBC, JP Morgan, Scotia, Standard Chartered and Toronto Dominion Bank. There was also an ‘observer’ from full LBMA Market Maker UBS. There were 3 Full Member representatives, namely from PAMP, Malca-Amit (the security carrier), and Asahi Refining.

At the AGM on 27 September, there was a vote on the Full Member reps to the Board, of which there are 3 positions in the new Board. The existing Full Member reps had to stand down and they, and other Full Member candidates, could re-stand for election:

The voting results elected / re-elected the following:

  • Grant Angwin, Asahi Refining (and co-chairman of the Board)
  • Mehdi Barkhordar, PAMP
  • Hitoshi Kosai, Tanaka Kikinzoku Kogyo

Because there were 5 Market Maker reps already on the Board, and the new Board structure only allowed 3, there was also an election on which 3 of the 5 would remain: The results were:

  • Steven Lowe, Bank of Nova Scotia-ScotiaMocatta
  • Peter Drabwell, HSBC Bank
  • Sid Tipples, JP Morgan Chase

Noticeably, these 3 remaining reps represent what are probably the 3 most powerful bullion banks in the LBMA / LPMCL system, HSBC,  JP Morgan and Scotia, two of which, HSBC and JP Morgan, operate large commercial gold vaults in London, and all 3 of which operate large commercial COMEX approved gold vaults in New York City. The reps from HSBC and Scotia have also been very long serving members of the LBMA Management Committee / Board, having been re-elected in 2015.

The AGM voting results press release also added that:

“The other two Non-Executive Directors of the LBMA Board will be announced in the near future.”

Given the aforementioned profile of the new ‘independent’ LBMA Board Chairman and ex Bank of England senior staffer Paul Fisher, it will be intriguing to examine the new independence credentials of these 2 new Non-Executive Directors who will be announced in the near future. Will they be truly independent, or will they be former bullion bankers previously affiliated with the LBMA and the London Gold Market, or ex FCA people previously affiliated with the LBMA, or maybe a combination of the two.

As per the UK Corporate Governance Code:

There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board”. The board should also “state its reasons if it determines that a director is independent“. If an external search consultancy is used in finding either of the 2 new non-executive directors, there should be a “statement made as to whether it [the search consultancy] has any other connection with the company [the LBMA]“.

If 2 extra executive directors are also added to the Board from the LBMA’s staffers, to bring the number of Board directors up to 12, who will these 2 people be? My money in the first instance would be on the LBMA’s senior legal counsel (for regulatory reasons) and the LBMA’s communications officer. Whether the minutes of future or past LBMA Board meetings will ever be made public is another matter, but given the persistent secrecy that surrounds all important matters in the London Gold Market, it would probably be very naive to think that real LBMA communication via, for example LBMA Board meeting minutes, will ever see the light of day.

Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)

The London Bullion Market Association (LBMA) is a London-based, globally active, trade association for “the promotion and regulation of commerce relating to the London Bullion Market”. The “London Bullion Market” here collectively refers to the London Gold Market and the London Silver Market. The remit of the LBMA has very recently also been extended to cover the London Platinum and Palladium Market (LPPM).

While it is generally known to many, vaguely or otherwise, that the Bank of England has a vested ‘interest’ in the London gold market, the consistently close relationship between the Bank of England and the LBMA tends not to be fully appreciated. This close and familial relationship even extends to the very recent appointment of a very recently departed Bank of England senior staff member, and former head of the Bank of England Foreign exchange Division, Paul Fisher, as the new ‘independent‘ chairman of the LBMA Management Committee (a committee which has recently been rechristened as a ‘Board’). Note that at the Bank of England, the Bank’s gold trading activities fall under the remit of the ‘Foreign Exchange’ area, so should be more correctly called Bank of England Foreign Exchange and Gold Division. For example, a former holder of this position in the 1980s, Terry Smeeton, had a title of Head of Foreign Exchange and Gold at the Bank of England.

What is also unappreciated is that the same Paul Fisher has in the past, been the Bank of England’s representative, with observer status, on this very same LBMA Management Committee that he is now becoming independent chairman of. This is an ‘elephant in the room’ if ever there was one, which the mainstream financial media in London conveniently chooses to ignore.

As you will see below, the UK’s Financial Conduct Authority (FCA) also has a close, and again, very low-key but embedded relationship with this LBMA Management Committee.

threadneddle-st

At the ‘Behest’ of the Bank of England

The LBMA states in one of its Alchemist magazine articles, that its Association “was established at the behest of the Bank of England” in 1987, with Robert Guy of N.M. Rothschild, the then chairman of the London Gold Fixing, spearheading the coordination of the Association’s formation. Elsewhere, in a recent summary brochure of its activities, the LBMA states that it was “set up in 1987 by the Bank of England, which was at the time the bullion market’s regulator”, while a recently added historical timeline on the LBMA website, under the year 1987, states “LBMA established by the Bank of England as an umbrella association for the London Bullion Market.”

Established at the behest of“, “set up by” or “established by“, take your pick, but they all clearly mean the same thing; that the Bank of England was the guiding hand behind the LBMA’s formation.

Prior to the formation of the LBMA, and before a change of regulatory focus in 1986, the London Gold Market and London Silver Market had primarily followed a model of self-regulation, but the Bank of England had always been heavily involved in the market’s supervision and operations, especially in the Gold Market. Even reading a random sample of the Bank of England’s archive catalogue material will make it patently clear how close the Bank of England has always been to the commercial London Gold Market. For scores of years, the London Gold Market to a large extent merely constituted the Bank of England and the five member firms of the London gold fixing,  namely NM Rothschild, Mocatta & Goldsmid, Sharps Pixley, Samuel Montagu, and Johnson Matthey.

According to the 1993 book, “The International Gold Trade” by Tony Warwick-Ching, a combination of the advent of the Financial Services Act of 1986 which introduced supervisory changes to the UK’s markets, and the growing power of other bullion banks and brokers in the London precious metals market in the 1980s, acted as a combined impetus for the LBMA’s formation in 1987.

As Warwick-Ching stated:

“The LBMA was partly a response to a growing demand of concerns who were not members of the [gold] fixing for a greater involvement at the heart of the bullion market.” 

Morgan and J.Aron join the Party

Specifically, according to its Memorandum of Association, the LBMA was formed into a Company on 24 November 1987 by N.M. Rothschild & Sons Limited, J.Aron & Company (UK) Limited, Mocatta & Goldsmid Limited, Morgan Guaranty Trust Company of New York, Sharps Pixley Limited, and Rudolf Wolff & Company Limited. This company is “a company limited by guarantee and not having a share capital”. Given their participation from the outset, presumably J Aron (now part of Goldman Sachs) and Morgan Guaranty (now part of JP Morgan Chase) were members of the ‘growing demand of concern‘ contingent alluded to by Warwick-Ching, who wanted a bigger say in the gold market’s inner sanctum.

lbma-signatories
Signatories to the original LBMA Memorandum of Association

The authorising subscribers of the original Memorandum, on behalf of their respective companies were, Robert Guy (Rothschild), Neil Newitt (J. Aron), Keith Smith (Mocatta & Goldsmid), Guy Field (Morgan Guaranty Trust), Les Edgar (Sharps Pixley), and John Wolff (Rudolf Wolff & Company), and they requested that “We, the subscribers to the Memorandum of Association, wish to be formed into a company pursuant to this Memorandum.” The original steering committee of the LBMA comprised five of the above, Robert Guy (Chairman), Guy Field (Vice Chairman), Keith Smith, John Wolff, Neil Newitt, as well as Jack Spall of Sharps Pixley, the father of Jonathan Spall (current consultant to the LBMA). Note that the incorporation filing at UK Companies House for the LBMA is dated 14 December 1987, about 3 weeks after the date listed on the original Memorandum of Association.

As early as April 1988, there were 13 “Market Maker” members and 48 ‘Ordinary’ members in the LBMA. The market maker members had to be ‘listed money market institutions’, which meant that they were institutions listed under section 43 of the Financial Services Act 1986 (on a list actually maintained by the Bank of England) who conducted  various transactions, including bullion market transactions, which were exempt from authorisation.

The Shadowy Observers: Bank of England

According to the LBMA website:

“The Bank of England has been intrinsically linked with the London bullion market since its foundation in 1694.” 

“Although the Bank isn’t a member of the LBMA, members of the LBMA hold gold custody accounts with the Bank”

“The Bank’s vaults hold approximately two-thirds of all the gold held in London vaults and as such plays a significant role in the liquidity within the London gold market. Customers are able to buy or sell gold to other customers, by making or receiving book entry transfers, with ownership transferred in the Bank’s back office system… The service provides a very important element of the gold market infrastructure in London, helping LBMA members and central banks to trade in a secure and efficient way.”

A Bank of England presentation to the 2013 LBMA conference in Rome, titled the-bank-of-englands-gold-vault-operations, gives a good overview of the Bank’s provision of book entry transfers to its central bank and bullion bank clients for the smooth running of the London Gold Lending Market, a market which is totally opaque and completely undocumented. In fact the Bank of England sits at the heart of this gold lending market.

Furthermore, on the clearing side,

“The London bullion clearing members role involves a considerable degree of direct client contact, electronic interfaces between the clearing members and close liaison with the Bank of England…”

From its very foundation in late 1987, the Bank of England was involved in the first steering committee of the LBMA and the activities of the Association. And to this day, Bank of England ‘observers’ attend LBMA Management Committee monthly meetings.

As a historical account of the LBMA’s 1987 formation states:

“From the Steering Committee’s inception, The Bank of England, which held responsibility for the supervision of the wholesale bullion market, was involved in the Association’s affairs and assisted in the drafting of the relevant Code of Conduct. Observers continue to attend Management Committee Meetings to the present day.”

This steering committee ultimately became the LBMA Management Committee, and, in the last few months, has become the LBMA ‘Board’. So the Bank of England is, for all intents and purposes, a highly active partner within the LBMA’s governance structure. As a confirmation of this point, at the LBMA annual general meeting in July 2014, the then chairman of the LBMA Management Committee chairman, David Gornall, of Natixis stated in his speech that:

“The LBMA is also privileged in having an observer from the Bank of England on the Management Committee. The Bank’s presence is of inestimable benefit to us.”

As to what inestimable benefit David Gornall was referring to, or in what way a Bank of England observer participates on the LBMA Management Committee, was not elaborated on. Nor can it be gleaned from any meeting minutes from LBMA Management Committee meetings, because such minutes are not made publicly available (See below).

For anyone not familiar with the concept of an observer on a corporate committee or board, it does not refer to someone who just sits there and observes, as the name may suggest. An observer refers to an attendee at the committee / board meetings who actively participates in discussions but who has no voting rights on committee / board resolutions. Observers can and do fully participate in meeting apart from voting. When voting occurs, they may (or may not) be asked to leave the room.

At the LBMA annual general meeting in June 2013, David Gornall, also chairman of the LBMA Management Committee at that time, revealed that not only was there a Bank of England observer on the Management committee, but there was also an observer from the UK financial regulator, the Financial Conduct Authority (FCA), on the same committee:

“The LBMA is also privileged in having observers from both the Bank of England and the FCA on the Management Committee. Their presence is of inestimable benefit to us.”

In fact, there are many such references within various LBMA related speeches. At the LBMA Precious Metals Conference in September 2013, Matthew Hunt of the Bank of England stated:

“More specifically on gold, even though we are not active traders in the market but we are a large custodian, some of the people in our team responsible for gold observation sit on the LBMA Management Committee and the LBMA Physical Committee as observers. Thus we retain a significant engagement with the gold market via that route.” 

Notably the Bank of England has a team of people responsible for gold observation, but not for the observation of other commodities such as zinc, lean hogs, live cattle, heating oil, soybeans, sugar, beaver pelts etc etc.

In March 2013, Luke Thorn of the Bank of England, while addressing a LBMA Assaying and Refining Seminar, stated:

“We are not a member of the LBMA, but we continue to play a key role in the London market. We have observer status on the Management, Physical and Vault Committees.” 

There are therefore Bank of England observers on 3 LBMA Committees. So, who are these Bank of England and FCA observer representatives? That is not an easy question to answer. There is no mention on the LBMA website’s committee page, and has never been any mention, of any Bank of England observers or FCA observers on the LBMA Management Committee (now Board). Nor are there any published minutes on the LBMA website of any LBMA Management Committee meetings, or the meetings of any of the other five LBMA sub-committees, such meeting minutes as would generally list the attendees of such meetings. More about the lack of minutes below.

Turning briefly to the physical and vault committees, the LBMA website has a listing for its physical committee and does mention that a Bank of England observer called Jennifer Ashton currently is on this committee.

According to the LBMA’s good delivery summary:

“The Physical Committee is made up of industry experts from the physical bullion market. It is responsible for monitoring, developing and protecting the Good Delivery List and works closely with sub-Groups such as the LBMA Referees and the LBMA’s Vault Managers Working Party

There is however, no formal listing of the Vault Manager ‘s group as a LBMA committee within the LBMA’s committee listings section. The only informative reference to such a committee on the LBMA web site is in the good delivery rules explained section, which states:

 “The Vault Managers Working Group, comprising the Bank of England and representatives from those LBMA members with their own vaulting facilities in London, meet regularly to consider issues relating to bar quality and vault procedures. Vault Managers are required to document every case of bar rejection and provide the associated information to the LBMA Executive”

Who is on this committee from the Bank of England, let alone from any of the other committee member companies is not disclosed.

Turning again to the identities of LBMA Management Committee observers, and going back slightly further to the LBMA Annual General Meeting on 20 June 2012, the Chairman, the omnipresent David Gornall of Natixis London Branch, stated:

“Talking of the Management Committee, let me remind you that we are very fortunate to have observers from both the Bank of England and the FSA on the committee. I would like to thank Trevor Stone and Don Groves for their participation in our affairs”.

From a speech at the 2009 LBMA annual conference by Michael Cross, the then Head of Foreign Exchange at the Bank of England, we learn that the Bank of England’s Banking Services area:

“is where Trevor Stone and his colleagues, who will also be known to many of you, work. The Banking Services area provides wholesale banking and custody services to a wide range of bank customers”

These ‘Banking Services’ functions at the Bank of England are similar to Central Bank and International Account Services (CBIAS) services offered to central bank customers by the New York Fed, and include gold custody services.

fca stairs

The Embedded Observers – FCA, Don Groves

On 30 September 2013, the ever-present David Gornall in another speech, this time to the LBMA annual conference in Rome, had this to say:

“We are grateful for the communication and feedback on our work from regulators, particularly that of own regulator the FCA. We are delighted to be joined by Don Groves of the FCA during tomorrow’s financial market regulation session. Don is a long-time observer on the LBMA Management Committee and we thank him for his participation and continued dialogue on our regulatory questions facing the London Market.”

The next day, on 1 October 2013, at the same conference, Ruth Crowell, the then Deputy CEO of the LBMA (and current LBMA CEO) introduced Don Groves as follows:

“With that, I am going to turn it over to Don Groves from the Financial Conduct Authority. Don is a technical specialist in the market contact area of the FCA’s Market Monitoring Department, where he is responsible for reviewing allegations of market misconduct, including market abuse and insider dealing.

Don specialises in the UK commodity markets and has been in market conduct for a number of years. We are also very privileged to have Don as an observer on the LBMA’s Management Committee.

Groves joined the FCA in 1999, and left the FCA in March 2015. While his LinkedIn profile has very detailed listings of his duties while at the FCA, there is no reference to the fact that he ever sat on the LBMA Management Committee, which strikes me as odd, unless that is a deliberate omission.  A previous version of Groves’ LinkedIn profile states:

I am considered to be an expert in Market Conduct matters and market abuse in the UK. I conduct project work pertaining to market conduct issues, contribute to the drafting of European legislation pertaining to market abuse and am an experienced public speaker. My main area of interest is the UK’s commodities markets.

Is it not odd that a FCA regulator was a long-time observer sitting on the LBMA Management Committee, but that the FCA has never had anything to say about the London Gold Market. Perhaps it’s because of the following, which gives the impression of a compliant and embedded regulator. As the FT wrote in October 2013 in an article titled “Gold and oil benchmarks face tighter regulation“:

“I don‘t want to give the impression that the UK is picking on the bullion market or anything else,” Mr Groves told the London Bullion Market Association precious metals conference in Rome. “But a consumer focus is what politicians are looking at…so there’s going to be more focus from us as regulators, on consumer issues.”

“However, [Groves] admitted the regulator did not know enough about physical markets and had launched a project to increase its knowledge. “We are going out as the FCA and learning about those markets,” he said.

What exactly the FCA was doing sitting on the LBMA Management Committee remains unclear, because, to reiterate, there are no publicly available minutes of the Committee’s meetings. At a guess, perhaps Groves was “learning about physical markets“, specifically the physical gold market.

Its also relevant to note that the Bank of England and FCA both crop up as observers when the LBMA holds various seminars, such as the seminar it held in the City of London on 24 October 2014 to showcase various solution providers that were competing to provide the infrastructure for the LBMA Gold Price fixing auction competition that was running at that time:

According to the LBMA press release, “Both the Bank of England and the Financial Conduct Authority attended the seminar as observers.

meeting-minutes

Where are the LBMA Mgt Committee Meeting Minutes?

Through the Non-Investment Products Code (NIPs), the Bank of England interfaces closely with the UK’s foreign exchange, money and bullion markets. The Bank of England explains NIPs as follows:

“The Non-Investment Products Code

This Code has been drawn up by market practitioners in the United Kingdom representing principals and brokers in the foreign exchange, money and bullion markets to underpin the professionalism and high standards of these markets.[1]

It applies to trading in the wholesale markets in Non-Investment Products (NIPs), specifically the sterling, foreign exchange and bullion wholesale deposit markets, and the spot and forward foreign exchange and bullion markets.”

Footnote [1]: Co-ordinated by the Foreign Exchange Joint Standing Committee, the Sterling Money Markets Liaison Group and the Management Committee of the London Bullion Market Association

Of the three, the  Foreign Exchange Joint Standing Committee is chaired and administered by the Bank of England. The Sterling Money Markets Liaison Group (now known as the Sterling Money Markets Liaison Committee) is also chaired and administered by the Bank of England.

On the Bank of England’s web site, there are very extensive informational resources about the Foreign exchange Joint Standing Committee and the Sterling Money Markets Liaison Committee, but surprise, surprise, there is nothing about the LBMA Management Committee. The Bank of England website offers publicly accessible documents of all meeting minutes of the FX Joint Standing Committee, including the representatives names of attendees and the banks and institutions represented at each meeting. These meeting minutes are highly detailed. See May 2016 FX Joint Standing Committee minutes as an example. Likewise, for the Sterling Money Markets Liaison Committee, the minutes of every meeting have been uploaded to the Bank of England website and are publicly accessible. These minutes are highly detailed. See for example the February 2016 Sterling Money Markets Liaison Committee meeting minutes.

However, the only tiny piece of information offered about the LBMA on the Bank of England website is as follows:

“The Bullion element of the NIPs Code is being replaced by a new code which will be established by the London Bullion Markets Association (LBMA). Further information on the bullion code can be found on the LMBA website.” 

Conveniently, the Bank of England passes the buck back to a web site (LBMA’s website) which is notoriously bereft of any information about the meetings of the LBMA Management Committee, the agendas of such meetings, the minutes of such meetings, and the attendees at these meetings. Why is this opacity allowed by the FCA and Bank of England when the foreign exchange and money market brethren have to submit to published minutes of their meetings, which in many cases involve the same banks and institutions? Could it be that discussion of the London Gold Market is highly secretive and a no-go area, and that the institutions involved have a free pass from the Bank of England and FCA to continue their discussions in private, away from the public eye?

Mark Carney and Paul FIsher
Mark Carney and Paul FIsher

 Pièce de Résistance

Arguably, the pièce de résistance of these Bank of England / FCA relationships with the LBMA Management Committee, is the fact that Paul Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, formerly known as the LBMA Management Committee, has already previously been the Bank of England’s “observer” on the LBMA Management Committee.

In his speech to the 2004 LBMA Annual Conference in Shanghai, Fisher, the then Head of Foreign Exchange at the Bank of England, while discussing the “Non-Investment Products Code”, a code which regulates the bullion market, the foreign exchange market, and the wholesale money market, stated that:

“In the bullion section, the work is led by the LBMA and the whole is coordinated by the Bank of England. Partly on that basis, I am glad to be invited to the LBMA’s Management Committee meetings as an observer. I’d just like to pay tribute to the professionalism and integrity with which I see the Management Committee operating for the best interests of the global marketplace for bullion.”

One of the more bizarre parts of Fisher’s appointment, in my view,  is that when the LBMA announced in a press release last July (2016) that Fisher was being appointed as the new LBMA chairman, there was no mention of the fact that he had previously attended the LBMA Management Committee meetings. One would think that this would be a very relevant when considering the ‘independence’ of the appointment?

On hearing the news on 13 July about the appointment of the Bank of England’s Paul Fisher as ‘independent’ non-executive chairman of the LBMA Board, James G Rickards, the well-known gold author and commentator, tweeted the below, which succinctly sums up the elephant in the room, which the mainstream media chooses to ignore.

This appointment reinforces the link, or bridge, between the two entities, which is now even more set in stone than previously. It’s as if the Bank of England, at this time, has felt the need to put it’s man directly at the head of the LBMA. The timing may be relevant, but in what way is not yet clear.

A forthcoming article looks at this appointment of a former Bank of England Head of Foreign Exchange as the new ‘independent’ Non-Executive Chairman of the LBMA Board, considers what, if anything, is independent about the appointment given the extremely close relationship between the Bank of England and the LBMA, and examines the appointment in the context of the UK Corporate Governance Code, which now governs the Constitution and operation of the LBMA Board.