On 21 September, ICE Benchmark Administration (IBA) announced that it will take over the administration of the daily LBMA Silver Price benchmark auction beginning Monday 2 October. This LBMA Silver Price auction is the successor to the former London Silver Fix auction. The auction takes the form of trading unallocated silver positions on an electronic platform. The resulting price from the daily auction provides a daily silver price reference rate or benchmark which is used widely throughout the global precious metals industry. It is also now a Regulated Benchmark, regulated by the UK Financial Conduct Authority.
Bizarrely, even though it has now been more than 3 years since this new LBMA Silver Price auction was launched, there are still only 7 direct participants in the auction, a fact which flies in the face of all the previous promises from the LBMA that the rejuvenated silver auction would allow dramatically wider auction participation. These 7 participants are HSBC, JPMorgan, Morgan Stanley, Bank of Nova Scotia – ScotiaMocatta, UBS Toronto Dominion Bank, and China Construction Bank.
Even more surprisingly, from 2 October, ICE states that only 5 of these 7 bullion banks, namely HSBC, JP Morgan, the Bank of Nova Scotia, Toronto Dominion Bank, and Morgan Stanley, will continue to participate, with UBS and China Construction Bank staying on these sidelines because they do not currently have the IT systems in place to process cleared auction trades, a clearing procedure which ICE will be introducing to the auction. Two other commodity trading companies INTL FCStone and Jane Street, will however, join the auction on 2 October. INTL FCStone and Jane Street also recently joined the LBMA Gold Price auction as direct participants.
Beyond the continued exclusion of the vast majority of global silver participants from the auction, the very fact that a new administrator has had to be drafted in to run this LBMA Silver Price auction is itself noteworthy, as is the ultra-secretive way in which ICE has been selected as the new auction administrator.
CME / Thomson Reuters – Exit Stage Left
In early March this year, the London Bullion Market Association (LBMA) announced that CME Benchmark Europe Ltd and Thomson Reuters Benchmark Services Ltd were pulling out of their roles as administrator and calculation agent of the daily auction.
This news was somewhat surprising given that the CME – Thomson Reuters duo had only taken up responsibility for the silver auction in August 2014 and were just 2.5 years, or halfway through their 5-year contract providing this service. See BullionStar article “More Bad News for the LBMA Silver Price, but an Opportunity for Overhaul” from 7 March for more details.
While there have been various theories put forward as to why CME and Thomson Reuters decided to pull out of the new London silver auction, there has never been any official explanation forthcoming from either the LBMA, the CME Group nor from Thomson Reuters. with all parties remaining tight-lipped about the motive for the departure.
Notably, over its short life span, the new silver auction has on occasion suffered from a number of embarrassing glitches that both delayed its run time and skewed its auction price calculation, for example in January 2016, and even in April 2017 after the CME – Thomson Partners had announced their decision to exit the process. See “Death Spiral for the LBMA Gold and Silver auctions?”, dated 14 April 2017, for more details.
There were also rumours that CME and Thomson Reuters were exiting oversight of the auction due to the advent of more onerous European benchmark regulations. Whatever the real reason, the lack of clarification from the LBMA – CME – Thomson Reuters is strange given that this new silver auction was supposed to usher in an era of transparency to this critical and globally used silver pricing benchmark.
Stranger still is that the process initiated by the LBMA to secure a replacement provider for the silver auction has been itself run with the utmost level of secrecy and a total lack of consultation with the global silver market.
When news of the CME – Thomson Reuters departure broke on 3 March, the LBMA was quick to confirm, via Reuters, that it would ‘shortly’ launch a new tender to find a replacement provider for the auction process, and that the alternative provider would be identified by ‘the summer’, before taking up the new position ‘in the autumn’.
Then following this 3 March statement from the LBMA, there was zero communication with the global silver market on this issue. No updates, no news of what the tender process consisted of, no updates on whether there was a short-list of applicants, no information on how many companies had applied to the tender nor their identities, and no publication of the proposed auction solutions of any of the tender applicants. In short, there appeared to be a news blackout by the LBMA, and also little interest in the issue from the London financial media.
It was only 3 months later on 8 June that Reuters revisited the issue, saying that ICE Benchmark Administration (which runs the LBMA Gold Price auction) and the LME (which runs the LBMA platinum and palladium auctions) were “vying for control of the London silver benchmark price”. Reuters also commented that “the LBMA …had no comment on the bidding process”.
Remembering that the LBMA Silver Price is a globally used and FCA regulated benchmark which determines silver prices for myriad silver industry participants and investors around the world, the secretive stance of the LBMA in 2017 is even harder to fathom. In contrast, back in 2014 when this LBMA silver auction was initially launched, there was at least an element of transparency about how the administrator selection process was conducted.
The 2014 Process – Transparent Lip-Service
In May 2014, when London Silver Market Fixing Limited, the operator of the former London Silver Fixing benchmark auction, announced that it would step down from running the silver auction, the LBMA moved quickly to launch a ‘consultation’ to ensure that it and its bullion bank members retained full control over the real estate of the London Silver Fix and the selection and introduction of a replacement silver benchmark auction.
The consultation, launched in mid May 2014 included an online survey which could be completed by any interested silver market participants, not just LBMA members. This survey allowed the global silver market to provide feedback on what an ideal replacement auction should look like, and at least on paper, appeared inclusive and collaborative with regards to worldwide silver stakeholders.
When the results of this survey were published on 5 June 2014, it revealed that 440 participants of the silver market globally had completed the survey, with 25% of the respondents (i.e. 110 participants) indicating that they would be interested in acting as a contributor, and another 33% (or 145 respondents) indicating that they were ‘maybe’ interested in acting as a contributor in the auction. The general consensus was also that the industry wanted “an increased number of direct participants” in the silver auction.
The LBMA then launched a semi-transparent “Request for Proposals” process for any solution provider companies that wished to apply to become the new administrator of the silver price auction.
Ten companies expressed interest in becoming the new auction administrator, and from this group the LBMA choose a short-list of 7 interested providers and organised a seminar in London on 20 June 2014 at which this short-list of providers presented their proposed solutions. This seminar was, however, only open to LBMA members, so even at this point, the reluctance of the LBMA to really consult with and include the broad global silver market was apparent.
There was then a second survey of seminar attendees and LBMA full members in which they voted on which of the proposals of the short-list candidates they would most like to see implemented. Following this on 11 July 2014, the LBMA announced that the joint bid by CME And Thomson Reuters had been selected to become and administrator and auction platform provider for new replacement silver auction.
There then followed a number of seminars from CME Group, Thomson Reuters and the LBMA in late July and early August 2014 in which they promised the world in terms of vastly increased direct participation and central clearing in the new silver auction, promises which unfortunately never came to pass. See BullionStar article “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing”, dated February 2016, for full details of these broken promises.
The point of covering the above is not so much to rehash the auction selection process from 2014, but to illustrate that while it ended up being more of a lip-service to consultation with the broader worldwide silver market, at least there was an element of communication from the LBMA through each step of the process during which the LBMA successfully retained dominant over the control of this key Silver Pricing benchmark.
Communication and Transparency – Out the Window
Fast forward to 2017, and it becomes apparent that for whatever reason, the LBMA’s experiment with communication and semi-transparency (as of 2014) was thrown out the window, with the LBMA Board reverting to its characteristic secrecy and opacity.
With ICE Benchmark Administration about to embark on administering the LBMA Silver Price, it’s pertinent to ask what actually happened between early March 2017 and the present to lead to this outcome? Well, its hard to say actually, precisely because there is very little information available.
The news page of Issue 86 of the LBMA’s magazine The Alchemist, from mid-August 2017, provides a clue into how the selection process that chose ICE was probably run.
“The Board has also been closely involved in the recent decision to appoint ICE Benchmark Administration as the new administrator for the LBMA Silver Price.”
This Board refers to the LBMA Board, which is a new name for what was formerly known as the LBMA Management Committee. This LBMA Board is a 10 person committee and includes representatives from bullion banks and precious metals refineries. Interestingly, of the three bullion banks currently represented on the LBMA Board, two of them, namely HSBC, and JP Morgan are direct participants in the LBMA Silver Price auction.
So it appears that this secretive and opaque ‘tender’ process to appoint a successor administrator to the LBMA Silver Price auction was controlled and run by the LBMA Board, and not, as should have been the case, by a consensus approach involving all participants in the vast global silver industry.
Central Clearing – One Step Forward, Two Steps Back
When ICE secured the silver auction mandate on 14 July, it released a statement in which it referred to its administration of the LBMA Gold Price as a model that it seeks to follow when it takes over the administration of the LBMA Silver Price:
“Our centrally cleared model has already enabled broader participation and we continue to expand the gold auction. We anticipate this will support expanded participation in silver as well.”
However, there are still only 15 entities currently authorized to directly participate in the LBMA Gold Price. Nearly all of these entities are bullion banks, and four of these banks are still suspended from the daily gold auctions because they have not implemented internal system changes to allow the processing of cleared auction trades. The excluded banks for the gold auction are UBS, Standard Chartered, China Construction Bank, and Société Générale.
“trading volumes [in the gold auction] fell sharply after April 10, when four of the 14 participating banks and brokers stopped taking part after the auction’s administrator, Intercontinental Exchange (ICE), introduced a requirement to clear that meant participants had to modify their own IT systems and procedures.”
In essence, the introduction of central clearing into the gold auction by ICE was intended to facilitate broader auction participation. However in reality, the changes have done the opposite and actually shrunken the list of active participants.
The same pattern is now playing out in the silver auction, with 2 of the 7 existing direct participants in the LBMA Silver Price, namely UBS and China Construction Bank, now dropping out precisely for the same reason that they don’t have the internal IT changes in place to process cleared auction trades.
There has even been a delay in ICE taking over the silver auction, because in late August, ICE said that it was planning to commence administration of the LBMA Silver Price on 25 September. See Platts article here for details. Then on 21 September, 4 days before the 25 Sept earmarked launch date, ICE pushed back the launch another week until 2 October. What caused this delay is unclear, but it may have been related to other participants not being ready in time to process these new cleared auction trades.
ICE Silver Futures – to Facilitate Central Clearing
So how exactly does ICE implement central clearing in the daily London gold and silver auctions. In summary, it implements a model that involves trading ICE Gold Daily Futures contracts and Silver Daily Futures contracts. Previously in the auctions, all of the direct auction participants had to maintain large bilateral credit lines with each other. Under ICE’s central clearing model, ICE now offers Exchange for Physical (EFP) transactions, with the EFPs exchanging into these futures contracts positions which trade on the ICE Clear US platform.
In the world of LBMA unallocated positions, these futures can be ‘physically settled’ into either gold and silver respectively, however, it is not actually physical gold or physical silver that is being settled, but more correctly unallocated gold and unallocated silver (i.e. paper gold and paper silver). ICE even states this when it says the futures are:
ICE launched its daily gold futures on 30 January. More recently, ICE launched its daily silver futures on 5 September. Although these silver futures have been available for trading for 3 weeks now, they have not traded at all according the the trading volume reports on the ICE market data website. This was similar to the ICE daily gold futures, which only started to see actual trades when the LBMA Gold Price auction began to allow central clearing. So expect some small volume trading of these silver futures from 2 October onwards.
An added bonus for ICE is that the gold and silver auctions kickstart its futures contracts, however at the same time it has forced some of the direct participants in the gold and silver auctions to drop out, thus reducing the already meagre numbers of direct participants in these very influential benchmarks and also reducing liquidity in the auctions.
Currently, only market making members and full members of the LBMA can directly participate in the LBMA Silver Price auction. This is because full or market making membership of the LBMA is a stipulation of the LBMA’s “Benchmark Participant” criteria.
“focus on increasing the number of participants and bringing the benchmark under IBA’s IOSCO-compliant governance and oversight framework.“
IOSCO here refers to International Organisation of Securities Commissions. Following the regulatory investigations into the manipulation of LIBOR and other interest rate benchmarks, IOSCO established a task force to devise a best practice guidance framework for financial benchmark related activities. In July 2013, this task force published their guidance in a final report called ‘Principles for Financial Benchmarks’.
One of the IOSCO benchmark principles states that a financial benchmark should be a reliable representation of interest, in other words, that it should be representative of the market it is trying to measure using metrics such as market concentration.
Therefore, the current handful of LBMA bullion banks that will directly participate in the LBMA Silver Price auction from 2 October, i.e. HSBC, JP Morgan, the Bank of Nova Scotia, Toronto Dominion Bank, and Morgan Stanley, in addition to 2 commodity trading companies INTL FCStone and Jane Street, is in no way representative of these 500-1000 active trading entities in the global silver market.
Therefore, yet again, with the LBMA acting as gatekeeper on who is allowed to be a direct participant in the LBMA Silver Price auction, ICE has its hands tied on meeting IOSCO’s requirement that the should be a reliable representation of interest, and there is zero chance that this silver auction will ever see the many 100s of silver trading entities taking part and zero chance that the auction will ever reflect the silver price discovery that these 100s of silver trading entities would bring to the table.
Two months after the LME announcement, during the annual conference of the London Bullion Market Association (LBMA), Intercontinental Exchange (ICE) announced on 17 October that it too planned the launch of a gold futures contract in the London market. See Bullion Desk’s “ICE to launch gold futures in 2017, competition in gold market grows” as well as the ICE press release. The ICE contract is named “Gold Daily Futures” and resides on the ICE Futures US platform. It too is a daily futures contract.
Not to be outdone, the CME Group then followed suit on 1 November 2016 and it too announced plans for a “London Spot Gold Futures contract” as well as a “London Spot Silver futures contract”. See CME press release “CME Group Announces New Precious Metals Spot Spread” from 1 November 2016, and “CME to launch London spot gold, silver futures for spot spread” from the Bullion Desk, 1 November 2016. The CME contract was to trade on COMEX (Globex and Clearport) as a daily futures contract, and was devised so as to offer traders a spot spread between COMEX and London OTC Spot gold.
As of August 2016, the LME’s target launch date was said to be “the first half of 2017”. ICE was more specific with a target launch of February 2017 (subject to regulatory review). In it’s announcement, CME went for an even earlier planned launch date of 9 January 2017 (subject to regulatory approval).
Two Launches – No Volume
Why the update? Over the 2 weeks, there have been a number of developments surrounding these 3 contracts. The CME and ICE gold futures contracts have both been launched, and additionally, LME has provided more clarity around the launch date of its offering.
Surprisingly, while there was plenty of financial media coverage of these 3 gold futures contracts when their plans were initially publicised from August – November 2016, there has been little to no financial media coverage of the contracts now that 2 of the 3 have been launched.
On 25 January, I took a look at the CME website to see what the status of the CME gold futures contract might be. Strangely, the contract itself was defined on the CME website (with a code of GSP) but it had no trading volume. From the website, it was not clear when the contract actually launched, but it looked to be sometime during the last week of January.
On 25 January, I also sent a short email to CME asking:
“Has the London Spot Gold contract started trading yet?
Next up the ICE gold futures contract (AUD). Upon checking the ICE website under section “Products”, the new ICE Gold Daily Futures contract has been defined, and the description states “The Daily Gold Futures contract will begin trading on trade date Monday, January 30, 2017“.
Turning to the ICE reporting section of the website for futures products, and selecting the end of day ICE Futures US report page, and then selecting the reports for AUD, there are 6 daily reports available for download, namely, from 30 and 31 January, and 1, 2, 3 and 6 February. Again, looking at each of these reports, there are varying prices specified in the reports but there are no trading volumes. All of the volumes are zero.
Therefore, as far as the CME and ICE websites show, both of these new gold futures contracts have been launched and are available to trade, but there hasn’t been a single trade in either of the contracts. Not a very good start to what was trumpeted and cheer-led as a new dawn for the London Gold Market by outlets such as Bloomberg with the article “Finance Titans Face Off Over $5 Trillion London Gold Market“.
LMEprecious – To Launch Monday 5 June 2017
Finally, possibly so as not to be forgotten while its rivals were launching their London gold futures offerings, the LME on Friday 3 February announced in a general LME and LME Clear update memo that the planned launch date of its LMEprecious platform is now going to be Monday 5 June, i.e. 4 months from now.
As a reminder, the LMEprecious contracts will be supported by a group of market maker investment banks, namely Goldman Sachs,Morgan Stanley, Société Générale, Natixis and ICBC Standard Bank.
It’s also important to remember that all 3 of these gold futures contract product sets are for the trading of unallocated gold, (i.e. claims on a bullion bank for gold, aka synthetic / fictional gold). All 3 contracts claim to be physically-settled but this is essentially a play on words, because in the world of the London Gold Market, physically-settled does not mean physically-settled in the way any normal person would define it. LBMA physically-settled just means passing unallocated balances around, a.k.a. pass the parcel. To wit:
ICE London gold futures settle via unallocated accounts:
“The contract will be settled through unallocated loco London gold vault accounts using LBMA Good Delivery Rules.”
CME London gold futures settle via unallocated accounts:
“London Spot Gold futures contract will represent 100 troy ounces of unallocated gold“
And for LMEprecious, settlement will be:
“Physical settlement one day following termination of trading. Seller transfers unallocated gold to [LME Clearing] LMEC account at any LPMCL member bank, and buyers receive unallocated gold from LMEC account at any LPMCL member bank.”
With neither the CME nor the ICE gold futures contracts registering any trades as of yet (according to their websites), it will be interesting to see how this drama pans out. Will they be dud contracts, like so many gold futures contracts before them that have gone to the gold futures contracts graveyard, or will they see a pick up in activity? All eyes will also be on the LME contract from 5 June onwards.
The lack of coverage of the new CME and ICE London gold futures contracts is also quite unusual. Have the London financial media already forgotten about them? According to Reuters it would seem so. On 22 January, Reuters published an article titled “LME’s pitch for share of gold market faces bumpy ride” which exclusively questioned whether the LME gold contract would be a success, while not even mentioning the CME and ICE contracts. Given that 22 January was right before the CME and ICE contracts were about to be launched, this is quite bizarre. Presumably Bloomberg will come to the rescue of its ‘financial titans’ heros, and will write glowing tributes about the new contracts, but this will be tricky given the zero trade volumes. We await with bated breath.
The platinum and palladium markets arguably receive more focus during the third week of May than at any other time of the year. This is due to a series of events hosted in London known as London Platinum Week. London Platinum Week, which also covers other platinum group metals such as palladium, is coordinated by the London Platinum and Palladium Market (LPPM) association and its members. This year, London Platinum Week runs from Monday 16 May until Friday 20 May.
The LPPM is intrinsically linked to London Platinum Week. Indeed, London Platinum Week is specifically held in the month of May because it commemorates the fact that the LPPM was founded in May, in 1987.
‘L-Phabet Soup': LPPM, LPPFC, LBMA and LME
To coincide with London Platinum Week, this article looks at the relatively low-key organisation known as the London Platinum and Palladium Market (LPPM), and associated entities such as the London Platinum and Palladium Fixing Company (LPPFC), as well as the more recent platinum and palladium fixings, which are now administered by the London Metal Exchange (LME) on behalf of the London Bullion Market Association (LBMA). It is also timely to take a look at LPPM since it will most definitely cease to exist as a stand-alone entity later this year after it merges into the LBMA through a series of manoeuvres which have already been planned and scheduled, the first of which is a general meeting of the LBMA on 29 June.
LPPM is a trade association representing the interests of its members on the London platinum and palladium markets. LPPM operates the London/Zurich Good Delivery List for refiners of platinum and palladium, and also liaises with UK regulators and bodies such as HM Revenue and Customs.
Although it’s an association, the LPPM also describes itself conceptually as a members-only ‘Market':
“The LPPM operates on an OTC basis…with trades being undertaken in troy ounces of platinum and palladium. Full membership of the Market is open to those companies in the UK currently engaged in trading in the metals [platinum and palladium] and offering services in the UK to the market, including market-making, clearing services, refining or manufacturing.”
“an international self-management industry organization controlling Platinum and Palladium fair trade and appropriate products”.
Without stating the obvious, the London Platinum and Palladium Market (LPPM) is worth being familiar with because it oversees the London platinum group metals markets. More importantly, the LPPM members, especially its market making members, have a very influential input into daily price discovery in the global platinum and palladium markets, which in a real way impacts all users of and investors in platinum and palladium around the world. And given that LPPM appears to be run in a very informal clubby style with the same opacity and barriers to entry that surround the London Gold and Silver Markets, this should be concerning to platinum and palladium users and investors worldwide.
As an entity, LPPM is structured as an association, but unlike the London Bullion Market Association (LBMA), the LPPM is not a registered company. Both organisations are most usefully viewed as the public faces of the member entities, especially the banks, that operate in the precious metals markets. Currently, LPPM has 17 full members (10 of which are banks), 35 associate members and 52 affiliates.
The full members of LPPM that are banks are JP Morgan, HSBC, Goldman Sachs, UBS, Bank of Nova Scotia, ICBC Standard Bank, Credit Suisse, Deutsche Bank, Standard Chartered and Toronto-Dominion Bank. All of these 10 banks are market-making members of LPPM along with BASF Metals, which is also a full member. The remaining 6 full members of LPPM are precious metals refiners, namely, Johnson Matthey Plc of the UK, Tanaka Kikinzoku Kogyo of Japan, Germany’s Heraeus, and Metalor, PAMP and Valcambi of Switzerland. Tanaka only became a full member of LPPM in March 2015, where its full membership was voted on at the LPPM AGM. This illustrates that it is not a matter of merely applying for membership when attempting to become a full member of LPPM, the application has to be endorsed by the existing full members. Barclays and Mitsui & Co Precious Metals Inc were also still listed as full members of LPPM as recently as January 2016, but both have now been reclassified as associate members.
The associate members of LPPM also include a large number of banks such as Citibank, SocGen, Morgan Stanley, Merrill Lynch, Barclays, Commerzbank, Natixis, RBC and BNP Paribas as well as commodities trading companies, brokers and the trading arms of platinum and palladium producers. LPPM therefore appears to be a private, members only trade organisation dominated by a small number of bullion banks, and in that regard is rather like the LBMA.
“The Company’s name is “The London Bullion Market Association”
The 1987 incorporation document of the London Bullion Market Association can be seen here, with its first registered office of ‘New Court, St Swithins Lane’, i.e. the headquarters of N.M Rothschild in London. The LBMA was founded 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.
LPPM was also established in 1987. Technically, LPPM was established so that the London platinum and palladium markets could be added to the UK’s Terminal Markets Order (TMO) exemption list so as to receive a zero rate of VAT from HM Revenue & Customs on sales of metal between LPPM members and non-members. LPPM was added to the VAT (Terminal Markets) Order by an amendment to the Order on 5 May 1987.
LPPM was established as an ‘Association’ via a ‘Deed of Establishment’. LPPM confirmed to me recently that it doesn’t have a Memorandum of Association nor Articles of Association, which seems odd given that its structured as an ‘Association’. According to a UK government website on legal forms for business:
“Unincorporated Associations are groups that agree, or ‘contract’, to come together for specific purpose. They normally have a constitution setting out the purpose for which the association has been set up, and the rules for the association and its members. They are typically governed by a management committee”.
LPPM therefore must have a deed of establishment and probably has a constitution, but where these documents are publicly filed, if at all, is anybody’s guess.
All of these 6 founding members of LPPM are still full members of LPPM in one shape or another. Samuel Montagu through it being part of Midland Bank became part of HSBC, as did Mase Westpac which was bought by Republic National Bank of New York in 1993 which was then acquired by HSBC. Aryton Metals became part of Standard Bank in 1994. ICBC has recently acquired Standard Bank, and is now known as ICBC Standard Bank. BASF acquired Engelhard in 2006, hence the entity that was formerly known as Engelhard Metals is now known as BASF metals. The old Sharps Pixley business was bought by Deutsche Bank in 1993. Johnson Matthey still exists today as John Matthey.
It’s very revealing that these founding entities of LPPM represent 4 of the 5 current fixing members (HSBC, BASF, ICBC Standard and Johnson Matthey) in today’s platinum and palladium daily price auctions. These price auctions are widely used throughout the global platinum and palladium industry as valuation and contract benchmarks. The 5 member participants in the daily platinum and palladium price auctions in London, administered by the London Metal Exchange (LME) are:
BASF Metals Ltd
HSBC Bank USA NA
Johnson Matthey plc
ICBC Standard Bank plc
Goldman Sachs International
Note that 4 of the 5 platinum and palladium auction participants are founding members of LPPM. More on the daily platinum and palladium auctions below.
As of 2001, there were still only 9 full members of LPPM (7 of which were banks), namely:
J Aron & Company (UK)
Engelhard Metals Ltd
HSBC USA (London Branch)
Morgan Guaranty Trust Company of New York (London)
Johnson Matthey Plc
NM Rothschild & Sons Ltd
Standard Bank London Ltd
Credit Suisse First Boston (London Branch)
LPPM currently has a 9 person management committee, comprising a chairman from Johnson Matthey Plc, a vice chairman from ICBC Standard Bank, and committee member representatives from HSBC, BASF Metals, SocGen, Toronto-Dominion Bank, Metalor, Heraeus and Anglo Platinum Marketing Ltd. Notably, 4 of the 9 members of the LPPM management committee, ie Johnson Matthey, HSBC, BASF Metals and ICBC Standard Bank, also represent 5 of the 6 founding members of LPPM and are also 4 of the 5 members participants in the daily London platinum and palladium price auctions.
London by name, but no London office
In addition to the fact that it’s a private association without any public filings, there are a number of organisational aspects about LPPM which indicate that it is run on a much more piecemeal style than the LBMA, with a setup more akin to a local golfing society than the global representative of the world’s biggest platinum and palladium trading hub.
Although ‘London’ is in the title of the ‘London Platinum and Palladium Market’, the LPPM doesn’t even have a permanent London address, but sometimes uses the rotating chairman’s company addresses in London for correspondence. The LPPM support staff and setup seems to be summed up as “anywhere but in the City of London”:
The LPPM website address lppm.com is registered to Sharps Pixley at a Suffolk address, some 60 miles outside London. [The LPPM website also states that the site created by a web development company “for Sharps Pixley Ltd”]
The LPPM’s treasurer, who is also the administrative contact for London Precious Metals Clearing Ltd (see lpmcl.com) has his mail server registered at an address in Surrey, 22 miles from London. [The LPPM treasurer was also the administrative contact for the old Gold Fixing and Silver Fixing websites (www.goldfixing.com and www.silverfixing.com)]
The LPPM’s inter-organisational relations contact is a former Chair of LPPM, who at the time represented LPPM member Mitsui, but Mitsui exited the precious metals markets in London last year, although this former chair is still involved through this LPPM role, but at what address?
There are no published details or minutes of LPPM AGMs and very few press releases – ever. The only press releases that are retained on the LPPM website are here, with a few others traceable here and here. All in all, quite a strange and secretive organisation that makes the LBMA look like the epitome of transparency.
London Platinum and Palladium Fixing Company Limited (LPPFC)
The London Platinum and Palladium Fixing Company Limited (LPPFC) is another low-key entity within the London platinum and palladium market, and not surprisingly it has very very close connections with LPPM. LPPFC is a private company made up of directors from HSBC, Goldman Sachs, ICBC Standard Bank and BASF Metals. As its name suggests, LPPFC was established for the purpose of operating the Platinum and Palladium price auctions. LPPFX was incorporated on 3 December 2004, and operated the platinum and palladium fixing auctions up until 1 December 2014, i.e. for 10 years exactly.
The reason LFFPC has not been dissolved is that it is a currently one of the defendants in a consolidated class action suit taking place in the Southern District court in New York, where it is accused of platinum and palladium price manipulation along with the fixing members of LPPFC, namely Goldman Sachs Group Inc, HSBC Bank USA NA, ICBC Standard Bank PLC, and also UBS (not a fixing member of LPPFC). This class action was filed on 21 April 2015. In late 2015, the defendants tried to have the plaintiff’s motion dismissed but this was not upheld by the court. The class action suit against LPPFC and its member companies is in many ways similar to class action suits currently running against the London Gold Market Fixing Company and its members and the London Silver Market Fixing Company and its members, although the gold and silver class actions have received more publicity than the platinum / palladium suit.
LPPFC hands the platinum and palladium fixings to LME
In the summer of 2014, during the period when the London Silver Fixing auctions were transitioning to a new platform via a high-profile competition that eventually resulted in the new LBMA Silver Price auction system being administered by Thomson Reuters (the award of which was announced on 11 July 2014), the LPPFC made a few stealthy moves to jettison its own operational role in the platinum and palladium fixings. These moves went mostly unreported and un-scrutinized in the financial media.
“shortly commence an RFP [Request for Proposals] process with a view to appointing a third party to assume responsibility for the administration of the London Platinum and Palladium Fixing“.
The press release also stated that “The RFP process will be launched shortly. Expressions of interest in that process should be directed to firstname.lastname@example.org by no later than 6 August 2014.” Given that 6 August (a Wednesday) was 3-4 business days after the announcement that an RfP process was being launched, this is extremely short notice for intending applicants to signal their interest in such a process, especially since it was the August holiday season in the City of London and the London financial services and technology industries. It’s as if the LPPFC did not want any potential applicants to express interest in the RfP.
At that time, the LBMA was silent on its role in the RfP process for the platinum and palladium fixings. On 31 July 2014, Bloomberg wrote a story highlighting that the LBMA’s public relations officer, Aelred Connolly, declined to explain the LBMA’s role in the platinum/palladium RfP:
“Aelred Connelly, a spokesman for LBMA, declined to comment on the association’s role in the platinum and palladium request-for-proposal exercise.”
However, a LBMA to LPPFC connection is apparent in a move by the LPPFC on 4 August 2014 when it announced (on the Sharps Pixley website) the appointment of Jonathan Spall as the ‘independent chair’ of the platinum and palladium fixing calls, a role that was said to commence that day on 4 August 2014. Jonathan Spall (ex Barclays and ex London Gold Market Fixing Company) at that time was acting as a consultant for the LBMA in the Silver Price auction competition process. LPPFC also said in the same announcement that Mr Spall would be supporting the LPPFC Board’s “assessment of responses to the RFP process announced by LPPFC on 31 July.”
More notably, there was nothing reported by LPPFC nor by LPPM nor by the financial media about this RfP process, nor about what happened after ‘expressions of interest’ were received by 6 August, until an announcement was made by LPPFC on 16 October 2014 (11 weeks later), again announced on the LPPM web site, that:
“Following completion of the RFP process announced by The London Platinum and Palladium Fixing Company Limited (the LPPFCL) on 31 July 2014, the LPPFCL is pleased to confirm that the London Metal Exchange (LME) has been selected and has committed to become the new administrator of the London Platinum and Palladium Fixing”
Given that there is no evidence to suggest that there were any applicants to this process, not any short list, nor any competition, it would appear that the contract was merely handed to the London Metal Exchange. I asked the LPPM recently to confirm how many applicant companies participated in the LPPFC RfP process that took place between August and October 2014, and of the applicant companies, could they confirm how many applicants were shortlisted and their identities? LPPM eventually responded that they did not carry out the RfP process and had passed my query on to the then chair of the fixing company [LPPFC] who would respond to me ASAP. When no response was received after a week of waiting, I asked the LPPM to confirm who my query had been passed on to. This question itself was not responded to by the LPPM. Hence, my conclusion is that neither the LPPM nor LPPFC wish to discuss the matter, and my conclusion is that there was no contested RfP process to run the replacement platinum and palladium fixings, and that the process was merely handed to the LME.
The reason why this is not surprising, apart from the secretive and stealthy operational culture of the LPPM / LPPFC, is that there is good reason to believe that the LME was being sweetened and placated with the platinum and palladium fixings administrator role after it failed to secure the administrator and operator role in the LBMA Silver Price competition in July 2014, a role which was awarded to Thomson Reuters and the CME Group. I have heard from a number of people in the precious metals sector in London that the LME was not happy about the way in which the LBMA awarded the silver price auction contract.
LME Downplays Silver auction after being awarded Platinum / Palladium
“Matthew Chamberlain, the LME’s head of business development, said the grouphad only been able to get ‘a bare bones’ pitch together in time for the deadline for proposals on the silver fix. For platinum and palladium, ‘we had time to get our technology in place,’ he said.”
Frankly, this ‘bar bones’ pitch statement by Chamberlain in bizarre and preposterous, in light of the fact that the LME is on record during the Silver auction competition in July 2014 as saying it had a full and complete solution that it claims was considered the best solution by much of the market. The reference to not having enough time is also bizarre and hard to fathom.
Proving that the Wall Street Journal reporters don’t seem to read their own previous articles on the same subject, the Wall Street Journal reported in a 29 May 2014 article titled “CME Group, LME Separately Work on Hosting a New Silver Fix” that the LME proposal was at that stage in late May 2014, more advanced that the ultimately winning CME proposal:
“While the LME’s proposal is relatively advanced, CME Group is only in the early stages of considering a new silver fix, people with knowledge of the matter said.
“The LME went one further, saying it already has a proposal that will ‘provide best-practice regulatory compliance while maintaining the global position of the London market.’ The LME, which is owned by Hong Kong Exchanges and Clearing Ltd., said it would give more detail “at the appropriate time once the market consultation is complete.”
It can only be concluded that the LME was seriously downplaying the Silver Price competition in October 2014, since by that time it was satisfied in getting the platinum and palladium business. Consider the following timeline which shows that the LME had weeks and weeks in which to devise a solution for the Silver auction:
“Our silver auction is based on market best-practice with rigorous regulatory and compliance features, and will be ready for demonstration on our production systems by Friday 27 June.”
“We are the natural London home for silver”
“We have reacted to strong market demand – from both physical and financial players – for the LME to deliver the London Silver Price, and our solution incorporates significant market feedback from across the silver community. Our dedicated team of precious metals experts is ready to support delivery of the solution, and ensure market continuity on 15 August 2014.”
On Wednesday 9 July, 2014, the LME announced that it had formed an alliance with financial technology company Autilla to provide a joint solution in the London Silver Price competition. The LME stated in a press release on that day that:
“’Throughout the LBMA’s process, the market has consistently indicated that Autilla’s technology and the LME’s compliance and price discovery systems are market-leading, and LME and Autilla have received numerous requests from the market to provide a joint solution,’ said Garry Jones, CEO of the LME.”
Two days later on 11 July 2014, the LBMA announced that CME / Thomson Reuters had secured the silver price auctions contract, news which must have caused much chargin and gnashing of teeth to LME and Autilla.
LME amends Press Release and deletes reference to central clearing
On Thursday 16 October 2014, the London Platinum & Palladium Fixing Company Ltd (LPPFC) awarded the contract to run the platinum and palladium price auction fixings to the London Metal Exchange (LME). LPPFC communciated this appointment in a press release which was published on the LPPM website (another example of the unhealthy inter-connectedness between the LPPM and LPPFC).
But the more interesting announcement that day came from the LME’s own web site where it issued a press release that was 7 paragraphs long, and also contained 2 ‘Notes to Editors’ bullet points.
The final two paragraphs of the LME’s press release that morning on 16 October 2014 explained the LME’s plan to use its LME Clear clearing service for platinum and palladium, so as to overcome the problem of bi-lateral credit risk between auction participants in the platinum and palladium auctions. This bilateral credit risk is huge barrier in the London Silver and Gold Price auctions as creates an obstacle for a wide-range of participants such as miners, refiner and mints to (on a practical level) taking part in the auctions. For background on the obstacle posed by not having central clearing, see for example “The LBMA Silver Price – Broken Promises on Wider Participation and Central Clearing“.
The LME original press release included the following two paragraphs:
“To maximise participation in the London pricing mechanism, the LME also plans to introduce a cleared platinum and palladium service, which will mitigate the difficulty associated with participants taking bilateral credit risk in positions.
LME Clear, launched on 22 September 2014, was built specifically to enable efficient clearing of metals exposures and will extend its existing precious metals clearing functionality to clear platinum and palladium.“
I tweeted about this at 11:24 am London time that morning, with a link to LME press release, saying:
LME will use a cleared platinum and palladium service to prevent need for participants taking bilateral credit risk http://t.co/ZpLA0Uhb86
Less than 3 hours later (somewhere between 13:34 and 14:21), the LME removed these 2 critical sentences from its press release and reissued an amended version of the press release on its website. The 13:34 and 14:21 time-stamps are based on Google cache which had made an imprint of the original press release at 16 Oct 2014 13:34:19 GMT and had found the amended press release at 16 Oct 2014 14:21:49 GMT.
Luckily, at least one financial news site, Finance Magnates, used the original press release, and reported as follows:
“To maximise participation in the London pricing mechanism, the LME plans to “introduce a cleared platinum and palladium service, which will mitigate the difficulty associated with participants taking bilateral credit risk in positions”.
LME Clear, launched on 22nd September 2014, was built specifically to enable efficient clearing of metals exposures and will extend its existing precious metals clearing functionality to clear platinum and palladium.”
Therefore, between 1:34pm and 2:21pm, someone at the LME deleted the two sentences on clearing from the press release and the reference to LME Clear. LME Clear was launched on 22 September 2014. The LME press release now remains on its web site in its second incarnation. The most important question is why was this press release altered as soon as it was released, and who requested that it be altered. Was it too revealing to the incumbent parties that central clearing would blow apart current clearing status quo and make redundant the argument that widespread participation in the precious metals auctions is a difficult process? Because with central clearing of auction trades, direct participation in the platinum and palladium auctions for hundreds of platinum and palladium entities around the world would be a very simple process.
Very interestingly, there was also one other change to the 2nd version of the LME press release in the ‘Notes to editors’ section where it was amended as follows:
Original: “The go-live date of 1 December is dependent on the ongoing participation of the four participating members of the LPPFCL.”
Revised: “The pricing mechanism is dependent on market participation. The LME has worked with the LPPFCL to ensure that its solution can be adopted on 1 December by both existing LPPFCL members, and new participants.”
This looks like a re-edit that was designed to distract from the fact that the LME auction was merely the same 4 old fixers in a different disguise, or in other words, “meet the new boss same as the old boss”, or “same old wine, in a new bottle“. It’s highly comical that the exact same participants that were in the old platinum and palladium auctions now appear in the new platinum and palladium auction as the only participants, and the LPPM, LBMA, LPPFC and LME have the gall to keep a straight face when reporting this. In fact, it would be a complete joke, if it were not for the fact that the topic of global price discovery of platinum and palladium is critically important. And finally, neither of the LME executives that were interviewed by Reuters that same week of October 2014 , in an article about the platinum and palladium contract award titled “LME CEO plays Asia card as gold market decides on fix replacement” even mentioned LME Clear to Reuters. Hmm, I wonder why?
The LME’s brochure about LMEBullion now states that “All transactions in platinum and palladium are Loco London and are settled on a bilateral basis“. Again, no mention of LME Clear or the central clearing capabilities of the LME.
The LME Fixings
On the day the LME platinum and palladium price auctions went live on 1 December 2014, it was announced by the LBMA that the auction / benchmark prices would be called the LBMA Platinum Price and the LBMA Palladium Price. This, according to the LBMA, was due to the LPPFC having asked the LBMA to take over the intellectual property for the two sets of daily prices before the new auctions were launched. Trademarks for the LBMA Platinum Price, LBMA Palladium Price and also LBMA Platinum and Palladium Price were registered by the LBMA on 28 November 2014, and a LBMA company called ‘Precious Metals Prices Limited’ was incorporated on 1 December 2014 to manage the intellectual property rights of the LBMA Platinum Price, the LBMA Palladium Price, the LBMA Silver Price and the LBMA Gold Price.
LBMA Platinum Price and LBMA Palladium Price auctions take place twice daily at 9:45am and 2pm London time. The platinum auction is schedule to run first, followed by the palladium auction. LME runs the daily auctions for platinum and palladium on an electronic auction system called LMEBullion.
The are only 5 member participants of LMEBullion, namely:
Goldman Sachs International
HSBC Bank USA NA
ICBC Standard Bank plc
BASF Metals Ltd
Johnson Matthey Plc
The 4 LPPFC members (Goldman, HSBC, ICBC Standard and BASF) were the only member of participants of LMEBullion when it was launched on 1st December 2014. Johnson Matthey Plc joined as a member participant of the auctions on 19 January 2015, a day on which the LME stated that:
“We believe that wider participation will maximise the effectiveness of the process, and we look forward to broadening participation further.”
However, since January 2015 however, no other member participants have joined. Why not? And why are there no industry participants directly participating in the auctions?
ETF Securities, which operates the ETFS Platinum Trust (PPLT) that uses the afternoon LBMA Platinum Price (the PM fix) as a valuation price source, states in an official filing dated 31 December 2015 that:
“Formal participation in the LME PM Fix is limited to participating LPPM members, each of which is a bullion dealer. Twelve LPPM members are currently participating in establishing the LME PM Fix (Barclays Bank PLC, BASF Metals Limited, Credit Suisse, Deutsche Bank AG, Goldman Sachs International, HSBC Bank USA NA, ICBC Standard Bank PLC, JP Morgan Chase Bank, Standard Chartered Bank, The Bank of Nova Scotia, ScotiaMocatta, The Toronto-Dominion Bank and UBS AG). Any other market participant wishing to participate in the trading on the LME PM Fix is required to do so through one of the participating LPPM members.”
Similar wording and the same list of 12 banks is also stated in the official filings of the ETFS Palladium Trust (PALL). Therefore, according to ETF Securities, participation in the LBMA Platinum and Palladium daily price discovery auctions is also a closed-shop in a similar way that participation in the LBMA Gold Price and LBMA Silver Price auctions is a closed-shop, with only a handful of dominant bullion banks being allowed to directly participate.
Since the beginning of 2016, Barclays has withdrawn from some activities in the precious metals markets in London. Excluding Barclays from the above list and excluding BASF Metals Ltd, then all of the other 10 banks that are allowed to participate are the only banks that are full members of the LPPM. Therefore, the rules of the auctions are de facto limiting ‘formal participation’ in the platinum and palladium auctions to LPPM bullion dealer full members (i.e. bank entity intermediaries), and by extension, excluding every other platinum and palladium market participant in the world of which there are thousands.
Note that 7 other banks, namely, JP Morgan, Scotia, Barclays, UBS, Deutsche Bank, Toronto Dominion Bank,and Credit Suisse, are ‘participating’ in the fixes in addition to the 5 member participants. Some readers will recognise that 4 of these additional banks, JP Morgan, Scotia, Barclays, and UBS, are clearing members of the London precious metals markets along with HSBC and ICBC Standard through their membership of London Precious Metals Clearing Limited (LPMCL). The power of LPMCL banks in all four of the London precious metals markets, and their obsession with maintaining the clearing status quo, should not be underestimated, but it is a point which seems to have been ignored by the London financial media.
Participation and Governance of the LME administered prices
There does not appear to be any information on the LME website or associated uploaded documents that explains how interested participants can become participating members in the LBMA Platinum and LBMA Palladium auctions, or what the participation criteria is. These auctions therefore look like private clubs in the same vain of the LBMA Gold Price and LBMA Silver Price auctions, but even more closed and protected than their silver and gold counterparts.
The oversight committee for the platinum and palladium price auctions is even stranger. There is nothing independent about it. On the LME website, a document titled “Control Framework for LPP Prices“, paragraph 14, refers to an LPP Prices Oversight Committee for the Platinum and Palladium fixings, comprising 3 LME representatives, a possible 5 representatives (one each from the 5 member participants) and a potential LBMA observer:
“The Oversight Committee shall be composed of at least three senior individuals from the LME to serve as LME members on the Oversight Committee. These individuals will be appointed by the LME’s Executive Committee. Each member participant may also
nominate a qualified individual to act as a representative on the Oversight Committee. The London Bullion Market Association is entitled to nominate an observer to attend meetings of the Oversight Committee.”
However, the LME website shows that this Oversight Committee only consists of 3 representatives from the LME and no one else. It doesn’t even contain representatives from the member participants. Even if it did though, it’s still not independent, since there are no representatives from the wider global platinum / palladium sectors. Even the LBMA Gold Price and LBMA Silver Price administrators operate independent oversight committees, which while not perfect, are far more diverse than the LME Oversight Committee. See ICE Benchmark Administration (LBMA Gold Price) oversight committee and Thomson Reuters (LBMA Silver Price) oversight committee.
The LBMA’s roadmap for consolidating its power in the London precious metals markets has been well telegraphed since 2014. The fragmented nature of the 3 sets of precious metals fixings in London with 3 different platforms and 3 administrators is one aspect of the ‘Problem-Reaction-Solution’ agenda that has been played out by the LBMA and LPPM strategists since the 2nd half of 2014. An early inception of the idea of the LBMA and LPPM coming together was placed into the ‘Market’ in the October 2014 issue of the LBMA’s Alchemist magazine when LBMA consultant Jonathan Spall, in an article titled ‘No More Fixings‘ posed the question:
“Do we need an umbrella organisation with a strong voice to promote the interests of our rather small area of the global financial community?”
The ‘New World Order’ agenda was again pushed and crafted in the LBMA’s orchestrated ‘LBMA Strategic Review’ conducted by EY consultants, a review which was not open to public consultation during the consultation phase, and the full findings of which have never been published. By June 2015, the LBMA CEO stated that the LBMA was planning to:
“Develop the precious metals market landscape to meet the current and future needs by implementing new services, new corporate structure and new governance“
“A New Trade Association for all four metals will be formed which will hold the current assets of the market such as the Good Delivery List as well as develop new Financial Services to support market trading.”
Bloomberg summed up this October 2015 news as follows:
“The association [LBMA] is consideringexpanding its oversight to include platinum and palladium, rather than just gold and silver, Chief Executive Ruth Crowell said Monday at the conference, citing regulatory, political and competitive changes. Having all four metals under one group would make sense from a banking and vaulting perspective and LBMA members will be asked to vote on the change at the annual general meeting in June , she said.”