This new gold vault data was first released in early April 2017 and covers gold bar holdings at the Bank of England for every month-end for the last 6 years. Going forward, the Bank will publish updates to this dataset every month, on a 3-month lagged basis.
The move by the Bank of England to publish this data was first reported by the Financial Times in February and was supposedly part of a broader gold vault reporting initiative which was to include vault holdings for all 7 of the London Bullion Market Association (LBMA) commercial precious vaults in London. These commercial vaults are run by HSBC, JP Morgan, Brinks (on behalf of itself and ICBC Standard), Malca Amit, Loomis and G4S. While the Bank of England had single-handedly gone ahead with its side of the reporting initiative, the precious metals vault holdings data from the LBMA was conspicuously absent when the Bank of England made its move. As I wrote in my article last week:
“The London Bullion Market Association was also expected to publish gold vault holdings data for the commercial gold vaults in London, but as of now, this data has not been published, for reasons unknown.”
“While the Bank of England has now followed through with its promise to publish its gold vault holdings, the LBMA has still not published gold vault data for the commercial gold vault providers, i.e. its members HSBC, JP Morgan, ICBC Standard Bank, Brinks, Malca Amit, Loomis and G4S. Where is this data, why is there a delay, and why has it not yet been published?”
However, as if by magic, the LBMA has now just issued a press release titled “LBMA to publish Precious Metal holdings in London vaults”. Coincidence, perhaps. But whatever the case, the LBMA development is timely, and the press release, which is actually a combined press release from the LBMA and one of its alter egos, London Precious Metals Clearing Limited (LPMCL), makes interesting reading, but unfortunately at the same time is still quite vague, and appears to suggest that some of the vault operators in question have been dragged kicking and screaming to the start line.
Summer of 2017
The statement from the LBMA reveals that:
“from summer 2017 the LBMA will be publishing the gold and silver physical precious metals holdings of the London vaults, with the platinum and palladium holdings to be published at a later date”
The statement also clarifies that “the data only includes physical metal held within the London environs” and that it will cover “aggregate physical holdings”.
Given that the LBMA and Bank of England work very closely, its disappointing and bizarre that the LBMA didn’t coordinate the vault data release at the same time as the Bank of England, because, at the end of the day, this is just some simple holdings data we are talking about, and all the vaults concerned know precisely how much precious metal they are holding at any given moment.
As a reminder, the Bank of England was established by the LBMA in 1987, the Bank of England is an observer on the LBMA Management Committee, and the former head of the Bank of England Foreign exchange Division, Paul Fisher, is the recently appointed ‘independent‘ chairman of the LBMA Management ‘Board’ (formerly known as the LBMA Management Committee). See “Blood Brothers: The Bank of England and the London Bullion Market Association (LBMA)” for more details.
Representatives of the two large commercial vault operators in London, HSBC and JP Morgan, also sit on the LBMA Board. Additionally, representatives of the vault operators HSBC, JP Morgan, Brinks and ICBC Standard Bank also sit on the LBMA Physical Committee and all of the vault operators are represented on the LBMA’s Vault Managers Working Party.
The reference to ‘aggregate physical holdings‘ in the press releaseis also potentially disappointing as it seems to imply that the LBMA will not break out its vault reporting into how much gold and silver is held by each of the 7 individual vault operators in and around London, but might only publish one combined figure each month end.
A reporting format in which each vault/operator is listed alongside the quantity (tonnes or thousands of ounces) of gold and silver held by that vault operator would be ideal.For example, something along the lines of:
Quantity per vault is the approach taken in the daily precious metals vault reports that COMEX releases on its approved vault facilities in and around New York, as per an example for gold here. HSBC, JP Morgan, Brinks and Malca Amit submit inventory levels to COMEX for that report. Likewise, HSBC, JP Morgan, Brinks and Loomis submit inventory levels in New York to ICE futures for its version of the gold futures inventory report.
Given that the individual vault operators based in New York report precious metals inventory to COMEX and ICE, is it too much to expect that many of the same vault operators cannot do likewise for their London vault facilities?
It remains to be seen which date ‘summer 2017” refers to. This seems like a bizarre non-committal cop out by the LBMA not to have announced a definitive date for beginning to report vault data. Summer 2017 could mean anything. Assuming they are talking about the northern hemisphere, summer could mean anywhere from May to August or beyond.
If the LBMA data is on a 3-month lagged basis in the same way that the Bank of England data is, the first tranche of LBMA vault data could neatly be released after 30 June and would cover month-end March 2017. As a reminder, the Bank of England gold vault data shows:
“the weight of gold held in custody on the last business day of each month. We publish the data with a minimum three-month lag”
Why the vault data on a platinum and palladium can’t be published at the same time as the gold and silver data is also puzzling, because the London Platinum and Palladium Market (LPPM) is now officially integrated into the LBMA following a change in the LBMA’s governance and legal structure in 2016, so both sets of data are now under the remit of essentially the same Association.
It also remains to be seen whether the LBMA data will have a 6-year historical look-back as the Bank of England data does, or whether it will just begin with a one month-end snapshot? For consistency with the Bank of England data, the LBMA vault data should ideally cover the same time period, i.e. every month beginning at January 2011. In short the LBMA press release is lacking quite a lot of detail and unfortunately invites guesswork.
The Importance of the Vault Data
Turning quickly to why this gold vault data is important. Simply put, at the moment there is little official visibility into how much physical gold is stored in the London Gold Market, and how much of this gold is available as “liquidity” to back up the market’s huge fractional reserve gold trading volumes. Albeit for silver.
In my coverage on 28 April of the Bank of England data release, I had phrased the relationship between physical gold and gold trading in the London market as follows:
“this physical gold stored at both the Bank of England vaults and the commercial London vaults underpins the gargantuan trading volumes of the London Gold Market”
Interestingly and somewhat synchronistically, in its 8 May press release one week later, the LBMA uses very similar phraseology, as well as the identical verb ‘underpins’, when it states that:
“the physical holdings of precious metals held in the London vaults underpins the gross daily trading and net clearing in London”
Another coincidence perhaps, but the LBMA is now also saying that the physical gold bars which they will report on starting in summer 2017, and which the Bank of England has just started reporting on, literally ‘underpin’ or support the massive volume of gold trading in the London Gold Market.
“Net clearing” refers to London clearing volumes for gold and silver that are processed through the LMPCL’s clearing system AURUM, and that are published each month by the LBMA, a recent example of which, covering month-end March 2017, can be seen here. In March 2017, an average of 18.1 million ounces of gold (563 tonnes) and 203.2 million ounces of silver (6320 tonnes) were clearedeach trading day.
Since trade clearing nets out actual trading volumes, these clearing figures need to be grossed up to reveal the true trading figures. Using a 10:1 ratio of trading to clearing, which is a realistic multiplier as discussed here, this would be equivalent to 5630 tonnes of gold and 62,200 tonnes of silver traded each day in the London wholesale gold and silver markets. On an annualised basis, for gold, this would imply that the equivalent of over 1.4 million tonnes of gold are traded per year in the London gold market, quite an achievement, seeing that less than 200,000 tonnes of gold is said to have ever been mined throughout history, and half of this total is held in the form of jewellery.
The LBMA press release goes on to say that:
“Publication of aggregate physical holdings is the first step in reporting for the London Precious Metals Market.
The next step is Trade Reporting.
The collection of trade data will add transparency to the market and provide gross turnover for the Loco London market. Previously gross turnover had been calculated from one-off surveys or estimated from the clearing statistics.“
With the LBMA vault reporting being the first step, but only coming out in the summer of 2017, its anyone’s guess as to when LBMA trade reporting will be coming out, a project which has been bandied about in the financial media and by the LBMA for nearly 3 years now, but which must take the record as the slowest fintech formulation and release in the history of London financial markets, ever.
The Bank of England’s latest physical gold holdings for January month-end 2017 is only in the region of 5100 tonnes of gold bars. Furthermore, since the LBMA say that there are only about 6500 tonnes of gold in the entire London market, the LBMA commercial gold vaults in London have to hold far less gold than the Bank of England. Add to this the fact that the gold in the commercial vaults is mostly held on behalf of gold-backed Exchange Traded Funds (ETFs).
Given the above, it becomes increasingly clear than when the LBMA does decide to release gold vault holdings figures sometime in summer 2017, whatever figure(s) is released, will most likely confirm that there is very little gold in the London market which is not claimed to be owned by either a central bank or a gold-backed ETF. It will also provide a field day for all sorts of theories and calculations about the true ratio of gold trading volumes to gold bar vault holdings, and how much of this gold is allocated and earmarked, and how much can be considered a combined bullions banks’ float.
A Quick Calculation
Its possible to go someway towards estimating a minimum figure for how much gold to expect the LBMA to report on the commercial vaults when it begins vaults reporting this summer. The same exercise could be conducted for silver but is beyond the scope of this analysis. For gold, when such a figure is calculated and added to the amount of gold in the Bank of England vaults, it gives a grand total of how much gold is in the combined LBMA and Bank of England vaults in London.
A large number of high-profile gold-backed ETFs store their gold bars in LBMA vaults in London, mainly in the vaults of HSBC and JP Morgan. The HSBC vault in London holds gold on behalf of the SPDR Gold Trust (currently 853 tonnes) and ETF Securities (about 215 tonnes). The JP Morgan gold vault in London holds gold on behalf of ETFs run by iShares (about 210 tonnes in London), Deutsche Bank (95 tonnes), and Source (100 tonnes). An ABSA ETF holds about 36 tonnes of gold with Brinks in London. In total, these ETFs represent about 1510 tonnes of gold. For the approach used to calculate this type of figure for gold-backed ETFs, please see “Tracking the gold held in London: An update on ETF and BoE holdings“.
ETF gold holdings (most of which are stored in London) have been relatively static since mid March 2017. See chart below. Therefore if the LBMA starts reporting vault gold holdings for a month-end date such as month-end March 2017, it would probably reflect about 1500 tonnes of ETF gold, mostly held by at HSBC and JP Morgan vaults in London. This is assuming that some of the ETF gold is not held in sub-custody at the Bank of England vaults.
Until the LBMA starts its vault reporting, its unclear how much other gold is in the commercial vaults in London above and beyond the ETF holdings. However, non-monetary gold regularly flows in and out of the London Gold Market from gold trade with countries such as Switzerland. While March 2016 to October 2016 was a period in which the UK was a strong net importer of non-monetary gold from Switzerland, since then the UK has been a net exporter of gold to Switzerland, and has exported 325 tonnes of gold from October 2016 to end of March 2017. Therefore, whatever data the LBMA starts reporting, it logically should reflect the renewed outflow of gold from London to places like Switzerland and would tend to suggest that whatever excess bullion bank float gold is in the London commercial vaults, it is less than it would have been in the absence of these renewed outflows.
“6,500 tonnes of gold held in London vaults, of which about three quarters is stored in the Bank of England”
While this web page text is probably slightly out of date, a literal interpretation would imply that 4875 tonnes of gold are in the Bank of England (which is not too far from the actual figure) and that 1625 tonnes are in the commercial vaults (which would mean that very little non-ETF gold is in the commercial vaults).
The Bank of England claims to have about 72 central bank customers with gold accounts, For month-end January 2017, the Bank of England is reporting that there was approximately 5100 tonnes of gold in its vaults. At least 3800 tonnes of this gold is claimed to be owned by 34 known central banks. See “Central Bank Gold at the Bank of England” for more details. That would leave about 1300 tonnes of gold at the Bank of England owned by a selection of other central banks and bullion banks. As to how much gold the bullion banks hold at the Bank of England is not clear, but since central bank gold holdings are relatively static (at least when excluding gold lending), then most of the month-to-month movements in Bank of England gold vault holdings are most likely due to bullion bank activity.
As to how easily bullion bank gold holdings at the Bank of England can switch to or be transported to the vaults of the commercial vault operators in London is also unclear, as logistics is a secretive area of the London Gold Market.
So with (1500 ETF tonnes of gold + X) in the commercial vaults, and 5100 tonnes of gold in the Bank of England vaults, this gives a grand total of 6600 tonnes of gold + X in all the vaults of the London as of early 2017. X could be 400 tonnes, it could be 1400 tonnes, or it could be any other figure of similar magnitude. My guess is that there is not that much gold in the commercial vaults above and beyond whats in the gold-backed ETFs. Maybe a few hundred tonnes or so. However, we will have to wait until the dog days of ‘summer’ in London to know this definitively.
On 5 February, the Financial Times of London (FT) featured a story revealing that the London Bullion Market Association (LBMA) plans to begin publishing data on the amount of real physical gold actually stored in the London precious metals vaulting network. The article titled “London gold traders to open vaults in transparency push” can be read here (accessible via FT subscription or via free monthly FT read limit).
This new LBMA ‘monthly vault data’ will, according to the FT’s sources, be published on a three-month lagged basis, and will:
“show gold bars held by the BoE, the gold clearing banks, and those [vaults] operated by the security companies such as Brink’s, which are also members of the LBMA.”
The shadowy source quoted in the FT article is attributed to “a person involved in setting up the programme”, but at the same time, although “the move [to publish the data] is being led by the LBMA“, the same LBMA ”declined to comment” for the FT story. This then has all the hallmarks of a typical authorised leak to the media so as to prepare the wider market for the data release.
On 16 February, the World Gold Council in its “Gold Investor, February 2017” publication featured a focus box on the same gold vault topic in its “In the News” section on page 4, where it states:
“Enhanced transparency from the Bank of England
The Bank of England is, for the first time, publishing monthly data revealing the amount of gold it holds on behalf of other central banks.
As a leading custodian of gold, with one of the largest vaults in the world, the Bank of England’s decision is highly significant. Not only will it enhance the transparency of the Bank’s own gold operations; it will also support the drive towards greater transparency across the gold market.
The data reveals the total weight of gold held within the Bank of England’s vaults and includes five years of historical data.”
The Proposed Data
Based on these two announcements, it therefore looks like the gold vault data release will be a combined effort between the LBMA and the Bank of England, the blood brothers of the London Gold Market, with the Bank of England data being a subset of the overall LBMA data. While neither of the above pieces mention a release date for the first set of data, I understand that it will be this quarter, i.e. sometime before the end of March. On a 3 month lagged basis, the first lot of data would therefore probably cover month-end December 2016, because that would be a logical place to start the current dataset, rather than, for example, November 2016.
While the Bank of England data looks set to cover a 5 year historical period, there is no indication (from the FT article) that the wider LBMA vault data will do likewise. From the sparse information in the FT article, the LBMA data will “show gold bars held“. Does it mean number of gold bars, or combined weight of gold bars? What exactly it means, we will have to wait and see.
The Bank of England data will capture “total weight of gold held“. Notice that in the above World Gold Council piece it also states that the data will cover the amount of gold that the Bank of England “holds on behalf of other central banks.” There is no mention of the amount of gold that the Bank of England holds on behalf of commercial bullion banks.
Overall, this doesn’t exactly sound like it is “enhancing the transparency of the Bank’s own gold operations” as the World Gold Council puts it. Far from it. Enhancing the transparency of the Bank of England’s gold operations would require something along the lines of the following:
Identities of all central banks and official sector institutions (ECB / IMF / BIS / World Bank) holding active gold accounts at the Bank of England. Active gold accounts meaning non-zero balances
Identities of all commercial / bullion banks holding active gold accounts at the Bank of England
A percentage breakdown between the central bank gold held in the Bank of England vaults and the bullion bank gold held in the Bank of England vaults
An indicator for each gold account as to whether it is a set-aside earmarked custody account or whether it is a fine troy ounce balance account
Information for each central bank and official sector institution as to whether any of “its” gold is lent, swapped or repo’d
Information for the bullion bank gold accounts as to whether the gold recorded in those accounts is borrowed, sourced from swaps, sourced from repos, or otherwise held as collateral for loans
Information on the gold accounts of the 5 LPMCL clearing banks showing how much gold each of these institutions holds each month and whether the Bank of England supplies physical gold clearing balances to these banks
Information on when and how often the London-based gold-backed ETFs store gold at the Bank of England, not just using the Bank of England as sub-custodian, but also storage in their own names, i.e. does HSBC store gold in its own name at the Bank of England which is used to supply gold to the SPDR Gold Trust
Information on whether and how often the Bank of England intervenes into the London Gold Market and the LBMA Gold Price auctions so as to supply gold in price smoothing and price stabilisation operations in the way that the Bank of England’s Terry Smeeton seems to have been intervening into the London Gold Market in the 1980s
Information on the BIS gold holding and gold transactions settlements accounts at the Bank of England and the client sub-account details and central bank identities for these accounts
Information on gold location swaps between gold account holders at the Bank of England and gold accounts at the Federal Reserve Bank of New York, the Banque de France, and the Swiss National Bank, and BIS accounts in those locations
Gold for oil swaps and oil for gold swaps
Anything less is just not cricket and does not constitute transparency.
And its important to remember that any publication of gold vault data by the LBMA and Bank of England is not being done because the LBMA suddenly felt guilty, or suddenly had an epiphany on the road to Damascus, but, as the FT correctly points out:
“the LBMA, whose members include HSBC and JPMorgan, hopes to head off the challenge and persuade regulators that banks trading bullion should not have to face more onerous funding requirements.”
The Current Data
As a reminder, there is currently no official direct data published on the quantity of real physical gold bars held within the London gold vaulting system. This vaulting system comprises the vaults of eight vault operators (see below for list).
Once a year in its annual report, the Bank of England provides a Sterling (GBP) value of gold held by its gold custody customers, while the LBMA website states a relatively static total figure of “approximately 6,500 tonnes of gold held in London vaults” that it claims are in the vaults in its network. But beyond these figures, there is currently no official visibility into the quantity of London Good Delivery gold bars held in the London vaults. There are, various ways of estimating London gold vault data using the Bank of England annual figure and the LBMA figure together with Exchange Traded Fund gold holdings and central bank divulged gold holdings at the Bank of England.
The September 2015 estimates calculated that there were 6,256 tonnes of gold in total in the London vaults, with 5,134 tonnes at the Bank of England (as of end February 2015), and 1,122 tonnes in London “not at the Bank of England“, all of which was accounted for by gold-backed ETFs which store their gold in London. These calculations implied that there was nearly zero gold stored in London outside the Bank of England that was not accounted for by ETF holdings.
The “Tracking the gold held in London” estimates from September 2016 used a figure of 6,500 tonnes of gold in total in the London vaults, and showed that there were 4,725 tonnes inside the Bank of England vaults, of which about 3,800 tonnes was known to be held by central banks (and probably a lot of the remainder was held by central banks also) and that there were 1,775 tonnes of gold outside the Bank of England. The article also calculated that there were 1,679 tonnes of gold in the gold backed ETFs that store their gold in London, so again, there was very little gold in the London vault network that was not accounted for by ETFs and central bank gold.
The Vaults of London
Overall, there are 8 vault operators for gold within the LBMA vaulting network. These 8 vault operators are as follows:
The Bank of England
HSBC Bank plc
JP Morgan Chase
ICBC Standard Bank Plc
Malca-Amit Commodities Ltd
G4S Cash Solutions (UK) Limited
Loomis International (UK) Ltd
HSBC, JP Morgan and ICBC Standard are 3 of the London Gold Market’s clearing banks that form the private company London Precious Metals Clearing Limited (LPMCL). The other two member of LPMCL are Scotia Mocatta and UBS. Brink’s, Malca-Amit, G4S and Loomis are the aforementioned security companies. The LBMA website lists these operators, alongside their headquarters addresses.
Bizarrely, the FT article still parrots the LBMA’s spoon-fed line that the vaults are “in secret locations within the M25 orbital motorway”. But this is far from the truth. Many of the London vault locations are in the public domain as has been covered, for example, on this website, and the FT knows this:
It’s slightly disappointing that we spend time and effort informing the London financial media where some of the London gold vaults are, and then they continue to parrot the LBMA’s misleading “secret locations” line. I put this fake news down to a decision by the FT editors, who presumably have a stake in playing along with this charade so as not to rock the boat with the powerful investment banks that they are beholden to.
The FT also reminds us in its article that “last year a gold vault owned by Barclays, which can house $80bn of bullion, was bought by China’s ICBC Standard Bank.“
This Barclays vault in London was built by and is operated by Brink’s, and presumably after being taken over by ICBC Standard, it is still operated by Brink’s. Logistically then, this ICBC Standard vault is most likely within the Brink’s complex, a location which is also in the public domain, and which even hosts an assay office as was previously mentioned here over a year ago. The Barclays vault (operated by Brink’s) is even mentioned in a Brink’s letter to the SEC in February 2014, which can also be seen here -> Brinks letter to SEC February 2014.
Given the fact that there are eight sets of vaults in the London vault system (as overseen by various groups affiliated to the LBMA such as the LBMA Physical Committee, the LBMA Vault Managers Working Party, the gold clearers (London Precious Metals Clearing Limited), and even the LBMA Good Delivery List referees and staff, then one would expect that whatever monthly vault data that the LBMA or its affiliates publishes in the near future, will break out the gold bar holdings and have a distinct line item in the list for each vault operator such as:
HSBC – w tonnes
JP Morgan – x tonnes
ICBC Standard – y tonnes
Brink’s – z tonnes
At the LBMA conference in Singapore last October, there was talk that there were moves afoot for the Bank of England to begin publishing data on the custody gold it holds on a more regular basis. It was also mentioned that this data could be extended to include the commercial bank and security carrier vaults but that some of the interested parties were not in favour of the idea (perhaps the representative contingents of the powerful HSBC and JP Morgan). Whatever has happened in the meantime, it looks like some data will now be released in the near future covering all of the participating vaults. What this data will cover only time will tell, but more data than less is always welcome, and these data releases might also help show how near or how far we were with earlier estimates in trying to ascertain how much gold is in the London vaulting system that is not accounted for by ETF holding or central bank holdings.
Revealing the extent of the gold lending market in London is critical though, but this is sure to remain a well-kept secret, since the LBMA bullion banks and the Bank of England will surely not want the general market to have any clue as to which central banks don’t really have any gold while still claiming to have gold (the old gold and gold receivables trick), in other words, that there is serious double counting going on, and that some of the central bank gold has long gone out the door.
Written by Allan Flynn, specialist researcher in aspects of gold and silver.
Five months have lapsed without decision, since London gold and silver benchmark-rigging class action lawsuits received a cool response in a Manhattan court. Transcripts from April hearings show, in the absence of direct evidence, the claims dissected by a “very skeptical” judge, and criticized by defendants for lack of facts suggesting collusion, among other things.
Judge Valerie E. Caproni, former white-collar defense attorney, SEC Regional Director and controversial FBI General Counsel, presided over oral arguments for motions-to-dismiss totaling 9 hours on April 18 and 20.
Its “based entirely on statistics with no other,” the judge said, pouring cold water on plaintiff’s claims of bank collusion in gold benchmark rigging. Defense attorney scoffed as much at the silver hearing. “There is not a single fact… that shows an agreement between my client and the other alleged conspirators to fix the fix.”
Seven banks are being sued in separate gold and silver class action lawsuits currently before the US. District Court, Southern District of New York. The plaintiffs: gold and silver bullion traders, and traders of various associated financial instruments, allege banks conspired in secret closed meetings, to rig the London PM Gold Fix, and Silver Fix benchmarks during the period from 2001 to 2013.
If the motions to dismiss are allowed, the complaints will be thrown out. Plaintiffs on the other hand, are hoping to crack open the door to “discovery,” where they get to access confidential bank communications and records. Turning the tables earlier in April Deutsche Bank surprised by promising to provide such evidence ratting out its former fellow defendants. “No. I cannot consider it at all,” the judge said, stonewalling plaintiffs’ arguments mentioning the move. The German mega-bank settled claims a week prior to the hearing but is yet to hand over records.
Alleged proof of downward price manipulation is revealed by averaged charts showing “Anomalous” price drops from 2001 to 2013 in the London Silver Fix and PM Gold Fix. In sympathy, even as the gold price quadrupled from around $300 to $1200 through the period, something counter-intuitive happened. Plaintiffs’ claim during London hours between the AM and PM fixes, the average price declined for each of the 13 years, bar one being flat in 2013. More pronounced effects were seen in silver.
“Those were compelling charts,” the judge responded to a presentation of evidence during the silver hearing. “I mean, seriously, they truly show that something happened.”
Defendants argue rather than collusion, the price drops show normal “parallel conduct.” Loads of precious metals producers all needing to sell, and a bunch of savvy bankers hoping to buy low. Plaintiffs say the banks have a near-perfect record betting on the fix outcome. Well of course, they trade on “the best information in the world about supply and demand,” the banks’ attorneys retorted.
Inclusion of a non-fixing bank UBS, in the lawsuit, is described by defendants as “unfair,” and just to “suck in” a Swiss regulator’s findings. If the Court is to be believed, the FINMA report may be all the cases have going for them. Of its 19 pages, the dominating subject is foreign exchange misconduct, with only a few lines about precious metals. Tip-toeing around the topic of collusion, the report describes a process of “cooperation” between UBS and others in precious metals trading. It says the bank shared sensitive client trade information such as “client names”, “stop loss orders,” and “flow information on large or imminent orders” with “third parties.”
Sharing of client trade information by banks, including UBS, in currency trading, the UK Financial Conduct Authority (FCA) reported in 2014, was for the purpose of collusion. Such communication enabled different banks to plan trading strategies, and “attempt to manipulate fix rates and trigger client “stop loss” orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements).”
Strong similarities exist between the methods and tools used by currency traders to rig benchmarks, and those used by precious metals traders. Referring to the detailed description of UBS offences including collusion in currency benchmarks, the FINMA report said, “the conduct and techniques inadmissible from a regulatory perspective, were also applied at least in part to PM spot trading.”
Hanging by a Thread
One “misconduct” the report emphasized in precious metals trading was UBS’ manipulation of the silver benchmark in the banks proprietary trading. “A substantial element of the conspicuous conduct in PM trading was the repeated front running (especially in the back book) of silver fix orders of one client.” According to the FCA, front running is a kind of insider trading.
“transaction for a “person’s own benefit, on the basis of and ahead of an order (including an order relating to a bid) which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market or auction clearing price.”
Commenting on the brevity of plaintiffs’ evidence in silver, and the FINMA findings, Judge Caproni pointed out, “your hanging your hat pretty heavily on one line in that report.”
Attorney for defendants found the report favorably vague:
“Your Honor, I apologize. I must say he has made a misstatement three times. The FINMA settlement, Section 3.2.3 talks about UBS conduct with respect to silver. There’s not a not a word or hint about coordination with any other bank. It is between UBS and one of its customers or maybe more than one but no collusion.”
The judge responded, “We have the FINMA report. I knew that wasn’t exactly what it said.”
Confusion about the Swiss findings wasn’t helped by the events of the day. The conference call in German, reported FINMA boss Mark Branson alluding to perhaps more than the report dare, in, “clear attempts to manipulate precious metals benchmarks.” FINMA declined a request to supply a transcript or recording of the conference call, with a spokesperson responding, “We do not publish a transcript, and besides we have nothing to add to the report.”
A couple of things may help explain the regulators haziness, and thus the challenges for sensitive cases as these. Switzerland is a country long associated with gold and banking. In 1970 Zurich was home to the worlds largest gold market. Most of the worlds’ gold is imported to Switzerland for refining. Consider then this impressive feat: An official inquiry is conducted of Switzerland’s largest bank caught up in a scandal involving “precious metals.” Offenses were identified in its Zurich office. The agency reports “serious misconduct” in precious metals trading including sharing of secret client trade orders with “third parties.” The agency head rallies against manipulation of “precious metals benchmarks.” Action against 11 bank personnel, including industry bans of between one and five years, were brought against two managers and four traders for, “serious breaches of regulation in foreign exchange and precious metals trading.” But yet, the word “gold” is absent from the entire report and announcements.
Secondly, FINMA’s 2015 Annual Report describes the sanctions against four now-former UBS traders. It may concern some, that justice is left to financial market regulators when:
“Four further enhancement actions against UBS foreign exchange traders were discontinued in August 2015. Since there were indications that their behavior had contributed to serious breaches of regulatory provisions, FINMA issued reprimands without taking further action against these individuals.”
If the cases proceed, US commodity futures markets may also come under scrutiny. The Court spotted a not-so-obvious paradox concerning allegations the banks suppress gold prices. “Why would they drive the price down when they are sitting on I don’t know how much bullion? They are driving down the price of their own asset,” Judge Caproni posed.
Plaintiffs claim the banks hold a majority of short gold and silver futures on the US-based Chicago Mercantile Futures Exchange, paper instruments tied to the value of London silver and gold, which increase in value as the bullion prices fall. The banks argue that it’s impossible to tell from mandatory government filings, which banks prosper during the declines, and to what extent. The judge agrees, and defendants are pleased. “I’m very skeptical they have a well-pleaded factual allegation of what the banks’…COMEX position is,” the judge said.
“Mr Feldberg: Then your Honor has said that much better than I ever could.”
Where direct evidence of collusion isn’t available, antitrust law allows the pleading of additional circumstantial evidence that lends plausibility to allegations. Other circumstantial evidence, or “plus-factors,“ listed by gold plaintiffs, namely problematic antitrust facts arising out of the very clubby arrangement of the fix meetings themselves, failed to impress particularly.
“The Court: But weren’t all of your plus factors just the natural – they are just a function of the fix?..I thought every plus factor you pointed to was just that’s the nature of the fix.”
The unconvinced magistrate was likely close to a decision, before four weeks back when the banks had one last throw at dismissal. The court in the silver case was asked to apply a recent ruling where warehouse aluminum price manipulation was deemed not to have impacted end users of aluminum. Any decision on this in silver will likely impact the gold case also.
The question of standing, or which plaintiff’s are close enough to the alleged activity to have suffered injury, was well discussed back in April. For example the Court put to defense: “I’m not saying the two guys at a swap meet from Ohio would be a particularly compelling class representative, but why wouldn’t they have standing?” Plaintiffs seemed to have convinced that the issue could be decided later, if it gets to that. Judge Caproni just wasn’t sure firstly if all the statistics, and facts complained were plausible enough to infer collusion, reminding frustrated gold plaintiffs where the balance lies.
“Unfortunately for you I’m the one who has to make the decision here.
Mr Brocket: Again, with the greatest respect, I am trying to resurrect this here but, look. Every fact alone doesn’t prove collusion.
The Court: I agree.”
Decisions regarding motions to dismiss in the London gold and silver benchmark-rigging class actions against banks, initially expected around the end of August, could come any day sooner or later according to someone familiar with the cases.
The above article was first published at Allan Flynn’s website here.
Allan Flynn is a specialist researcher in aspects of gold and silver. He is currently investigating for future publication on the same topic and works in property and commercial architecture when he needs to eat. He holds shares in precious metals producers and banks.
“There are seven custodians offering vaulting services in the London bullion market, three of whom are also clearing members of the LBMA (Barclays, HSBC and JP Morgan). There are also four other security carriers, who are also LBMA members (Brinks, G4S Cash Solutions (UK), Malca Amit and Loomis International (UK) Ltd). The Bank of England also offers a custodian service (gold only).”
These 8 custodians are then listed in a pdf document on the LBMA website with their head office addresses, but not the vault addresses. So where are the actual vaults?
“The London-based Malca-Amit vault is conveniently located close to Heathrow airport. The vault is graded at level XII CD EX, the highest European Vault classification and is complemented by the most up to date security systems including the Avigilon CCTV suite with cameras capturing 29 megapixels per frame.
The vault is authorised by the members of the London Clearing Company and has LBMA approval for the weighing and inspecting of precious metals.“
Notice the reference to London Clearing Company. This is a reference to the London Precious Metals Clearing Limited (LPMCL), a private precious metals clearing consortium comprising HSBC, JP Morgan, Barclays, The Bank of Nova Scotia – ScotiaMocatta, and UBS.
Driving around in Circles?
The London Bullion Market Association (LBMA) actually featured Malca-Amit’s London vault in a slightly tongue in cheek article by Aelred Connelly titled “Visit to Malca-Amit’s New Vault” which appeared in Issue 68 of the LBMA’s Alchemist magazine in October 2012.
The article begins:
“It was a balmy day when we arrived at Feltham station where we were warmly greeted by our host for the day, Allan Finn, Global Commodities Director for Malca-Amit. Allan told us that the location of the vault was top secret so he deviously drove his car round in circles until we were so disorientated we had no idea where he had taken us.”
And ends with:
“Our tour came to an end. Allan drove his car round in circles again until we were so disorientated that we didn’t know where we had come from. But he made up for it by taking us for a nice lunch on the river at Richmond.
Apart from driving around in circles between Feltham Station and the vault destination, the article also tells us that:
“Malca-Amit became a member of the LBMA in March 2012 and shortly afterwards completed the building of a new vault facility close to Heathrow airport…..
…the new secure storage facility was opened in April 2012 near Heathrow airport.“
So it seems that Malca-Amit was granted Ordinary membership status of the LBMA just prior to its new vault becoming operational. The granting of Ordinary membership was probably a precursor to the Malca-Amit vault being, in the words of Malca-Amit, “authorised by the members of the London Clearing Company ..[with].. LBMA approval for the weighing and inspecting of precious metals.”
The LBMA Alchemist profile goes on to say:
“Built above ground, the Malca-Amit vault is one of a number of new facilities that either have been built or which will be opened shortly within the perimeter of the M25….. Proximity to an airport is an advantage.“
“When we eventually arrived at our destination only the sound of planes overhead gave any indication as to where we were.”
“Before we went in to the building Allan explained that the perimeter fencing can withstand a 7.5-ton vehicle at 50 mph and the internal shutter anti-ram barrier which is located behind the entrance gates can withstand a 7.5-ton vehicle at 30 mph.”
“But the thing that strikes you most is the vault. Allan explained that it is a Chubbsafe grade XII which offers the highest possible level of security and provides capacity for more than 300 metric tonnes of gold and 1,000 tonnes of silver.“
“Gold and silver are not the only precious items in storage: there are also diamonds and other precious stones and jewellery which are kept in storage on behalf of clients.”
Where then could Malca-Amit’s recently opened gold and silver vault be located?
Arena Building, Parkway
It turns out that in a similar manner to G4S when it made a planning application amendment for its new vault building at Abbey Road in Park Royal, Malca-Amit was also not shy of listing its building location on the internet, for it too listed the location of its new vault in a planning application amendment submission dated July 2013.
(0 vehicle(s), 0 trailer(s)) New authorisation at this operating centre will be: 4 vehicle(s), 2 trailer(s)
Which leads us to the questions: what is and where is this Arena Building?
In 2011, the already completed Arena Parkway building, profiled in a glossy brochure, was marketed on a UK commercial real estate website called NovaLoca commercial property finder. This brochure pdf file was created on 14 July 2011. So although Malca-Amit may have “completed the building of a new vault facility” as the LBMA stated, it did not build the building in which the vault is located. The building had already been built prior to 2011.
The ‘Arena’ building is in the ‘Parkway Heathrow M4’ industrial estate off Cranford Lane, in Heston, in the Hounslow area to the north-east of Heathrow airport. Anyone who knows that area around Hounslow will know that the one of the landing routes into Heathrow Airport is a very low approach along a route right above where this building is located.
According to the brochure:
“The Arena provides a modern detached warehouse unit of 23,660 sq ft with a self-contained secure yard and benefits from 24-hour security, an on-site management team and surveillance cameras.”
“The unit is available on a new Full Repairing and Insuring lease basis.”
Additional information in the 2011 brochure includes such facts as:
“NEW DISTRIBUTION/WAREHOUSE UNIT 23,660 sq ft (2,198 sq m)”
Description The Arena is a new high quality warehouse suitable for production, storage, research and development, laboratories and general distribution. It has an impressive reception leading to first floor fully fitted offices. The property is constructed of brick and profile metal composite cladding with double glazed windows fitted with solar shading.
Accommodation The property provides the following approximate gross external floor areas: Warehouse 20,430 sq ft 1,898 sq m FF Offices 3,230 sq ft 300 sq m Total 23,660 sq ft 2,198 sq m
Amenities Warehouse, 8m clear height, Two up and over electric loading doors, 200 kVA 3 Phase power supply, Roof lights to 10% of warehouse floor area, Floor loading of 50Kn/m2
Offices Open plan layout, Full access raised floor, Suspended ceilings with recess lighting, Gas central heating, Double glazed windows, Passenger lift Reception area
Exterior Self-contained property, Large secure yard, Access for articulated lorries Allocated parking
Given that this Arena building was being marketed from July 2011 onwards, and that Malca-Amit began operating the vault facility from April 2012, then it would suggest, as would be expected, that Malca-Amit took possession, and then fitted out the building to its own specific requirements, including the vault, before opening for business in April 2012.
The Arena building is in the London Borough of Hounslow, so it is instructive to examine planning applications made for this building in and around the dates that Malca-Amit took occupancy.
A planning search for TW5 9QA on the Hounslow planning website reveals that plans for this Arena Parkway building were submitted from as early as December 2007, but there seems to have been a long drawn out series of planning applications and amendements made for the construction, the latest being submitted in December 2008 and approved by Hounslow Council in February 2009. Therefore, construction of the building would have commenced sometime after February 2009.
The planning applications for the Arena building, which were submitted by CGNU Life Assurance Ltd / Aviva Investors, summarise the project as follows:
“System Reference: P/2008/3669
Planning Reference: 00315/F/P59(6)
Following approval for demolition of the existing office building and construction of new industrial and warehouse unit with ancillary office accommodation, new entrances off existing access road, car parking, landscaping and roof mounted photo-voltaic panels details submitted pursuant to Condition 6 (waste and recycled materials storage) of permission dated 18/03/08
Name Mr Mark Nevitt CGNU Life Assurance Ltd
Address C/O Aviva Investors No.1 Poultry London EC2R 8EJ
The Arena drawings document submitted with the most recent building application shows a layout in keeping with the size and shape of the structure that was actually built, so it looks like the development was completed in accordance with the last approved set of plans.
Following occupancy by Malca-Amit, the only planning application submitted for the Arena Building since then is application “Planning Reference: 00315/F/P61″ which addressed improved fencing around the site.
“System Reference: P/2013/1670
Planning Reference: 00315/F/P61
Site description THE ARENA PARKWAY TRADING ESTATE CRANFORD LANE HOUNSLOW LONDON TW5 9QA
Date received 31/05/2013
Details: Erection of security fencing and bollards along perimeter of site with sliding gate at yard entrance and rising barrier at car park
Ward: Heston West [note that a ward is a sub-unit of a borough]
“The application seeks to improve the existing security around the site. The existing bollards around the site would be made good to existing low-level shrub planting. The fencing around the part of the site would be a 2.4m high 358 mesh panel fence powder 600 mm high electric fence above. This fencing would be on the north, south and west parts of the site. There would be a 6m cantilevered sliding gate, which would be 2.4m high with serrated top – RAL 9005 (black) finish.
In order to secure parking on site a car park gate has been proposed whichruns off the access road. This would be 3m wide rising barrier which wouldbe 1m high, RAL 9003 (white) finish with contrasting red banding. Therewould be 1m wide exit gate which would be next to the unit.”
The Site Plan and Elevation for the above application put some visuals on the above delegated report text. This fencing is therefore the fencing that Allan Finn of Malca-Amit was referring to when he told the LBMA that the”perimeter fencing can withstand a 7.5-ton vehicle at 50 mph and the internal shutter anti-ram barrier which is located behind the entrance gates can withstand a 7.5-ton vehicle at 30 mph.”
The Edinburgh Assay Office and UKAS
Not only is Malca-Amit located in this Arena Parkway Building, but so is the Edinburgh Assay Office. Although the Edinburgh Assay office has its headquarters in Goldsmiths Hall, Edinburgh, in Scotland, it also operates a laboratory at a Heathrow Sub Office where it is accredited for “Chemical Tests for the purpose of hallmarking”.
This fact is revealed in a series of United Kingdom Accreditation Service (UKAS) reports that were posted on the UKAS website in June 2015. On 8 June 2015, UKAS posted a report about the Edinburgh Assay Office on its website titled “The Edinburgh Assay Office Issue No: 010 Issue date: 08 June 2015″. This report lists a ‘Heathrow Sub Office’ for the Edinburgh Assay Office without specifying its address.
However, 4 days earlier on 4 June 2015, UKAS posted a report titled “The Edinburgh Assay Office Issue No: 009 Issue date: 04 June 2015” in which the Heathrow Sub Office was listed with an address of “1st Floor, Arena Parkway, Cranford Lane, Heston, TW5 9QA”.
Although the Issue 010 report from UKAS replaced its Issue 009 version a few days later, the Issue 009 version remained in the Google cache as a Google search result and also as a complete cached document:
Cached version of Issue 009
The commercial logic for the Edinburgh Assay Office having a presence in Malca-Amit’s Arena building seems to be that, in addition to Malca-Amit storing precious metals and precious stones and jewellery in the building, the location is also convenient for the rest of the Heathrow area where precious metals and jewellery are constantly arriving into and departing from. This is the ‘Hallmarking in Transit’ service offered by the Edinburgh Assay Office, offered in conjunction with Malca-Amit, and explained on the Assay Office website here, and also on Malca-Amit’s website here.
This is not the only UK-based assay office to maintain a sub-office in the premises of a secure precious metals transport and secure storage operator near Heathrow Airport. The Goldsmiths Company – Assay Office, which is headquartered in the City of London, also operates a Heathrow Sub Office in “Unit 7, Radius Park, Faggs Road, Feltham, Middlesex, TW14 0NG”. This is listed in a UKAS report “The Goldsmiths’ Company – Assay Office Issue 016 Issue Date 05 August 2014″. This ‘Unit 7 Radius Park’ is a Brinks building and it too contains a vault, but that’s another vault profile for another day.
(Update 23/03/2015: The www.goldfixing.com website was permanently switched off in the early morning of Monday 23rd March 2015)
The last ever ‘Gold Fixing’ will take place on the afternoon of Thursday 19th March 2015 at 3.00pm.
Following the last fixing, the www.goldfixing.com website of the London Gold Market Fixing Limited will be immediately and permanently taken off-line as of close of business 19th March (i.e. the web server will be made inaccessible to web browsers).
London Gold Market Fixing Limited (LGMFL) recently confirmed to me that:
“The Gold Fixing website will be taken down completely as of the close of business on Thursday 19-3-15 and from 20-3-15 the new LBMA Gold Price will appear on their website www.lbma.org.uk. All the historical gold Fixing price data on the www.goldfixing.com website is already available on the LBMA website.“
This power-down and switching off of the web server follows a similar manoeuvre on the evening of 14th August 2014, when the web site of the London Silver Market Fixing Limited, www.silverfixing.com, was immediately and permanently switched off (without warning), leaving no trace of the live website.
This is very unusual behavior by the administrators of the fixing web sites and the bullion banks that run the Gold Fixing and Silver Fixing Companies to immediately make the web sites inaccessible. It’s as if the two Fixing Companies want to vanish without a trace from the internet.
The Gold Fixing website domain was first registered on 22 Dec 1999 by firstname.lastname@example.org, and is listed with a tech support contact of email@example.com. See Domain lookup. So there is still a direct reference to Barclays in the web site and in the Sapient app, which is interesting given that Barclays was the firm that was fined by the FCA for manipulating the gold fixing in 2012 and whose trader Daniel Plunkett was also fined for the same offence.
Interestingly, the London Silver Market Fixing Limited has not been wound up, and still exists as a company, and its directors, until recently, represented HSBC, Scotia and Deutsche Bank. The only Deutsche director, New York based Eric Parker, resigned from the company last December. The HSBC and Scotia directors are still in situ.
The London Gold Market Fixing Limited also still exists as a company (obviously), and its directors are representatives of HSBC, Scotia, Barclays and SocGen, and all of these directors are still in situ. The two most recent Deutsche directors, Kevin Rodgers and James Vorley, resigned from the company on 14th May 2014, which was the same day that Deutsche Bank dropped out of the daily Gold Fixing process.
Both the Gold and Silver Fixing Companies have a registered address of c/o Hackwood Secretaries Limited, One Silk Street, London EC2Y 8HQ. Hackwood Secretaries Limited is a company belonging to Linklaters law firm. See the Linklaters ownership of Hackwood Secretaries here. Hackwood Secretaries is also the registered address of London Precious Metal Clearing Limited (LPMCL), the precious metals clearing company of Barclays, HSBC, Scotia, UBS, JP Morgan and Deutsche Bank.
Gold Price Data
From Friday 20th March 2015, the LBMA Gold Price data will appear on the London Bullion Market Association’s (LBMA) web site at http://www.lbma.org.uk/pricing-and-statistics. From 20th March, the daily fixings are being administered by ICE Benchmark Administration (IBA). There is some historical gold fixing price data already on the LBMA site, however it is less detailed than the historical gold price data which had appeared on the www.goldfixing.com web site.
On the Gold Fixing web site, the daily and historical data both included the net volume of gold bars bought and sold at the fixing price, as well as the number of participants who had non-zero interest at the fixing price. This extra detail was added to the gold fixing website in the second half of last year. See screen shots below, both daily and historical. Historical data could also be toggled between dollars, euro and pounds.
In contrast, the gold price data currently displayed on the LBMA web site does not include net volume of bars bought and sold at the fixing price, nor the number of participants declaring a buy or sell interest at the fixing price. See screenshot below.
London Gold Market Fixing Limited’s representative confirmed to me recently that all the historical Gold Fixing price data from www.goldfixing.com is already on the LBMA site. But without the volume and participant data, this claim is not entirely accurate. Adding in the volume (in bars) and the participant totals would make the data more complete.
ICE Benchmark Administration do mention a transparency report which will be published after each auction. This report will contain volume and participant numbers. It remains to be seen if this report will be published on the LBMA website. From the LBMA FAQ:
“At the end of the auction process, IBA will publish the benchmark price. IBA will also publish a Transparency Report showing for each round: the price in USD; the aggregated bid and offer volume; the number of participants; and the timings for each round.”
The current gold price data disclaimer on the LBMA web site (for data up to 19th March) states that “Fixing data reproduced by kind permission of the London Gold Market Fixing Ltd” . Please refer to its website to see licensing requirements for the commercial use of the data as well as the time stamps.”
Incidentally, this existing LBMA disclaimer continues with some very out of date text referring to BBA LIBOR. Now there’s a blast from the past…. “Neither the BBA LIBOR Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, nor the LBMA can be held responsible for any irregularity or inaccuracy of BBA LIBOR (for more details, see “Prices Explained”).”
The new LBMA Gold Price has its own disclaimer which is to be found on the new LBMA Gold Price page, and it reads “LBMA Gold Price (“Benchmark”) is owned by The London Bullion Market Association (“LBMA”), calculated and administered by IBA.”
No Way Back
The reason for highlighting that the Gold Fixing web site is being taken offline is that now there will be no way to access it. This is so because it has not been archived in any meaningful way. This is so because the Gold Fixing website www.goldfixing.com has a ‘Terms’ page that appeared at the entry page which prevented the Internet Archive / Wayback Machine (www.archive.org) from archiving the site’s pages. This means that all of the non-price data on the site disappears when the web site is switched off.
On the Gold Fixing web site, under a section called ‘Policy Documentation’ there were seven documents, including the Code of Conduct of the Gold Fixing company, the Terms of Reference of the gold fixing Supervisory Committee, the names of the people on the Supervisory Committee, and a document retention policy. For those interested, these documents can be found here:
The website also contained an essay about the history of the gold fixing, which I noticed also is on another website here. On the Gold Fixing web site, there had been one small recent addition to this essay to reflect the fact that Deutsche Bank had resigned from the auction. This small addition stated “In May, 2014 Deutsche Bank resigned as a member and the line-up became: Barclays, HSBC, Bank of Nova Scotia Mocatta and Societe Generale.”
The Gold Fixing web site had also prominently displayed the four Members and the most recent chairman, and the logos of the Member banks:
Finally, there was an interesting section explaining “How is the Price Fixed?” which was not really explained very well elsewhere. This will be of relevance to anyone who wants to compare the old price determination process to the new one, and to gauge how much, or how little, the process has changed.
This is especially relevant because ICE Benchmark Administration will be employing a human chairperson in the new LBMA Gold Price auction to determine the opening price and the starting price of each round, as opposed to an algorithm. There will be a panel of chairpersons operating on a rotational basis.
Note that ICE and the LBMA are refusing to divulge the identity of these chairpersons.
ICE claim that this is to ‘preserve the anonymity of the auction. This is a totally bogus and unacceptable reason because without ICE confirming the identity of the chairperson, their claim that the chairperson is fully independent of the participants in the auction cannot be verified and will cause suspicion.
It is also shocking, especially since the identity of the chairperson in the Gold Fixing auctions has always been known, in every fixing from 1919 all the way through to 19th March 2015 (i.e. see the screen shots above).
The financial media should really be asking ‘Who is this Chairperson?’, and reporting on this issue.
According to Reuters, ICE has now said that there will be four chairpersons rotating over a six month period and that these will be ‘four ex-bankers‘. The identities of these four ex-bankers have not been revealed. If anything, this appears to cement the control of the incumbent bullion banks over the entire London Gold Fixing process. Reuters also says that none of the Chinese banks will be participants in the auctions.
How the Price was Fixed
The “How is the Price Fixed?” process from the Gold Fixing site can be read below:
The fixing process is governed by a set of Rules for the Administration and Conduct of The London Gold Market Fixings (the “Fixing Rules”). The current version of the Fixing Rules, made under Article 15.01 of the London Gold Market Fixing Limited’s Articles of Association, became effective on 14 July 2014.
The Company has a Supervisory Committee which is responsible for the oversight of the fixing process. The Company has various policies and procedures to ensure the integrity and quality of the gold fixing price which are available on the Company’s website.
Pursuant to the Fixing Rules, representatives of the four members of the London Gold Market Fixing Limited (the “Company”) dial-in to a secure conference facility to determine the single trading price for gold at 10:30 am and 3:00 pm London time on each London business day.
The fixing process commences with the chairman of the fixing (the “Chair”) determining and announcing the opening price of gold.
(The opening price): The Chair shall identify the opening price. The opening price should be the prevailing US dollar mid-market price for London gold and is identified by the Chair after appropriate consideration of the prevailing spot price and the prevailing bid/offer price in the gold futures market.
(Declaration of interests): Assuming this price, the fixing members aggregate all orders received from clients (both prior to the fix and those received in real-time during the fix) with their own proprietary trading position. Members then declare whether or not they have a net buying or selling interest or if they have no buying or selling interest at the opening price.
(No buying or selling interest): If there is no buying or selling interest, the Chair will announce the trading price as fixed at the opening price. Similarly, if at any point during the fixing process there is no buying or selling interest at a given price, the Chair will announce the price as fixed.
(Only buying or selling interest): If there is only buying or selling interest at the opening price and those buying or selling interests represent more than two of the fixing members (e.g. there are three sellers and one no interest), the Chair will move the opening price higher or lower.
Alternatively, if those buying or selling interests represent two or fewer of the fixing members (e.g. two buyers and two no interests), the Chair will ask the fixing members to indicate the net quantity of gold that they are willing to buy or sell at that price.
Fixing members must declare their net interest in increments of five gold bars and must not declare any interest of less than five bars. If the total quantity offered or wanted is 50 bars or less, the Chair will declare the price as fixed at the opening price. If the total quantity offered or wanted is more than 50 bars, the Chair will move the opening price higher or lower.
Similarly, if at any point during the fixing process there is only buying or selling interest at a given price, the Chair will act as described in paragraphs 8 to 10 above.
(Two way interest:) If there is two-way interest at a given price, the Chair will ask members to indicate the net quantity of gold that they are willing to buy or sell at that price.
If supply meets demand, or the difference between supply and demand is 50 bars or less, the Chair may declare the trading price as fixed. Otherwise, the Chair will progressively move the price up or down in an attempt to meet supply and demand.
An upwards price adjustment will cause (i) the potential fixing price to exceed some purchase order limits, which will have the effect of reducing demand as those orders drop out of the members’ net buying interests; and (ii) the potential fixing price to exceed some sale order limits, which will have the effect of increasing supply as those orders are included in the members’ net selling interests.
A downwards price adjustment will cause (i) the potential fixing price to fall below some purchase order limits, which will have the effect of increasing demand as those orders are included in the members’ net buying interests; and (ii) the potential fixing price to fall below some sale order limits, which will have the effect of decreasing supply as those orders drop out of the members’ net selling interests.
The Chair will repeat this adjustment procedure until supply and demand meet or the imbalance is 50 bars or less and the Chair is able to declare the price as fixed.
(Price increments:) The fixing price must be moved in increments of at least 5 cents and in multiples of five cents during the fixing process, in all case taking account of prevailing market conditions.
The Chair identifies price increments based on an assessment of the current price of gold in the spot and futures markets and the level of buying and selling interests declared in the fixing process.
(The discretion): Where the Chair has been unable to exactly match supply and demand, the fixing members will pro rata the difference between supply and demand amongst themselves.
For example, if there is more buying than selling interest (with two buyers and two sellers) and the difference is 20 bars, each buyer will reduce their buying interest by five bars and each seller will increase their selling interest by five bars. This pro rata arrangement is purely between the fixing members and only affects the amount of gold traded as between those members; it does not affect underlying customer orders.
Where the Chair is unable, through moving the price in increments of 5 cents, to achieve an imbalance of 50 bars or less and three attempts have been made to fix the price at a particular level, the Chair may ask the other fixing members to accept an imbalance of up to 100 bars. All members must agree to this increase.
(Flags): Throughout the fixing process members communicate with their clients who are able to cancel, increase or decrease their interest depending on price changes and the level of buying and selling interest.
If, at any time, a member or one of its clients choose to increase, decrease or withdraw a previously declared buying or selling order, that member may require a short pause to recalculate its net interest. In these circumstances the member may call a “flag” which brings the fixing process to a temporary halt. The gold price cannot be declared by the Chair during such a pause.
The term flag is a reference to when the fixing members would meet in a single place to determine the gold trading price. When a member required a pause they would raise a small flag. The flag would be lowered again when they were ready to proceed with the fixing process.
(Execution): Following the determination of the fixing price, the members will execute trades for gold amongst themselves at 15 cents above the fixing price and in the amounts offered during the fixing process.
The Chair will specify the trades that should be executed between the members. The Fixing Rules specify that the largest seller’s order is filled first by matching that order with the largest buyer’s order, with members’ orders then being matched in descending order size.
Settlement takes place two London/New York business days after the fix. Execution of trades between the members does not affect any arrangements agreed between the members and their clients.
(Determination of the fixing price in euros and pounds sterling): The trading price is published by the Company in three currencies: pounds sterling, euros and US dollars. The fixing process takes place in US dollars. Once the trading price is fixed, the Chair will provide the equivalent trading prices in pounds sterling and euros. The Chair uses the then prevailing exchange rates published on Bloomberg or Reuters for this purpose.
(Publication of the fixing prices): Immediately following a fixing, the Chair posts the fixing price, the time at which the price was fixed, the final buy/sell volume figures on an anonymised basis and the basis on which the price was fixed if the discretion was increased from 50 bars, on the Company’s website. The Chair also sends an email confirmation of the fixing price and the time that the price was fixed to the other members.
The published price is the price for one troy ounce (just over 30 grams) of gold delivered in London in the form of LBMA Good Delivery Bars (approximately 400 troy ounces each).
There is a growing assumption in the financial media that a number of Chinese banks will be joining the new LBMA Gold Price auction as direct participants when the auction launches in London on Friday 20th March. This assumption is based on various sources, but primarily on a number of general comments made by the London Bullion Market Association (LBMA) in February, and also some comments made by the LBMA last October.
ICE Benchmark Administration (IBA), the administrator for the LBMA Gold Price, issued a press release on 2nd February in which the Chief Executive of the LBMA, Ruth Crowell said:
“I’m delighted to see a high level of interested participants for the March launch. The intention and the interest has been very positive and creates a more diverse pool of participants which includes Chinese banks. We look forward to having enhanced numbers of participants for day one for the LBMA Gold Price.”
There are, however, a number of dangers in assuming that some of the Chinese banks will be direct participants in the new gold auction at launch date, not least of which is that the identities of the direct participants will only be revealed on 20th March, but also the fact that the LBMA’s comments above didn’t specifically say that Chinese banks will be direct participants on launch date. The LBMA’s comments merely said that Chinese banks were interested in participating in the auction.
ICE Benchmark has just published an FAQ document on its website, and in answer to “Who are the direct participants in the auction?”, it states “direct participants will be announced on the day of launch.” Note that the LBMA refers to the entities that will participate at launch date as ‘phase one participants’.
Indeed, the vague nature of the reference to Chinese banks in the 2nd February press release forced the major financial media outlets to be non-committal about the Chinese banks as direct participants on launch date.
‘There’s a “more diverse pool” of participants, including from China, interested in being part of the LBMA Gold Price, Ruth Crowell, chief executive of the London Bullion Market Association, said in a statement Monday. The LBMA declined to comment on the number and names of those in talks for the new mechanism that will start in March.’
“The replacement for the near-century-old London gold fix will start in March, with the hope of attractingat least 11 members, including Chinese banks for the first time.”
“The presence of Chinese banks would give the world’s second-largest consumer of the precious metal a greater say in the global gold price.”
There is also a danger in assuming that the LBMA’s use of the word ‘participant‘ refers to ‘direct participant in the auction‘, although it’s totally understandable that most people would make this assumption. As is often the case, the LBMA’s communications and press release language leaves a lot to be desired when addressing anything to do with the gold and silver fixings, and needs to be read and interpreted carefully. Furthermore, in my view, neither the LBMA nor ICE have publicised and explained the concept of direct participant properly.
Therefore, many commentators on the new Gold Price auction don’t seem to realise that there is a difference between being a direct participant in the auction and another type of participant in the auction. At the end of the day, this other type of ‘participant’ is basically just a client of a direct participant.
Although ICE says in its FAQ document that “the auction is designed to allow as broad participation as possible”, it does not elaborate.
Where it does elaborate is in the executive summary of its proposal that it used in October to secure the administration of the new Gold Price auction. Here, ICE states that one of the key advantages of its offering is:
“A fair and sustainable fee structure, designed to encourage direct participation from a diverse cross-section of market participants and broad use of the price as a benchmark.”
“We have designed our commercial model to promote direct participation in the fixing process and broad usage of the benchmark. And, in designing the commercial model, we have considered the particular nature of the London Gold Fix and its usage in the financial markets.”
It goes on to say:
“Traditional clients such as miners, refiners, jewelers and central bankscan choose to become a direct participant and deal anonymously in the gold auction. Alternatively, if sponsored by a direct participant, they can be given their own screens and manage their own positions by trading through their sponsor.”
“One of the key benefits of WebICE is its ability to allow clients to participate in the auction process with the same information and order management capabilities as the direct participants. This reduces both operational and regulatory risk for direct participants, even before increasing the number of direct participants or moving to a centrally cleared model.“
Interestingly, ICE reveals its view that even though the Gold price auction will not at this time use a centrally cleared model, this should not require the use of credit lines because until a centrally cleared model is introduced,“weaker credit names can be accommodated via pre-collateralisation.” The concept of credit lines is explained below and is another example of where the LBMA has avoided explaining the concept to the global gold public.
On its web site, ICE Benchmark Administration touches on the concept of sponsored clients:
“Clients managing their own orders, sponsored by a direct participant – direct participants can choose to provide WebICE screens to their clients, allowing them to enter orders directly into the auction (orders still route through their sponsor/direct participant)….When client orders trade, their counterpartywill always be their sponsoring direct participant.”
Bank of China, ICBC and China Construction Bank
At this point it’s worth highlighting that there are only three Chinese banks that could realistically become direct participants in the new LBMA Gold Price auction right now, namely, Bank of China, the Industrial and Commercial Bank of China (ICBC), and China Construction Bank (CCB). Bank of China is a commercial bank and should not to be confused with the People’s Bank of China (PBOC) which is the Chinese central bank.
The reason why only Bank of China, ICBC and China Construction Bank can join the Gold Price auction as direct participants is that these are the only three Chinese banks that are ‘Full’ members of the LBMA, and the LBMA, at a minimum, will not allow any non LBMA members to participate in the auctions as direct participants.
These three Chinese banks have full membership due to being ‘Ordinary’ members of the LBMA. The other category of full membership of the LBMA is of course the LBMA market makers, or which there are currently fourteen of these.
As explained below, these three Chinese banks qualify for directly participating in the recently launched LBMA Silver Price auction, so the Silver Price participant criteria are a good proxy by which to measure the eligibility of the Chinese banks to be direct participants in the LBMA Gold Price auction.
There are of course other giant Chinese banks that are major players in the gold market, such as Bank of Communications and Agricultural Bank of China, however, as they are not LBMA members or even LBMA associates, they would not be able to qualify to be direct participants under the LBMA’s strict and exclusionary auction participant rules.
LBMA Silver Price bait and switch operation
As a quick recap, the current scandal ridden London Gold Fixing which is being discontinued from 19th March is still, at the time of writing, being run twice daily by Barclays (who was fined by the FCA for manipulating the gold price in 2012 during the Gold Fixing), HSBC, The Bank of Nova Scotia, and Société Générale. In April 2014, Deutsche Bank, which also held a seat in the Gold Fixing, resigned from the Fixing and renounced its fixing seat as of mid May 2014.
Deutsche bank then gave up its seat in the Silver Fixing on 14th August. When the new LBMA Silver Price auction was launched on 15th August last year (administered by Thomson Reuters with CME Group as the auction calculation agent), there were only three initial participants, namely, the HSBC Bank USA NA, Bank of Nova Scotia (Scotia Mocatta) and Mitsui & Co Precious Metals Inc.
Two of these participants, HSBC and Scotia, had been the incumbent members of the triumvirate London Silver Market Fixing Limited company, along with Deutsche Bank. Mitsui, the Japanese bank, in some ways just took the place of Deutsche Bank, or at least, that is how it was viewed in the media.
Despite misleading claims from the LBMA on August 15th that it “fully expects the list of price participants will grow over the coming weeks” and that “these participants include banks, trading houses, refiners and producers”, this wider cross-sectional direct participation in the Silver auction never happened.
In a very low-key on-boarding process, only three additional entities joined the new Silver auction following the launch on 15th August, and all three of these entities were bullion banks that joined without the fanfare of press releases from the LBMA or press releases from the banks in question.
UBS joined the Silver auction on 26th September, JP Morgan Chase Bankjoined the Silver auction on 14th October, and The Toronto Dominion Bank joined the auction on 6th November.
What’s very interesting about these six banks is that they are all represented on the LBMA’s 10 person Management Committee.
The current Management Committee of the LBMA consist of Grant Agwin of Johnson Matthey (Chairman), Steven Lowe of Bank of Nova Scotia-ScotiaMocatta (Vice-Chairman), Peter Drabwell of HSBC Bank USA NA, Kevin Roberts of JP Morgan Chase Bank, Philip Aubertin of UBS AG, Robert Davis of Toronto Dominion Bank, Jeremy East of Standard Chartered Bank, Simon Churchill of Brinks Ltd, and Ruth Crowell (Chief Executive).
Note: Anne Dennison of Mitsui was appointed as a director of the LBMA on 25th September 2014, but then this appointment was terminated on 20th December 2014.
Readers may wonder if some or all of these six bullion banks were pre-selected or encouraged to participate by the LBMA even before the LBMA Silver Price auction was launched in August. The answer to that would be a definitive ‘Yes’, since, from as early as July 2014, the LBMA and the CME Group had already identified a group of 6 to 7 bullion bank ‘first tier participants’ that they had agreed would be the initial pipeline of benchmark participants to receive LBMA accreditation to take part in the new Silver auction.
This information was conveyed by CME to the London silver market during the CME’s pre-launch information and training sessions. As for wider silver market participation in the auction, this was never part of the phase 1 plan for the silver auction. Phase 2 of the Silver auction using a central counterparty clearing system was also quietly dropped by the LBMA and CME Group despite initial lip-service claiming such as a development was on the immediate horizon.
On 14th August 2014, a day before the Silver Price auction go-live, Reuters ran an article stating that while UBS was looking at the possibility of joining the Silver auction, the other giant Swiss Bank, Credit Suisse, would definitely be joining the auction:
“Credit Suisse said on Thursday (August 13) that it would be taking part in the new process, while UBS said in an email that “it is currently evaluating the feasibility of becoming an auction member in the near future.”
In the end, UBS joined but Credit Suisse seems to have had a change of mind.
What are the chances that all six participants that did join the LBMA Silver Price auction would all be bullion banks that are represented on the LBMA Management Committee? Or said another way, what are the chances that six of the seven banks represented on the LBMA Management Committee (apart from Standard Chartered) would end up as the only participants in the new LBMA Silver Price auction? In a random world, the chances of that would be remarkably small.
“From a Controls Perspective”
Keeping in mind the above silver auction participant list of banks and this statistically improbable overlap with the make-up of the LBMA Management Committee, the Financial Times (subscription) published an interview with LBMA CEO Ruth Crowell on Monday 13th October 2014, in which she said that:
“several Chinese banks were also interested in joining the Silver Price alongside JP Morgan, HSBC, UBS, Mitsui & Co Precious Metals, and the Bank of Nova Scotia.”
Crowell told the FT that:
“It will take some time from a controls perspective for them [Chinese banks] to get where they need to be. But I would imagine they will look to do both gold and silver simultaneously,” said Mrs Crowell. “It will make the London market that much more international.”
As to how much time equals ‘some time’, or what ‘controls perspective’ referred to, Crowell did not elaborate. As discussed below, there are no criteria from a ‘control perspective’ that the large Chinese bank members of the LBMA would not qualify under to participate directly in the gold and silver auctions.
However, it’s notable above that there was an LBMA view that the Chinese participants would join both the Gold and Silver Price auctions at the same time.
On Tuesday 14th October, the day after the above FT interview was published, the Bullion Desk also published an article about the interest by the Chinese banks in the new London daily fixings, in which it stated:
“Several Chinese banks are set to join the London Bullion Market Association’s (LBMA) gold and silver pricing benchmarks, with a spokesman indicating that they are simply waiting for the administration to be decided.
A handful of Chinese banks indicated to LBMA chief executive Ruth Crowell during a recent visit to China that they would like to take part in the daily silver pricing benchmarks, the spokesman said.
The interested parties are, however, waiting to discover who will be awarded the administration of the gold pricing benchmark before also taking part in the twice-daily gold pricing sessions, he added.”
The Bullion Desk article again refers to the Chinese wanting to participate in both the Silver and Gold daily auctions, but even more interestingly, it appears that the Chinese banks placed a high value on knowing which administrator was going to run the Gold Price auction.
Its unclear why the Chinese would be so concerned about the identity of the auction administrator. It’s possible they did not approve of one administrator i.e. CME Group, running both auctions. It may also have been a red-herring on the part of the LBMA to raise this as an issue, however now that this information is known, i.e. ICE Benchmark Administration, it would be interesting to know how the Chinese view this outcome.
“Among those that are interested in participating in the discovery processes are several Chinese banks that the LBMA recently met in China.
These were initially interested in contributing to gold price discovery, but then said they would like to get involved in the silver process, Crowell said.
“It’s been very welcome to see that quite a few banks in China are very interested in taking part. They said they definitely wanted to be there on day one for gold and that they’d look to get involved in silver as well,” she added.
“We spoke about what we did with regard to silver and how we had started the process for gold, so the natural question was, well, will it be more open? There will be more participation. There will be levels of transparency [in gold] that you are seeing with the silver auction,” she said.”
So, the LBMA has gone on record as stating that the Chinese ‘definitely’ want to be participants in the LBMA Gold Price auction on Day one (which is 20th March 2015).
If the Chinese had indeed been curious as to which administrator would be chosen to run the Gold Price auction, perhaps they will be curious about the fact that ICE Benchmark Administration has just announced that over the short-term, it is planning to employ a human (as opposed to an automated) chairperson in the daily Gold Price auctions. However, ICE will not reveal at this time who they have selected as this chairperson. The identity of the chairperson will only be revealed on launch day, 20th March.
The chairperson’s role in the auctions is to “set the starting price and the price for each round based on a set of rules that will be pre-determined and publicly available.”
ICE Benchmark Administration (IBA) state that:
“IBA has appointed a chairperson for Day 1. In due course, IBA will evaluate developing an algorithm, in consultation with the market. The chairperson has extensive experience in the gold market, and is appointed by IBA and therefore independent of the auction process.”
Again, to reiterate, ICE will not reveal publicly until launch day as to who this chairperson is. With “extensive experience in the gold market”, it would be unfortunate and probably unacceptable to many entities in the wider global gold market (including the Chinese banks) if this chairperson (for example former Barclays director of the London Gold Market Fixing Limited Jonathan Spall), was closely connected to the LBMA or closely connected to one of the LBMA bullion banks or the soon to be discontinued Gold Fixing, since that would not demonstrate the degree of independence that IBA is claiming.
The Participant Criteria
The main requirement for Bank of China, ICBC and China Construction Bank in becoming participants in the LBMA Gold Price auction at launch on Day 1 would be for them to meet the LBMA’s Participant criteria as well as ICE Benchmark Administration’s Participation criteria.
Given that the LBMA and IBA have not yet published these Gold Price auction criteria in the form of a methodology guide, the best approach right now is to look at how the Chinese banks would fulfill the participant and participation criteria that were formulated in July/August 2014 for the LBMA Silver Price auction. Since, as explained above, the Chinese banks actively want to participate in the daily Silver Price auction, they will have to go through this application process anyway.
Additionally, the Silver Price accreditation criteria can be assumed to be very similar to the criteria of the Gold Price auction since the two auction processes are basically identical.
In August 2014 a document titled “Commodities Benchmark Methodologies: LBMA Silver Price” was published under the name of Thomson Reuters, the administrator of the LBMA Silver Price benchmark. This methodology guide was jointly written by the LBMA, Thomson Reuters, and the CME Group and discusses the methodology that the three partners have established for the silver price benchmark, including the criteria that qualifies an applicant to be authorised as a silver auction participant.
This LBMA Silver Price Methodology document states that:
Participation in the auction is open to all silver market participants who meet the following conditions:
– meet the Benchmark Participant criteria set out by the LBMA
– meet the Participation criteria set out by Thomson Reuters as the Administrator
– meet the requirements set by CME Benchmark Europe Ltd to use the technology platform and participate in the auction market place.
The market participants are accredited by the LBMA; access to the auction platform is approved by CME Benchmark Europe Ltd.
It’s critical to note that these three sets of criteria/requirements are the official basis under which the LBMA plays the role of gatekeeper in deciding which applicants to allow to join the Silver Price auction process, and which to keep out. It’s also important to note the distinction between participant criteria and participation criteria:
And now the most important part. The LBMA’s Benchmark Participant criteria for the Silver auction are as follows:
A participant has to be a Full Member (Ordinary or Market Making) of the LBMA.
The participant also needs to have a Loco London Clearing account
Applications are subject to review and ultimate approval by LBMA
The participant has to accept and implement the Thomson Reuters LBMA Silver Price Participant Code of Conduct
Participation is additionally subject to the requirements set by CME Benchmark Europe Ltd for use of the technology platform and for participation in the auction (e.g., in respect of credit arrangements)
So, all three Chinese banks, as Ordinary members of the LBMA, are also Full members of the LBMA, and therefore fulfill the first criterion to be direct participants in the auction.
By definition, to become an Ordinary member of the LBMA “members must be companies or organisations which are actively involved in the London bullion market. For entities which trade, this means trading gold or silver bullion or related derivatives such as forwards and options in the loco London market.” Additionally an Ordinary member, when trading bullion and derivatives has to trade “in the loco London market with at least three existing members.”
So, given that the three Chinese banks are Ordinary members of the LBMA, by definition they trade, settle and clear gold and silver in the loco London market and by definition they maintain loco London clearing accounts. This fulfills the second criterion for direct participation in the auctions.
All Full members of the LBMA (Ordinary and Market Making members) have to pass ‘know your customer’ (KYC) procedures and ‘declare conformance with the Non-Investment Products Code’ before being accepted as members. Again, by definition, the three Chinese banks fulfill these requirements also since they are already Ordinary members.
Therefore, to become direct participants in the auction, the three Chinese banks would just need to receive LBMA approval and sign up to the ICE auction platform and its participation criteria, which would essentially refer to adopting something that could be called the Gold Price Participant ‘Code of Conduct’, which is just a subset of IOSCO benchmark principles that specifically address ‘code of conduct’.
In the IOSCO Principles, there is a “Submitter Code of Conduct”, which states:
“The Administrator should develop guidelines for Submitters (“Submitter Code of Conduct”), which should be available to any relevant Regulatory Authorities, if any and Published or Made Available to Stakeholders.”
And given that the Financial Conduct Authority (FCA) has decided very recently that the participants in the Silver and Gold Price auctions are not even defined as submitters, then the codes of conduct are even less severe than, for example, in the new LIBOR process. Adhering to the Code of Conduct just allows the administrator (IBA) to maintain a set of internal controls in the auction platform that allows for the collection of the price inputs in an IOSCO compliant way.
In summary, there is nothing in the LBMA participant criteria or administrator participation criteria to exclude Bank of China, ICBC and China Construction bank from being direct participants in the LBMA Gold Price and Silver Price auctions.
One final point on this matter is that the new gold and silver auctions, like the old gold and silver fixing auctions, make use of bilateral credit lines between all of the auction participants. What this means is that to participate in the auctions, an entity has to have large credit lines set up with all other participating entities, which essentially creates a mutual pool of credit, and all the participants share this pool of credit.
The LBMA could easily have introduced a central clearing platform for the trades in the new auctions so as to have prevented the need for large credit lines (both the ICE and the CME systems allowed this, as did the LME solution), but the bullion banks chose to ignore this solution, and are conveniently using the need for credit lines as an excuse to keep out smaller participants who might want to participate directly, such as refiners, miners etc but who do not have credit lines established.
It also conveniently protects and ring-fences the London Precious Metal Clearing Company’s AURUM unallocated metal clearing platform which is another critical point, but beyond the scope of this current discussion.
Again however, the large Chinese banks would have no problem running large credit lines with the other bullion bank participants, since Bank of China, ICBC and China Construction are some of the largest banks in the world with very high investment grade credit ratings and strong tier 1 capital ratios.
The Big 3 in London
Let’s look at the three Chinese banks that are Full Members of the LBMA, i.e. Bank of China, ICBC, and China Construction.
All three of these Chinese banks have their UK headquarters in the City of London, near the Bank of England and incidentally very near the LBMA’s offices also. Bank of China is at 1 Lothbury, China Construction is at 111 Old Broad Street, and ICBC is at 81 King William Street. These three locations form a triangle, and are literally 5 minutes walk from each other, and coincidentally, the LBMA offices at Royal Exchange Buildings are right at the heart of this triangle.
China Construction Bank
China Construction Bank became an ordinary member of the LBMA on 7th October 2014, and is classified by the LBMA as a bank entity (as opposed to a broker) and is categorised under country classification of China. China Construction’s headquarters is in Beijing.
China Construction Bank (London) Ltd had been based at Heron Quays in Canary Wharf (east of the City) but in June 2014, the Bank purchased a building at 111 Old Broad Street, in the City (of London) to use as its new European headquarters.
On its London website, China Construction Bank (CCB) states that:
“We are also active in money market business and provide a Euro time zone platform for CCB’s foreign exchange and precious metal trading.”
CCB is active in the offshore RMB market and in 2012 received the designation as the “first clearing bank outside Asia for the Chinese currency”. In June 2014, CCB was also designated by the Chinese central bank as the London RMB clearing bank. CCB London is the 2nd largest Chinese bank in the UK.
In 2013, CCB was ranked 5th in the “Top 1000 World Banks” by the Banker Magazine, and ranked as 2nd by the Banker in 2014.
Both CCB entities are permitted to arrange, deal and transact in investments in the UK including commodities.
Although China Construction Bank Corporation was authorised by the FCA and PRA on Monday 22nd December, it only announced this authorisation in a press release on 2nd February 2015,
“On 22 December 2014, the UK’s Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) officially approved the establishment of China Construction Bank Corporation, London Branch….. Concurrently, the application for a Whole-firm Liquidity Modification waiver for the branch has been approved.”
Industrial and Commercial Bank of China (ICBC)
ICBC is an Ordinary Member of the LBMA and was admitted as an ordinary (Full) member of the LBMA in late 2012. See press release 23rd December 2012. ICBC is classified by the LBMA as a bank, and is categorised under country China, with its headquarters in Beijing.
Bank of China is a Full ordinary member of the LBMA, is classified as a bank by the LBMA, and interestingly, in the LBMA schema is categorised by the LBMA under country UK, and not China. Its Headquarters is 1 Lothbury, which is the street behind the Bank of England. Bank of China issued RMB bonds though its London branch in January 2014. This followed similar RMB issuance from ICBC and CCB.
Bank of China has been an ordinary member of the LBMA since the 1990s. On its London website it states:
“The major currencies that we can provide for FX spot are: Australian Dollar (AUD), Canadian Dollar (CAD), Swiss Franc (CHF), Chinese Renminbi (RMB)….etc…etc… Swedish Krona (SEK), U.S. Dollar (USD), Singapore Dollar (SGD), Silver (XAG), Gold (XAU), South African Rand (ZAR), etc.
There are similar statements for Swaps and Forwards.
All three Bank of China entities are permitted to arrange, deal and transact in investments in the UK including commodities.
The 11 to 13 Entities
On 7th November 2014, upon announcement of ICE (IBA) being ‘selected’ as administrator of the LBMA Gold Price, Ruth Crowell said “we are pleased to haveeleven entities intending to be Phase One Participants.” These entities (bullion banks) had signalled their interest to the LBMA before, during and after the period from October 24th (an LBMA closed-door seminar about the new gold auction and the various proposals) up to 4th November (LBMA committee meetings to discuss the vote and agree on the winning entry). The “Phase One Price Participants” as the LBMA refers to them, were also involved in these discussions in and around 4th November.
Since this announcement about the “eleven entities intending to be Phase One Participants” was only three weeks after Crowell’s statement that “it will take some time from a controls perspective for them [Chinese banks] to get where they need to be”, this would suggest that the Chinese banks were not part of this group of 11 phase one participants.
While covering the LBMA’s conference in Lima, Peru which was held over the two day period 11th – 12th November, Bullion Desk, who were at the conference, quoted Finbarr Hutcheson, ICE Benchmark Administration president, as saying:
“During the consultation process, 11 companies came forward as prospective direct participants. And over the past two days we’ve heard from two more, bringing the total up to 13.”
The same article quoted Ruth Crowell as saying:
“The London Bullion Market Association (LBMA) has already received interest from 13 banks or other firms looking to become direct participants in the new gold price benchmark auction.
“We’re now actively recruiting because the last thing we want is for everyone to be staring at a blank screen on that first day. Bringing participants on-board is our number one priority,” Ruth Crowell, LBMA chief executive, said on Monday at the association’s conference here.”
However, and this is an important point, there were no representatives from Bank of China, ICBC, or China Construction in attendance at the LBMA’s Lima conference in November, so the 2 additional interested parties that expressed an interest during the conference were by definition not Chinese, unless they had contacted IBA remotely while the IBA and LBMA executives were in Lima, which seems highly unlikely. See 2014 conference delegate List pdf, and also another version here.
It would be unusual for Chinese banks to be planning to imminently join the Gold Price and Silver Price auctions but not attend the LBMA conference, since this conference was attended by senior executives of the winning administrator, ICE Benchmark Administration, as well as senior representatives from the CME Group and Thomson Reuters.
Small delegations from some Chinese banks did chose to go to theLBMA’s Singapore Bullion Market Forum in June 2014. Here, ICBC’s Zhou Ming, General Manager, Precious Metals Department actually made a presentation, and other ICBC precious metals staff, as well as China Construction staff, attended, but no one from Bank of China.
There was one Bank of China senior executive, Steven Haydon, at the 2013 LBMA annual event in Rome. The LBMA’s 2012 Conference, which was held in Hong Kong, was attended by Yan Wang of Bank of China, London, as well as Xiaoyang Liu and Zheng Zhiguang of ICBC China. But overall the attendance of Chinese Bank delegates at these LBMA conferences over recent years has been patchy at best.
Who approves the Direct Participants? The LBMA!
In its FAQ document, ICE also explains that there is an LBMA Gold Price Oversight Committee, and reveals that “the first meeting of the LBMA Gold Price Oversight Committee was held on February 27, 2015″.
According to the FAQ, one of the roles of this Oversight Committee is to approve the criteria for new direct participants:
“The LBMA Gold Price Oversight Committee’s responsibilities include conducting regular reviews of all aspects of the determination of the LBMA Gold Price, overseeing any changes, setting and overseeing the rules and practice standards, approving the criteria for new direct participants and overseeing IBA’s adherence to its published methodologies”.
The ICE executive summary of its proposal for the Gold auction goes even further and says that:
“It is through the Oversight Committee that the LBMA will continue to have significant involvement in the auction process, including, among many other things, changes to the methodology, approval of direct participants, and the decision on whether to move to a centrally cleared model (until that time, weaker credit names can be accommodated via pre-collateralisation).”
So although the Oversight Committee is responsible for “approving the criteria for new direct participants”, the LBMA is responsible for the specific “approval of direct participants”. There is a difference.
Why is there an Oversight Committee and what type of entities are on the committee? Again, the ICE proposal explains:
“Under the UK benchmark regulation, the governance structure for a regulated benchmark must include an Oversight Committee, made up of market participants, industry bodies, direct participant representatives, infrastructure providers and the administrator.“
At the time of writing, neither ICE nor the LBMA have published any details of the identities of the members of the Oversight Committee or who they represent, nor have they published any agenda or minutes of the first meeting that took place on 27th February. And this is the new world of transparency for the LBMA Gold Price?
Who will the 11 – 13 entities be in the Gold Price auction?
It should be noted that in the new Silver and Gold auctions, the participants take part for their own bullion trades and those of their clients, and they are not obliged to represent other non-participant entities. So, for example, if bullion bank A is a participant in the new gold auction, it does not have to take gold fixing orders from bullion bank B for the fixing. Bullion bank B is expected to apply to become a participate itself (unless the LBMA don’t let them participate). The wider and more extended the participation, the more robust the data.
It is quite obvious that the vast majority of the 11-13 entities on Day 1 in the new Gold Price auction (if there are even that many taking part), will be the existing LBMA Market Makers.
In coverage by the Financial Times on 11 July, the day on which the LBMA awarded the CME Group and Thomson Reuters the contract to run the new Silver Price auction, the Financial Times said the following:
“Since there is no centralised clearing for precious metals markets, initial users of the new silver benchmark are likely to be the 11 LBMA spot market making members, including JPMorgan, Goldman Sachs and UBS. They can currently only trade through the fixing members.”
On 12 August, just before the launch of the LBMA Silver Price auction, the Financial Times again highlighted this key point about the lack of central clearing in the CME Group’s Silver Price platform, when it stated in nearly the same language, but adding in JP Morgan:
“Since there is no centralised clearing for precious metals markets, the initial users of the new benchmark are expected to be the 11 market making members of the LBMA, which include Credit Suisse, JP Morgan, Goldman Sachs, and UBS”.
Therefore, using a list of the LBMA Market Makers is a very good starting point for estimating the identities of the inner core of LBMA bullion banks that in all likelihood will make up the bulk of the 11 – 13 ‘Day 1’ ‘direct participant’ entities in the Gold Price auction.
This is notwithstanding the fact that, again, there was no need for the LBMA not to introduce a centrally cleared model on Day 1 so as to broaden participation, and also since as ICE said, until a “move to a centrally cleared model”, was introduced “weaker credit names can be accommodated via pre-collateralisation”.
Starting with the four existing banks in the current gold fixing, who are sure to re-enter the new auction, the first names on the 11-13 list are Barclays, HSBC, Scotia Mocatta, and SocGen. Since Deutsche Bank left the table, it would be surprising if Deutsche came back to the new gold auction so soon. Therefore I am leaving Deutsche off of my list.
Next to add to this list would be JP Morgan. JP Morgan is one of the six precious metals clearers in London in LPMCL, it runs an LBMA precious metals vault in central London, and it is a participant in the Silver auction.
Next add UBS and Credit Suisse, two huge players in the gold market, especially in Switzerland. Next up would be Goldman Sachs (J. Aron) which is a large player in the gold market and Mitsui, an existing participant in the Silver auction.
All of these banks trade spot market make in the London gold market. I would leave out Bank of America Merrill Lynch for the moment, for no particular reason except it only market makes options in the London gold and silver market.
Fast-Tracking Market Makers into the Gold auction?
To become an LBMA market maker, an Ordinary member LBMA bank has to undergo a three-month probationary period, during which it has to quote bids and offers in silver and gold to all other LBMA market makers. More importantly,all of the other market makers must approve the appointment of a new LBMA market making member.
In a very under covered story, three additional bullion banks very recently became LBMA market making members, namely Citibank, Morgan Stanley and Standard Chartered.
‘Officially’, this 3 month probation is the process that Citibank NA, Morgan Stanley & Co International and Standard Chartered would have gone through recently before they were all successfully reclassified as LBMA market making members in late 2014 and early 2015, which increased the number of LBMA market makers from 11 to 14.
This flurry of activity of Ordinary member bullion banks being reclassified as LBMA market making members is unprecedented and suggests that these three banks may have been preparing in some way to be participants in the LBMA Gold Price auction. That’s a 27% jump in the number of market makers from 11 to 14 in five months, with all 3 occurring in the run-up to the launch of the new Gold Price auction.
Before these three reclassifications, the previous transitions by an Ordinary member to become a market maker were Merrill Lynch in 2011, Credit Suisse in 2010, and Mitsui in 2007. That was three new market makers over four years as opposed to three over five months.
Of the 14 current market makers, 13 are spot market makers but only five of these banks make markets in the three products: spot, forwards and options. These banks are HSBC, UBS, JP Morgan, Goldman Sachs and Barclays.
In 2006, the LBMA rules on market makers were altered so that a market maker didn’t have to make markets in all three products.
The other nine banks make markets in one or two of the three products. Credit Suisse, Scotia, SocGen, Standard Chartered, Deutsche, Mitsui, Citi and Morgan Stanley are market makers in spot markets. Scotia also market make in forwards, while Credit Suisse, Deutsche, Standard Chartered and Morgan Stanley also trade options as market makers. Mitsui, SocGen and Citi just do spot market making. Merrill Lynch is only a market maker in options, and notably, does not do spot.
I would add the three newcomer market makers of Citi, Morgan Stanley and Standard Chartered to the ‘direct participant’ list for the Gold auction, since their transitions to market maker status could well be related to some LBMA criteria whereby the LBMA have decided to fast track market makers into the Gold auction.
The running total at this stage is 12 bullion bank entities, and no ‘Ordinary’ bank members have yet been considered.
A few of the above may not be on the list. Likewise, other bullion banks such as Commerzbank, Natixis, ANZ, Standard Bank or BNP Paribas may well be on the list. Until LBMA and ICE actually publish the list, the only alternative is to speculate.
What you can take away from this guessing game list however is that the numbers of 11 and 13 entities being thrown around in November of 2014 by the LBMA and ICE probably did not include the Chinese banks. That is not to say that things might not have moved on since last November and Chinese banks may now be on the direct participant list. A series of delays in launching the Gold Price auction may indicate that participant negotiations were still going on behind the scenes.
Multiple Delays in Launch
The expected launch date for the Gold Price auction was pushed back a number of times between November 2014 and February 2015. One possibility for the delays, in my view, was due to ongoing or reignited negotiations with the Chinese banks. Following the LBMA’s closed-door ‘Market Seminar’ on 24th October, the LBMA said that the new gold solution would be implemented in December/January (see page 4 of presentation). Then in the LBMA’s Lima Conference slides from 11th November it said that the implementation time-frame would be January/February (see timeline in presentation page 2 – Implementation expected for January/February).
“‘Mid-February is estimated for the [launch]. We’ve said that is a comfortable deadline, but if it can happen sooner, then great,’ Ruth Crowell, ceo of the LBMA, told delegates at the Mines and Money conference.”
However, there was no other LBMA or ICE public reference to the Gold Price auction again for nearly two months when, on 2nd February, ICE issued a press release in which it said that “the new LBMA Gold Price…is expected to be launched in March 2015“, without providing a definite date or an explanation for the delays.
The actual launch date was only confirmed on 19th February when the LBMA announced that the auction would be launched on 20th March. Then the first LBMA Gold Price Oversight Committee meeting took place on 27th February.
Some people might point to a letter that the LBMA sent to the FCA, dated 30th January, in which it highlighted some regulatory confusion from an FCA paper called CP14/32 about whether the participants in the Gold Price auction would be treated as benchmark submitters or not, and about which the LBMA claimed that lack of clarification on this issue would cause delays in potential participants signing up for the auction.
ICE confirmed to me however that participant sign-off was an internal matter for the participants and they did not appear to think that this submitter matter was an issue.
Anyway, the FCA confirmed in policy statement PS15/6 that this submitter definition was not applicable to the Gold Price auction, so it did turn out to be a non-issue, and does not explain why the launch date has been delayed so long. The gold and silver market knew from August 2014 when the “Fair and Efficient Markets Review” recommendations were published, that the gold and silver price benchmarks were in scope for FCA regulation from 2015.
In the FCA’s policy statement PS15/6, the FCA added “additional perimeter guidance to clarify further who in our view is, or is not, a submitter, and in particular, in respect of auction participants”. Specifically, the FCA said:
“a person who, in the context of an auction or otherwise, submits bids or offers solely for the purpose of transacting in a commodity or financial instrument or any other asset for their own, or their client’s, behalf will not normally be providing information in relation to a specified benchmark” (2.7.20E (A) G) (Annex E – Amendments to the Perimeter Guidance manual: specified benchmark activities)
Therefore, participants in the LBMA Silver Price and Gold Price auctions are not classified as benchmark submitters, and do not have to be regulated as such, so there is no reason why this should now hold up or delay approval of any direct participants for the Gold Price auction.
As the LBMA said itself on 2nd February:
“The systems and controls that the Administrator puts in place for non-submitters, namely, the criteria that must be met to participate, the contractual framework, for example the rulebook, participants agreement and code of conduct, should provide appropriate controls to maintain the integrity of these non-submission based benchmarks.” (i.e. the LBMA Gold and Silver Price auctions)
Despite all the above regulatory questions being answered and having had at least 4-5 months of advance preparation to join the new auction, the LBMA is now making more soundings that “Not all participants in ICE gold benchmark will be in place ‘on day one’.
This latest update come from Bullion Desk, who state:
“Some of the parties intending to participate in the new ICE gold benchmarking process may not be able to do so in the first auction on March 20, the LBMA has confirmed.
Internal sign-offs, regulatory procedures and credit lines with other participants may not be completed in time, it said.
“New participants unfortunately don’t have the framework in place like the current members of the London Gold Fix do,” an LBMA spokesman said. “The current members were ahead of the game on that front.”
‘It’s fair to say that we will likely have more participants involved after the initial launch. We can’t guarantee that all interested parties will be there on day one,’ he added.”
“I think it is fair to say there a lot of hoops for new participants to jump through,” the spokesman added.
This is another astounding part of the entire Gold auction participant drama, that the LBMA is now saying that regulatory procedures and credit lines, and “a lot of hoops” are delaying participants from completing what should really have been a very simple open and transparent process to allow any credible gold market participant worldwide to sign up and participate in an open and transparent new gold price discovery process.
“New participants unfortunately don’t have the framework in place like the currentmembers of the London Gold Fix do” according to the LBMA. Isn’t that the whole point, that participants should not need any existing framework to take part? The old London gold fix has been proven to have been corrupted and manipulated. There should be no legacy connection to it in the new system and no excusing from the LBMA or anyone else that potential participants are in some way dis-advantaged because they were not part of the old five fixers club. This is truly unbelievable.
And why should there be “a lot of hoops for new participants to jump through”? The entire fiasco is starting to look like it was designed by the LBMA to be as complex as possible so as to deter new participants from joining the auctions as direct participants.
ICBC and Standard Bank
Which brings us back to the Chinese banks. Bullion Desk said on 12th March 2015 in the same update as above that:
“Among others, several Chinese banks are said to be interested in joining some of the traditional members of the current fix in the new system.
Rumours have circulated that one of those banks is Industrial and Commercial Bank of China (ICBC), one of the biggest banks in the world and a major participant in the gold market.”
When Deutsche Bank was attempting to sell its Gold and Silver Fixing seats early in 2014, ICBC was eager to secure Deutsche’s Gold Fix seat through its interest in Standard Bank of South Africa. ICBC was also at that time rumoured to be interested in becoming a market making member of the LBMA. Neither of these events ever materialised however.
“South Africa’s Standard Bank, now selling a controlling stake in its markets unit to China’s ICBC, is emerging as a frontrunner to buy Deutsche Bank’s place in the global gold price-setting process, sources familiar with the matter said.”
“Market sources said Standard Bank, in conjunction with ICBC, is in prime position to buy the Deutsche seat. ‘Standard Bank is a shoo-in for the fixing seat – they want it, and it would be acceptable to the other members,’ a senior gold market source told Reuters. ‘It’s just whether they can agree a fee.'”
“‘ICBC have wanted to be a market-making member of the LBMA for a while,’ said another senior gold market source, who saw the bank as having potential interest in the fixing seat.“
The same article also pointed out that the previous time a Gold Fixing seat was sold was in 2004 when Rothschild sold its seat to Barclays for the princely sum of $1 million; small change for a giant Chinese bank such as ICBC.
However, on 28th April 2014, Reuters reported that Deutsche Bank had resigned its gold seat since, according to one of their sources:
“It was a case of not being able to agree on terms”.
It seems hard to believe that there was an inability to agree on the price of Deutsche’s Gold Fix seat, given the deep pockets of all the parties concerned. Some other factors must have been at play. Could it have been that the London Fixing banks did not want ICBC (through Standard) to purchase the seat?
It’s very unusual that given ICBC’s desire to become an LBMA market maker, that it has not yet done so, especially considering the rush by Citi, Morgan Stanley and Standard Chartered to become market makers in the last few months.
“‘We hope to play a bigger role in the global precious metals market and become a major market maker, like Barclays,’ Shen Shisheng, ICBC vice-general manager of financial markets, told Reuters on the sidelines of a conference in Shanghai.”
Standard Bank Plc, classified under the UK, is also an Ordinary member of the LBMA. On 2nd February 2015, ICBC announced that it acquired 60% of Standard Bank Plc:
“The Industrial and Commercial Bank of China (ICBC) announced on Monday the acquisition of a 60-percent stake in Standard Bank Plc.
Based in London, Standard Bank Plc is the international commodities and foreign exchange arm of Standard Bank Group (SBG), the largest African banking group by assets.”
ICBC already owns 20% of the Standard Bank Group. With this new 60% acquisition of a commodities and fx business through Standard Bank Plc, ICBC could well be planning to join the Gold Price auction via the Standard Bank route.
ICBC were also rumoured to be interested in purchasing Deutsche’s empty precious metal vault in Park Royal, London, which is operated by G4S, which could be another interesting development for the Chinese bank as a route into becoming a member of London Precious Metals Clearing Company (LPMCL).
“ICBC confirmed it had already laid the foundations for its participation in a press release on Monday.”
Monday here refers to Monday 2nd March. There will undoubtedly be a sense of shock and injustice if the LBMA and ICE do not include at least one or two Chinese banks, such as ICBC, on the list of day 1 participants, which, don’t forget, is only being published on launch day, and not before.
The LBMA Gold Price auction should comprise a broad participation auction of banks, trading houses, refiners, miners, jewelers and other gold market participants trading as direct participants if they so choose. It should not be a narrow auction made up solely of incumbent London-based bullion banks which is a system that has proven to have been manipulated and was successfully prosecuted by the FCA.
With prolific LBMA bullion bank representation on the Shanghai Gold Exchange including UBS, Goldman Sachs, Scotia Mocatta, Standard Chartered, HSBC, ANZ, Natixis, and the opening up of the Chinese gold market and Shanghai Gold Exchange to foreign banks, it would be unfortunate if a series of LBMA Gold Price structural barriers such as credit lines, FCA regulatory issues, and ‘a lot of hoops to jump through’ provided the LBMA Management Committee with an excuse not to approve the large Chinese banks to directly participate in the LBMA Gold Price auction on Day 1 on Friday March 20th.
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