Tag Archives: The london gold fix

Venezuela says adiós to her gold reserves

Five months ago in my article “Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation“, I concluded that:

“given the deteriorating state of Venezuela’s international finances and international reserves at the present time, it may be sooner rather than later before Venezuelan gold could be on the move again out of the country.

One thing is for sure. Gold leaving Venezuela on a flight back to London, New York, or elsewhere, will not get the fanfare and celebration that was accompanied by the same gold’s arrival into Caracas a few short years ago.

Those predictions now seem to have come to pass because there is now evidence that the Banco Central Venezuela (BCV) shipped gold out of Maiquetía Airport (Caracas international Airport) in early July 2015, and there is also separate evidence that Venezuela’s official gold reserve holdings, which are managed by the BCV, dropped by 60 tonnes between March and April 2015. These are two distinct events.

The 60 tonne drop in gold reserves in March-April

On 28 and 29 October respectively, Bloomberg and Reuters filed reports highlighting a decline in Venezuela’s gold reserves through the end of May 2015. The Bloomberg report is here, the Reuters report is here.  Both reports merely focused on the currency value of Venezuela’s gold reserves, and neither report addressed the critical metric that is needed in any discussion of central bank physical gold dealings, i.e. quantity or weight of gold. Furthermore, neither Bloomberg nor Reuters seems to grasp how the BCV values its gold reserves.

From Reuters:

Venezuelan central bank gold holdings declined in value by 19 percent between January and May, according to its financial statements, likely reflecting gold swap operations and lower bullion prices…

 ..Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May

 From Bloomberg:

“The value of the central bank’s bullion holdings fell 28 percent at the end of May from a year earlier, while the spot price for the metal declined just 12 percent.”

The problem with the above is that comparing the change in value of Venezuelan gold reserves over two points in time relative to the spot price change of gold over those same two points in time is not the correct approach because the BCV does not use the latest market price to value its gold holdings. The BCV uses a nine month rolling average valuation price methodology.

Without knowing the correct valuation price used at each month-end valuation point, the quantity of gold being valued cannot be calculated accurately. Conversely, doing some simple research (looking up the footnotes to the BCV accounts) and a few quick spreadsheet calculations gives a very accurate estimate of quantity of gold held at each month-end valuation point. Perhaps next time the major financial news wires can go the extra mile.

[Note: The Spanish translations in this article use a combination of Google Translate and Yandex Translate, and some instinctive re-sequencing.]

bcv Merentes

Valuation of monetary gold by the BCV

The BCV’s valuation methodology for monetary gold holdings, taken from 2014 year-end accounts, is as follows:

“Oro monetario…se valora mensualmente utilizando el promedio móvil de los nueve (9) últimos meses del fixing a.m. fijado en el mercado de Londres,

“Monetary gold…is valued monthly using the moving(rolling) average of the last nine (9) months of a.m. fixings set in the London market

Because the BCV holds a small percentage of its monetary gold in the form of gold coins, the valuation methodology also addresses how to value the coins, which, although not material to this discussion, is as follows:

“..más un porcentaje del valor promedio de la prima por el valor numismático que registren las monedas que conforman este activo.”

“..plus a percentage of the average value of the premium for the numismatic value of the coins which comprise this asset”

 (Note 3.3. to the 2014 BCV financial accounts)

To check this moving average calculation and how it works, you can apply it to the 2014 year-end monetary gold valuation figure and make use of note 7 in the same set of accounts. Note 7 states:

“Nota 7 – Oro monetario

Al 31 de Diciembre de 2014, las existencias de oro monetario se encuentran contabilizadas a un precio promedio de USD 1.257,80 por onza troy y totalizan Bs. 91.879.349 miles, equivalentes a USD 14.620.691 miles y su composición y valoración se corresponde con los criterios descritos en la nota 3.3”

“At December 31, 2014, the stock of monetary gold is recorded at an average price of USD 1257.80 per troy ounce and total Bs. 91,879,349 thousands, equivalent to USD 14,620,691 thousands, and its composition and valuation corresponds to the criteria described in Note 3.3

(Note 7 to the 2014 BCV financial accounts)

The Venezuelan accounting convention of USD 14.620.691 miles just means USD 14.6 billion.

check mate

361 tonnes of gold at year-end 2014

As at 31 December 2014, in its balance sheet, the BCV valued its monetary gold at Bs 91,879,349,000 (bolívares fuertes). Technically, since 2007, the Venezuelan currency is called the bolívar fuerte (strong bolivar) since at that time the Venezuelan government re-based the previous inflation ravaged bolivar and re-set 1000 old bolivars = 1 ‘strong’ bolivar. The updated name is in retrospect ironic given that the Venezuelan currency is now one of the weakest fiat currencies in the world as the Venezuelan economy begins to experience out-of-control price inflation.

This brings us to the next part of the BCV gold valuation equation. The BCV uses an ‘official’ Venezuelan exchange rate in its financial accounts. This official rate is a static 6.3 bolivars to the US dollar and is based on a February 2013 government edict called “Convenio Cambiario N° 14“.

Again, this exchange rate is another fantasy when compared to the unofficial market exchange rate for the Venezuelan bolivar in terms of the US dollar. This unofficial exchange rate, for example, is currently ~786 according to the Dolartoday website. The bolivar’s unofficial rate versus major currencies will no doubt go even higher in the near future as the currency continues to crumble and potentially goes into hyperinflationary territory.

The final part of the gold valuation equation is the London gold fixing (a.m.~morning) price (more recently LBMA Gold Price), whose daily price dataset can be downloaded here. Note that prior to 20th March 2015, the London gold auction ‘fixed’ price was known as the London gold fixing. Even though the London gold price is now still ‘fixed’ (in more ways than one) during the re-gigged auctions, the LBMA has opted for the less loaded name of the ‘LBMA Gold Price’ auction.

I calculate that the 9 month rolling average of the London morning gold price from 1 April 2014 to 31 December 2014 was USD 1257.49. This is pretty close to the BCV specified value of USD 1257.80 above. The BCV’s extra 31 basis points may reflect the numismatic premium on its gold coin holdings or some other calculation difference.

However, the important point to all of this is that the manual calculation method of arriving at the BCV’s gold valuation price (by calculating the 9 month moving average directly) looks accurate and is in line with the BCV’s number. Based on the BCV’s 31 December 2014 monetary gold value of Bs 91,879,349,000, and the BCV’s USD 1257.80 valuation price, Venezuela held 360.64 tonnes of gold at year-end 2014. This 360.64 tonnes figure is pretty close to the figure reported by the World Gold Council of 361.02 tonnes as at end of fourth quarter 2014 (which itself is not set in stone).

The Sale of 61 tonnes?

The BCV publishes monthly balance sheets (including the monetary gold valuation figure), but currently there is a 4 month lag on date publication, so the latest balance sheet is from May 2015 (the same month-end date that Bloomberg and Reuters referred to above). The monthly balance sheets for January to May 2015 can be downloaded here, here, here, here and here:

Using the valuation methodology described above, and some simple reverse engineering, shows that over the two month period between the end of February 2015 and the end of April 2015, the BCV’s gold holdings dropped by over 60 tonnes, with a 33 tonne drop in gold reserves during March, followed by a 27.7 tonne drop in April. The data below is taken from the 6 monthly balance sheets from Dec 2014 to May 2015, and the LBMA daily price dataset.

BCV gold jan - may 2015

My calculations for month-end January 2015 show Venezuela’s gold holdings to be 360.39 tonnes, nearly identical to the BCV’s month-end version for December 2014. I haven’t included any numismatic premium for gold coin holdings since its immaterial. My calculations show a 2.4 tonne increase in gold holdings at February month-end. I’m not sure what this increase refers to but it could be the monetization of some domestic gold mining production by the BCV (purchasing some Venezuelan mining output and classifying it as monetary gold), or conversion of some small residual BCV non-monetary gold holdings into monetary gold.

Adding domestically produced gold to monetary gold holdings in Venezuela has a precedent. So does conversion of already held non-monetary gold. For example in 2011 the BCV purchased 1.6 tonnes of domestic gold. The same year the BCV also converted 3.6 tonnes of ‘non-currency gold’ that it was already holding into monetary gold.  For details, see section “Changes to Venezuela’s gold reserves since early August 2011″ in my article “Venezuela’s Gold Reserves – Part 1: El Oro, El BCV, y Los Bancos de Lingotes“.

For March 2015, my calculations indicate that the BCV’s gold holdings witnessed a 33.17 tonne reduction, and ended the month at 329.64 tonnes. Similarly, in April 2015, my calculations find that the BCV gold reserves saw another outflow of 27.74 tonnes, bringing total holdings down to 301.90 tonnes. Between March and April, the combined gold reduction amounts to 60.91 tonnes. There was no material change in gold holdings between April and May, save a tiny 0.27 tonne increase, which could be calculation noise. The main damage to the gold holdings happened in the narrower time period of March and April, a fact that was not highlighted in the Reuters 4 month period reference, and the Bloomberg 1 year period reference.

On its website, the World Gold Council (WGC) publishes a “Quarterly times series on World Official Gold Reserves since 2000″ spreadsheet, which is based on data from the “International Monetary Fund’s International Financial Statistics (IFS) and other sources where applicable.

Interestingly, this WGC spreadsheet states that as of the end of Q4 2014, Q1 2015, and Q2 2015, Venezuela’s gold reserves remained unchanged at 361.02 tonnes, and the WGC does not reflect any of the above monthly reductions in Venezuela’s gold holdings. The WGC spreadsheet also states in a disclaimer that “While the accuracy of any information communicated herewith has been checked, neither the World Gold Council nor any of its affiliates can guarantee such accuracy.

This just goes to show the many problems that can arise by relying solely on IMF and WGC data sources for official sovereign gold holdings, in addition to the more problematic ‘gold receivables’ accounting fictions employed by central banks.

maria

BCV operations: First and Second?

To see what was happening with Venezuela’s gold holdings in March and April 2015, it is worth reading the last few sections of my “Venezuela’s Gold Reserves – Part 2: From Repatriation to Reactivation” article, especially the last section about the 5 questions Maria Corina Machado, parliamentarian and opposition party leader in Venezuela, posed to Nelson Merentes, president of the BCV on 12 March 2015.

Also important to know from that article are:

a) the details of the Venezuelan gold swap with Citibank which emerged in late April and was for only 1.4 million ounces (43.5 tonnes post haircut), and the gold to be used in the swap was the 50 tonnes of gold that had been left by the BCV in the Bank of England vaults in January 2012

b) the BCV was in discussions with a number of investment banks about harnessing its gold reserves, and that the BCV revealed on 5 March that six investment banks were making a pitch to the BCV, namely Credit Suisse, Goldman, BTGP Brazilian, Deutsche, Bank of America and Citibank. The favourites were said to be from a short-list of Deutsche Bank, Bank of America and Citibank, but another Caracas media source thought that Credit Suisse and Bank of America were involved

c) Goldman Sachs had previously been discussing a gold swap with the BCV, this news becoming public in November 2013

The 61 tonne reduction in Venezuela’s gold reserves over March-April 2015 cannot be accounted by the Citi gold swap since a) the Citi gold swap was for less than 45 tonnes, b) gold swaps usually stay on central bank balance sheets as an asset of the central bank, and c) if there was a gold swap transaction that did get taken out of the balance sheet, it would not be a reduction over 2 months, it would be one transaction.

Therefore, I think that this 61 tonne reduction over March-April 2015 represents something else entirely. It could be another transaction with one or more of the other investment banks above, or it could be an entirely separate gold sale to another entity such as the Chinese government.

Nicolas Maduro

Since Banco Central Venezuela is entirely non-cooperative in answering questions about gold posed by the media, some speculation is, in my opinion, acceptable. For example, for the articles referenced above, Bloomberg states that “The central bank’s press department declined to comment on the decline in gold holdings.” Reuters states that “The central bank declined to comment“. Another example of arrogant central bankers who consider themselves above normal standards of accountability and transparency.

A few clues about the gold holdings reduction are in the letter Maria Corina Machado sent to Nelson Merentes on 12 March. In the letter Machado asked these 5 questions of Merentes:

  • Are all of Venezuela’s gold reserves in the vaults of the Central Bank of Venezuela as stated by the former president Hugo Chavéz on 17 agusto 2011, when he ordered “repatriation of our gold”?
  • Is the BCV in negotiations with foreign banks for the sale or pawning of monetary gold?
  • Is it true that in the operation to pawn gold currently under discussion, it is intended to dispose of gold with a market value of US$ 2.6 billion? Does this represent / involve almost 20% of the total gold reserves of the Republic, in this first operation?
  • Is it true that they would be negotiating a second operation similar to the previous one for an even greater amount?
  • Do these operations involve removing the gold from the vaults of the BCV and returning it abroad?

Machado’s questions are very specific, i.e. US$2.6 billion, almost 20% of gold reserves, first operation, second operation, physical removal of gold, return of gold to abroad etc, and suggest that her questioning was based on sources that appear to have thought that this specific information was indeed factual.

In early March 2015, 20% of Venezuela’s gold reserves of 360 tonnes would be 72 tonnes, (while 61 tonnes would be 17% of gold reserves). Based on an average gold price of $1,200 in the first week of March, US$2.6 billion would be 67.4 tonnes. These figures are far closer to the actual reduction of gold holdings in March and April of 61 tonnes and suggest that there was a ‘first operation’ that was distinct from the gold swap with Citibank, and that necessitated the actual removal of 61 tonnes from the BCV balance sheet.

Then what about a ‘second operation‘ that could be ‘for an even greater amount‘ in the words of Machado?

aerporto maduro

Gold Flights from Caracas in July 2015

Caracas international Airport, where the flights laden with Venezuela’s repatriated gold arrived at during the period November 2011 to January 2012, is officially known as Simón Bolívar International Airport, but colloquially known as Maiquetía Airport since it’s in an area of Caracas called Maiquetía (the airport is beside the ocean).

On 01 July 2015, Venezuelan news site La Patilla published an article titled “El BCV reexporta para empeñarlo el oro que Chávez repatrió” (BCV re-exported for pledging, the gold that Chavez had repatriated), in which it featured two snippets from a letter written by the Banco Central Venezuela (BCV) to Maiquetia International Airport Air Customs (SENIAT) sometime just before July, probably written in June. SENIAT is the Venezuelan customs and tax authority, officially called Servicio Nacional Integrado de Administración Aduanera y Tributaria, or National Integrated Service for the Administration of Customs Duties and Taxes.

The first snippet of the BCV letter to SENIAT, and highlighted by La Patilla, stated:

Tengo el agrado de dirigirme a usted en ocasión de manifestarle que el Banco Central de Venezuela realizará exportación de valores, cuyas especificaciones y demás características se detallarán en actas a suscribirse con con funcionarios del Ministerio del Poder Popular de Economía, Finanzas y Banca Pública -Seniat y este instituro, las cuales serán presentadas a las autoridades competentes el día de salida en la Aduana Principal Aérea de Maiquetía

“I have the pleasure of addressing you on the occasion to inform you that the Central Bank of Venezuela will ​​export values, whose specifications and other characteristics will be detailed in Minutes to be signed with officials from the Ministry of Popular Power for Economy, Finance and Public Bank -Seniat and this Institute, which will be presented to the competent authorities on the day of departure in Maiquetía’s Main Air Customs”

The La Patilla article commented that:

Los “valores” a los que se refiere la comunicación sería oro monetario según nos respondieron dos economistas con experiencia en las operaciones del BCV.”

According to two economists with experience of BCV operations who responded to us, the ‘values’ to which the communication refers to is monetary gold.

The 2nd snippet of the letter, with the BCV stamp, is even more interesting, and I have included it below:

BCV SENIAT airport July letter

Although not fully legible on the very left hand side of the photo, the text, as far as I can make out, says:

“…el reconocimiento, pesaje y embalaja de la materia en referencia, en el Departamento de administracion del Efectivo, ubicado en el sótano 2 del elemento Sede de esta instituto. La…[  ]… actividad, se tiene previsto realizarla en los dias 02, 03 y 06/07/2015, a partir de las 8:00…[ ]. En caso de que la referida actividad se extienda más del tiempo prevista, le será notificado…[ ]

“acknowledgement, weighing and packing of the material in question, in the Cash Management Department, located in Basement 2 of the Headquarters of this Institute. The .. [  ].. activity is planned for the days 02, 03 and 07.06.2015, from 8:00…[  ]. In the event that the referred to activity extends beyond the planned time, you will be notified…[  ]”

It’s not unusual for letters about specific gold shipments from central banks to security carriers or other agencies to avoid to mention the actual cargo. I have seen the same approach used in historical Bank of England letters to companies like MAT Transport and the Metropolitan Police, phrases such as “we would like to go ahead with the matter we discussed’, and ‘we have now completed the aforementioned assignment bla bal bla, I trust everything was in order”. It’s merely phrased this way for security reasons.

Venezuela is short of hard currency bank notes such as USD and EUR. Venezuela would hardly be flying out hard currency cash. Nor would it be flying out worthless bolivar bank notes. The BCV letter refers to weighing and packing, which can only mean gold bullion.

The letter snippets in this ‘La Patilla’ news article look to be what they purport to be, and they do indeed appear genuine, so there is a high probability that the BCV was flying out cargos of monetary gold from Caracas International Airport on 2nd July (Thursday), 3rd July (Friday) and 7th July 2015 (Tuesday), and maybe after 7th July if the operation needed extended time as the contingency in the letter planned for.

When the last flight of repatriated gold flew into Caracas from Eorope on 30 January 2012, it was carrying 14 tonnes of gold in 28 crates. Based on this metric, 3 flights going out from Caracas in early July 2015 could carry 42 tonnes of gold, if not more. Therefore there is a realistic upper bound of at least 42 tonnes to the amount of gold that the BCV could have been flying out of Maiquetía airport on 2nd, 3rd and 7th July 2015.

This article has focused on two sets of events, 1) the drop in Venezuela’s monetary gold reserve holdings in March and April 2015 which looks to be distinct from the Bank of England vaulted gold used in the BCV-Citibank gold swap, and 2) a series of cargo flights of what looks like BCV monetary gold being flown out of Caracas International Airport in early July 2015.

Venezuela’s international reserves, managed by the BCV, are now down to USD 15.120 billion as at 29th October 2015, from USD 16.4 billion at the end of September 2015. Investment bank reports and the financial media are abuzz with speculation that (to paraphrase) “Venezuela will need to use its gold reserves to raise international funds for imports etc etc“. Which is no doubt true, but what the analyst reports and media reports are missing, in my opinion, is that a good chunk of Venezuela’s gold reserves are already in play and that any new repos, swaps or sales will have to line up and utilise whatever Venezuelan gold reserves are not already under lien, claim, encumbrance or collateralisation.

In the second half of October, Barclays’ two New York based Latin American economists, the two Alejandros (Arreaza and Grisanti) said that:

“Our quarterly cash flow model suggests that Venezuela will have a deficit of approximately USD10bn just during this quarter and will have to finance almost all of it with its own assets. Currently, liquid international reserves are likely less than USD0.5bn. The rest of the reserves are gold, SDRs and the position at the IMF. Therefore, assets besides reserves will need to be used.

We estimate that disposable assets (in and out of reserves) are about USD15.1bn. Assuming a gold repo of USD3.0bn before year-end, the disposable assets could end the year at about USD8.0bn. With these assets and a possible additional use of gold reserves, we expect Venezuela to meet its debt obligations at least until Q1 16″

Which is all very fine, except the fact that if the BCV gold reserves are 61 tonnes lighter due to outflows in March and April, and if there were additional gold outflows via international cargo flights in July, which looks likely, then a further USD 3 billion repo (circa 80 tonnes without deep haircut) will have to use additional BCV vaulted gold, a lot of which is in US Assay Office melt bars, which are not necessarily up to the expected quality of modern-day Good Delivery bars.

From my Part 1 article, I had calculated that “there were 12,357 bars held in the BCV vaults in Caracas before the gold repatriation started, and 25,176 bars in the BCV vaults when the repatriation completed“, since “12,819 good delivery bars” (160 tonnes) were repatriated. About 4,089 bars were left in London in 2012. The bars that were originally in Caracas are mainly if not exclusively US Assay office bars.

If the Caracas vaulted gold is being sold by Venezuela in the international market, it most likely would be of current Good Delivery standard (not US Assay office bars). With 160 tonnes of repatriated Good Delivery bars in 2011-2012, then if 61 tonnes was sold in March-April, and various flights happened in July 2015, there may not be enough modern Good Delivery bars remaining in Caracas to satisfy an additional USD 3 billion transaction.

In my Part 2 article in May, I had said:

“Venezuela (via the BCV) will put up 1.4 million ozs of gold as collateral in exchange for a $1 billion loan of foreign currency from Citibank. Since 1.4 million ozs of gold, valued at the late April 2015 price of $1,200, is roughly $1.68 billion, then Venezuela is having to accept a near 40% discount on the specified gold collateral.

Note that 1.4 million ounces is about 43.5 tonnes.

lpmcl

Interestingly, Barclays analysts Feifei Li and Dane Davis in their ‘Metals Markets Outlook’ piece from 26 October 2015 (last week) titled ‘Mixed Messages’ reiterated the above view and said:

“Earlier this year Venezuela executed a gold swap to raise $1bn. About 45 tonnes of gold was committed, indicating a haircut of around 40% for gold prices at the time. If we apply a similar haircut to the current gold price, it would imply that close to 140 tonnes of gold would be needed for $3bn. Thus if $3bn extra gold swaps were executed, half of Venezuela’s 361 tonne gold reserve would have been utilised.”

But 140 tonnes of gold will bring into play a lot of Venezuela’s US Assay Office bars, given that some other counterparties have already raided the Caracas vaults to get the best bars. While a lot of Venezuela’s US Assay office bars probably contain the fine gold count that they claim to hold, some probably don’t, as was illustrated in the sardonic yet jovial Zerohedge article “No Indication Should, Of Course, Be Given To The Bundesbank…” published back in September 2012.

So its buyer beware time for the counterparties that are now queued up to get their hands on Venezuela’s last remaining ingots of gold, before the entire Caracas stash may well get looted.

Six months on ICE – The LBMA Gold Price

It’s now been 6 months since the LBMA Gold Price auction, the much touted replacement to the London Gold Fixings, was launched on an ICE Benchmark Administration (IBA) platform on Friday 20 March 2015.

For anyone not au fait with the gold price auction, the LBMA Gold Price is a twice daily auction that produces the world’s most widely used gold price benchmark, which is then used as a daily pricing source in gold markets and gold products across the globe.

The 6 month anniversary of the LBMA Gold Price’s launch thus provides an opportune time to revisit a few unresolved and little-noticed aspects of this recently launched auction a.k.a. global benchmark.

 

Manipulative Behaviour and the FCA

From 1 April 2015, the LBMA Gold Price also became a ‘Regulated Benchmark’ of the UK’s Financial Conduct Authority (FCA) along with 6 other systemically important pricing benchmarks, namely, the LBMA Silver Price, ISDAFix, ICE Brent, WM/Reuters fx, Sonia, and Ronia. These 7 benchmarks join the infamously manipulated LIBOR in now being ‘Regulated Benchmarks’.

Manipulating or attempting to manipulate prices in a Regulated Benchmark is now a criminal offence under the Financial Services Act 2012.

Benchmark administrators and contributors must comply with the FCA’s ‘key requirements’ for a regulated benchmark which “include identifying potentially manipulative behaviour, controlling conflicts of interest, and implementing robust governance and oversight arrangements.

The specifics are set out in Chapter 8 of the FCA’s Market Conduct sourcebook (“MAR”), with the details on ‘identifying potentially manipulative behaviour’ covered in MAR 8.3.6 which says that a benchmark administrator must:

identify breaches of its practice standards and conduct that may involve manipulation, or attempted manipulation, of the specified benchmark it administers and provide to the oversight committee of the specified benchmark timely updates of suspected breaches of practice standards and attempted manipulation

and also:

notify the FCA and provide all relevant information where it suspects that, in relation to the specified benchmark it administers, there has been:

(a) a material breach of the benchmark administrator’s practice standards 

(b) conduct that may involve manipulation or attempted manipulation of the specified benchmark it administers; or

(c) collusion to manipulate or to attempt to manipulate the specified benchmark it administers.”

and furthermore that the arrangements and procedures referred to above:

“should include (but not be limited to):

(1) carrying out statistical analysis of benchmark submissions, using other relevant market data in order to identify irregularities in benchmark submissions; and

(2) an effective whistle-blowing procedure which allows any person on an anonymous basis to alert the benchmark administrator of conduct that may involve manipulation, or attempted manipulation, of the specified benchmark it administers.”

Section 91 of the UK Financial Services Act 2012 deems it a criminal offence to intentionally engage “in any course of conduct which creates a false or misleading impression as to the price or value of any investment” which creates “an impression may affect the setting of a relevant benchmark”.

 

Recent Manipulation of Auction Starting Price

All of these FCA  rules and the criminalisation of price manipulation offences sound very good in principle.

It is therefore expected that the ICE Benchmark Administration Gold Price Oversight Committee have been liaising with the FCA about the following developments in the LBMA Gold Price auction that occurred within the period between 20 March 2015 and end of May 2015, which were documented as agenda item 4, on page 2 of the ‘redacted’ minutes of the ICE Benchmark Administration Gold Price Oversight Committee held on 1 June 2015 in London:

“4. Findings since go-live: IBA shared with the Committee that:

 • IBA, and some direct participants, had observed the price of futures spiking during the minutes immediately before the afternoon gold auction starts.
IBA are now de-emphasising use of the futures as a related market to consider when determining the starting price .”

The fact that IBA has deemed it necessary to follow this course of action (i.e. de-emphasise the use of futures as a starting price determinant), and the fact that some entity or entities have been pushing around futures prices as a means of influencing the LBMA Gold Price starting price suggests that nothing has changed in the gold market since the introduction of the new auction, and that the same players who were actively manipulating the gold price back in 2012 are still doing so, despite this becoming a criminal offence under UK law.

Recall that on 23 May 2014 when the  FCA “fined Barclays £26 million for failings surrounding the London Gold Fixing“, in its ‘Final Notice’ explanation it included the following comments on futures prices influencing the fixing price during the protracted and manipulated afternoon fixing of 28 June 2012 :

4.12. At the start of the 28 June 2012 Gold Fixing at 3:00 p.m., the Chairman proposed an opening price of USD1,562.00. However, the proposed price quickly dropped to USD1,556.00, following a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).

“4.18. …before the price was fixed, there were a number of further changes in the levels of buying and selling in the 28 June 2012 Gold Fixing, which coincided with an increase in the price of August COMEX Gold Futures.

4.19. As a result of these changes, the level of buying at USD1,558.50 exceeded the level of selling (155 buying/45 selling), and the proposed price was likely to move higher. Given that the price of August COMEX Gold Futures was trading around USD1,560.00 at this time, if the Chairman did move the proposed price in the 28 June 2012 Gold Fixing higher, it was likely to be to a similar price level (which was higher than the Barrier).”

You can read the entire FCA account of the saga of the 28 June 2012 afternoon fixing here, and think about the consequences and meaning of the IBA move to de-emphasis futures prices and what it signals.

HSBC Gold Vault pallet and gate in background

Publicly Available Procedures – Not!

Which brings us to the procedures for establishing the auction starting price and subsequent prices for each round of the auction. On 28 April 2015, the IBA LBMA Gold Price web page, under ‘Auction Process’, stated that:

“The chairperson sets the starting price and the price for each round based on publicly available procedures.

 I was interested in reading these publicly available procedures, and learning about the price sources and price hierarchies used within the set of price determinants,  so on 28 April 2015, I emailed the IBA communication group and asked:

“I have a question on the LBMA Gold Price methodology.
 
On the IBA LBMA Gold Price web page (https://www.theice.com/iba/lbma-gold-price) under ‘Auction Process’, point 1 states that “The chairperson sets the starting price and the price for each round based on publicly available procedures“.
 
Can you direct me to where these ‘publicly available procedures’ are view-able?
 

Incredibly, IBA received my email that day, and then changed point 1 under ‘Auction Process’ by deleting the original reference to ‘publicly available procedures’ and by copying and pasting in the FAQ answer that I had referred to about ‘in line with current conditions and activity in the auction.

IBA then responded to my email on the same day, 28 April, without answering the question. The IBA response was:

Please note the updated text: ‘The chairperson sets the starting price and the price for each round in line with current market conditions and the activity in the auction’. Thank you for pointing this out.

So, not only did IBA avoid explaining the ‘publicly available procedures‘,  they also covered it up and had the cheek to thank me for pointing it out to them. You can see for yourself the reactionary and firefighting tactics used by IBA in perpetuating non-transparency.

Furthermore, the fact that the original web page said that the procedures were publicly available and then they pulled it suggests that at least someone with responsibility in IBA, maybe naively, originally had been of the view that the pricing procedures were to be publicly available.

I emailed IBA again and said:

“This FAQ answer (to the question “How are the prices set for each round of the auction?) doesn’t really explain anything at all.

My question though is, apart from this one line FAQ answer, are there no more in depth ‘publicly available procedures’ available that explain how the opening price is set, what the price sources used are, what pricing hierarchy is used to select an opening price etc..?”

I’ve looked on your web site and in the FAQs and can’t find them. The only brief reference to price determination in the FAQs is that the chairperson”sets the price in line with current market conditions and activity in the auction.”

To which IBA replied:

This information is not available on our website. However, as you seem to have a few questions, would you be interested in me setting up an off the record briefing with IBA in the next few weeks?”

I did not take IBA up on that offer since I do not think that an off the record briefing is appropriate for something that should be in the public domain. It also highlights the extent to which the vast majority of the financial media are happy to use unidentified sources, off the record briefings, and quotes, and willingly act as the mouthpieces for entities that they are too scared of offending lest they will not get ‘access’ to write their next regurgitated press release for, nor get invited to that entity’s Christmas party.

Next we come to the Chairpersons.

 

Chairpersons Я‘Us

According to a Reuters article on 19 March about the new auction:

“‘Four ex-bankers have been appointed as chairs and will rotate in their duty in the initial six months‘, one source said.”

And who are these four ex-bankers? Well, that is the billion dollar question, because, as Bulliondesk reported on 19 March in its article titled “ICE will not disclose names of chairs in new gold benchmark process“, after attending a press briefing with ICE:

“‘The names of those selected to oversee ICE’s new gold price benchmarking process will not be disclosed, Finbarr Hutcheson, president of ICE Benchmark Administration (IBA), said.

We are keeping that anonymous – we don’t think that it’s meaningful to the marketplace to know who’s running that auction and, frankly, the more we kind of feed the story, there’s just going to be more speculation around that,” he said at a briefing at its offices here.

There’s a legitimate desire to know but actually we don’t want this process to focus on any individual or names of people,” he added.

Not “meaningful to the marketplace to know who’s running the auction“? What sort of statement is that in a free market? If there is a legitimate desire to know, as Hutcheson concedes there is, then why hide the identities?

If anyone needs reminding, the predecessor to the LBMA Gold Price auction was a trading process which, on 23 May 2014, the UK Financial Conduct Authority (FCA) saw fit to fine Barclays £26 million “for failings surrounding the London Gold Fixing.” This was also the first and only precious metals trading process in the UK ever to receive a fine from the FCA.

I would suggest that given the history of a ‘proven to have been manipulated daily gold price auction’, whose successor on launch day primarily consisted of the 4 incumbent participants that comprised the previous Gold Fixings auction (including Barclays), then it certainly is meaningful to the marketplace to know who’s running the new auction.

Bulliondesk continued:

“’We have a panel of chairpeople that we are going to use and we have internal expertise as well on that, but we are not disclosing the names of those chairmen,’ Hutcheson said. “It will rotate through the panel but we have a significant bench of available external expertise with back-up if you like.”

Hutcheson declined to name how many chairpeople are on the panel.

But if the oversight committee were to feel that it was appropriate for the names to be disclosed, this stance may change, he suggested.”

And why would the oversight committee feel it to be appropriate or not to divulge the names of the chairpersons of the most important gold pricing benchmark in the world?

J119 and J120

The Changing of the Guard

Its interesting to see how ICE Benchmark Administration’s description of the chairpersons evolved over a short period after the LBMA Gold Price auction was launched on 20 March.

This was the initial version of the ICE IBA web site description of the Chairperson on 20 March (see screenshot 1 below also):

“The chairperson has extensive experience in the gold market, and is appointed by IBA, and therefore independent of the auction process.”

A week later, a revised, more lengthy version of the Chairperson description had appeared on the ICE IBA web site (see screenshot 2 below also):

“The Chair is appointed by IBA and is independent of any firm associated with the auction, including direct participants. The chair is externally sourced, but works with the IBA team to deliver a robust process for determination of the LBMA Gold Price.”

The Chair facilitates the determination of the LBMA Gold Price by providing his extensive market experience to assist in setting the price in each round of an IBA gold auction.”

By July, the second paragraph of the second version above had been changed to read:

“Both the initial and subsequent round prices are selected by the Chair using their extensive market experience and applied based on an agreed pricing framework.”

So, there is a panel of chairpeople, as Hutcheson told Bulliondesk, who are 4 ‘ex-bankers’ according to Reuters, and who have ‘extensive experience in the gold market’ according to the IBA web site. So these people were previously bankers (which means investment bank staff) who gained their experience of the gold market in investment banks, and who have extensive knowledge of how a gold auction works, and since they are working with London-based IBA on a London-based daily auction, the chairpersons are either London-based or live proximate to London. And finally, according to one of the web site versions above, it’s a ‘He’ or set of ‘Hes’ so we know they are male.

And yet these same people are said to be “independent of any firm associated with the auction, including direct participants.”

Given that there are now 11 direct participants in the LBMA Gold Price auction, namely,  Barclays, Bank of China, Goldman Sachs, HSBC Bank USA, JPMorgan Chase Bank, Morgan Stanley, Societe Generale, Bank of Nova Scotia – ScotiaMocatta, Toronto-Dominion Bank, Standard Chartered and UBS, how could ex-bankers based in London with extensive experience of the gold market collectively be independent of all of these banks?

And that’s just the direct participants. What about all the firms associated with the auction, for example, indirect participants who route their auction orders via direct participants?

It would be interesting to hear what IBA and the LBMA define as ‘independent’. Is there any precedent on a definition of ‘independent’ for persons connected to a daily gold auction? Luckily, there is.

A number of policy documents were drawn up and introduced for the previous London gold price auction, the London Gold Fixing, in approximately mid 2014. One of these documents was a “Terms of Reference for a Supervisory Committee of the Board of the London Gold Market Fixing Limited (LPMCL)“. That document describes the composition of a supervisory committee and deems that the  Board of directors of LPMCL may:

“appoint up to two independent qualified individuals to serve on the Committee. A person will be considered to be independent for the purposes of these Terms of Reference if he/she is not, and has not been at any time in the preceding year, an employee or consultant of any Member and does not otherwise have a personal interest in the fixing price or the Fixing Process.”

While this document was referring to a committee whose Members were the directors of the banks running the former auction, at least there is some semblance of a definition of the concept of ‘independent‘ when applied to a gold auction.

So using that yardstick, it would be interesting to measure up the ex-banker chairpersons in the current auction as to how long exactly have they and their handler have been ‘ex’ bankers. Less than a calendar year before 20 March 2015 (i.e. 01 January 2014) would not cut it under a  “has not been at any time in the preceding year, an employee or consultant of any Membertest.

And it also begs the question, why is the automated algorithm alluded to by ICE not being used in this LBMA Gold Price auction instead of a human chairperson?

 Chairperson description 1

19 March

 

 Chairperson description 2

26 March

 

Chairperson description version 3 

chairperson v3

 The Algorithm

You will notice from the first description screenshot of the chairperson (above) that on 20 March 2015, ICE IBA stated that:

“Feedback from the market is that the price in the first round of the auction, as well as the prices for the following rounds, is of paramount importance.

As a result, BA has appointed a chairperson from Day 1. In due course, IBA will evaluate developing an algorithm in consultation with the market.

Then notice that in the second version screenshot about the chairperson, there is no mention of any algorithm. It just vanished.

A slightly different version of the algorithm text appeared in the IBA gold price FAQ document published at launch time:

“Why are you using a Chairperson and not an algorithm for day one?

Feedback from the market is that the setting of the initial price of the first round of the auction, as well as prices for the following rounds, are important. As a result, it is appropriate to have a Chairperson on day one. In due course, IBA will consult on automating the auction process using an automated algorithm.”

A point of information at this juncture. When IBA and LBMA refer to ‘the Market’ they are referring exclusively to LBMA members of the wholesale gold market and not to any of the other hundreds of thousands of global gold market participants who rely on the LBMA Gold Price benchmark as a pricing source. In fact it seems that ‘the Market’ means whatever the LBMA Management Committee decide it means.

It is also worth pointing out that many of the LBMA’s claims on consulting ‘the Market’ are just empty rhetoric, and the consultations are purely for window dressing for decisions that they have already decided on, a case in point being the EY bullion market review commissioned by the LBMA  earlier this year that was announced on 27 April and wrapped up by June 2015. This is not too dissimilar to the way FIFA operates, as one correspondent pointed out.

In the case of the above ‘feedback from the market’ about wanting a chairperson, this could very well mean the 4 members of London Gold Market Fixing Limited (LGMFL) who all transitioned from the old auction to the new auction as if nothing had changed. It appears that they did not want anything to change. The old London Gold Fixing with 4 members had a chairperson (most recently Simon Weeks from Scotia) who rotated annually through the directors of (LGMFL), i.e. from Barclays, Scotia Mocatta, HSBC and SocGen.

Finbarr Hutcheson had also referred to this price calculation  ‘Algorithm’ on 19 March, the day before the LBMA Gold Price launch. To quote Bulliondesk again:

“The panel of the independent chairs will be responsible for overseeing the process although ICE has indicated that it will be looking to make the process electronic in future.

 

The LBMA Silver Price Algorithm

The LBMA Silver Price auction has a separate administrator, Thomson Reuters and a separate platform provider, CME Group.  Thomson Reuters has this to say about the opening price on page 8 of its LBMA Silver Price methodology guide:

3.7 Starting Price

The auction platform operator (CME Benchmark Europe Ltd) is responsible for operating the LBMA Silver Price auction, including entering the initial auction price.

The initial auction price value is determined by the auction platform operator by comparing multiple Market Data sources prior to the auction opening to form a consensus price based on the individual sources of Market Data. The auction platform operator enters the initial auction price before the first round of the auction begins….

For intra-auction prices for each round, the methodology guide says that:

3.8 Manual Price Override

In exceptional circumstances, CME Benchmark Europe Ltd can overrule the automated new price of the next auction round in cases when more significant or finer changes are required. When doing so, the auction platform operator will refer to a composition of live Market Data sources while the auction is in progress.

In the LBMA Silver Price methodology, only the first round is manually input. Subsequent rounds are calculated automatically by the ‘platform’. See page 7 of the guide:

“3.4 End of Round Comparison

[bullet point 2] If the difference between the total buy and sell quantity is greater than the tolerance value, the auction platform determines that the auction is not balanced, automatically cancels orders entered in the auction round by all participants, calculates a new price, and starts a new round with the new price.”

So this is different to the LBMA Gold Price where:

“The chairperson sets the starting price and the price for each round in line with current market conditions and the activity in the auction.”

 

Conclusion

Six months after the fanfare launch on 20 March 2015, unanswered questions remain:

  • How robust is the LBMA Gold Price auction mechanism, when within 3 months of launch date, IBA have to tinker with the price sources used to determine the starting price, and de-emphasise one price source due to volatile and seemingly delibrately manipulative futures price movements?
  • Why does the LBMA Gold Price auction needs a human chairperson throughout the auction and the LBMA Silver Price does not?
  • What happened to the plans for introducing an algorithm into the auction?
  • Why have ICE gone to great lengths to prevent the public knowing the identities of the chairpersons?
  • Why did ICE backtrack on a reference to ‘publicly available procedures‘ that would have explained how the starting price and round prices are determined?
  • What’s going to happen when the initial six months of the chairpersons’ rotating duties run out on Monday 21 September, as Reuters alluded to back in March?

ICE ICE

To that list some further questions could be added:

  • Where are the Chinese banks ICBC and China Construction, Bank which both expressed interest in becoming direct participants in the LBMA Gold Price auction, going to join?
  • Where are all the gold mining and gold refining entities that have expressed interest in being direct participants going to join, participants that the ICE auction platform can accommodate right now?
  • When will the LBMA Gold Price auction move to central clearing on an exchange distinct from LMPCL’s monopoly on clearing predominantly unallocated metal?
  • When will the prohibitive credit lines enforced by the LBMA be removed as as to allow other non-bank participants to directly participate in the auction without maintaining credit arrangements with the incumbent bullion banks?

These are just some of the questions which financial journalists cannot bring themselves to write about when covering this topic.

Chinese Banks as direct participants in the new LBMA Gold and Silver Price auctions? Not so fast!

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.”

ringin the bell

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.

For example, on 2nd February 2015, Bloomberg published an article titled “Chinese Banks in Talks to Take Part in Gold Fix Replacement”, in which it stated that:

‘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 Financial Times was slightly more definitive with its guesstimate in an article, also published on 2nd February (subscription), titled “Chinese banks to join new gold fix from March”, in which it said:

“The replacement for the near-century-old London gold fix will start in March, with the hope of attracting at 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.”

Direct Participants

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 banks can 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 counterparty will always be their sponsoring direct participant.”

ICBC London
ICBC London
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 weeksand 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 SeptemberJP Morgan Chase Bank joined 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.

China Construction CCB

“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.

Finally, in the same week, on Friday 17th October 2014, in an interview with Metal Bulletin (subscription) titled ‘LBMA chief on the new era of precious benchmarking’, LBMA CEO Ruth Crowell said:

“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).

mao

Chairperson Who?

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.

Spall
Jonathan Spall, ex Barclays
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)
Meeting the Criteria

All three Chinese banks, i.e. Bank of China, ICBC, and China Construction Bank are already Ordinary members of the LBMA. Bank of China has been an ordinary member of the LBMA since at least 1999. See LBMA member list here from August 1999. Industrial and Commercial Bank of China (ICBC) became an ordinary member of the LBMA in late 2011. On 7th October 2014, China Construction Bank was admitted as an Ordinary member of the LBMA.

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.

SGE ceremony

 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.

There are two CCB entities in the UK, China Construction Bank (London) Limited, regulated by the Financial Conduct Authority effective from 09/03/2009, and China Construction Bank Corporation London Branch regulated by the Financial Conduct Authority and Prudential Regulation Authority effective from 22/12/2014

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.

On its London website, in a December 2012 press release titled “ICBC Is the First Chinese Bank to Quote Precious Metal Prices and Match Deals in Global Market“, the Bank states that:

ICBC provides real-time prices to worldwide buyers and sellers of precious metals including gold or silver in Beijing, London and New York round the clock.

ICBC also runs two main UK entities  ICBC (London) plc, regulated by the Financial Conduct Authority and Prudential Regulation Authority effective 01/04/2013, and Industrial and Commercial Bank of China Limited, regulated by the FCA and PRA effective 08/09/2014. Both entities are permitted to arrange, deal and transact in investments in the UK including commodities.

Lothbury

Bank of China

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.

There are three Bank of China entities in the UK. Bank of China (UK) Ltd Bank of China Limited, and Bank of China International (UK) Ltd, which are, to various extents, regulated by the FSA and the PRA.

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 saidwe are pleased to have eleven 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 the LBMA’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?

Robustness
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.

On 25th September 2014, Citibank N.A. was reclassified as a spot LBMA Market Maker for spot and options. On 16th October 2014, Morgan Stanley was reclassified as a LBMA Market Maker for spot and options. On 9th February 2015, Standard Chartered was appointed as a LBMA market maker for spot and options.

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).

An article in Metal Bulletin (subscription) on 4th December titled “February launch likely for new gold price mechanism” quoted Ruth Crowell, as saying:

“‘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 current members 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.
Standard ICBC
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.

On 18th February 2014, Reuters reported that:

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.

Even as early as May 2012, ICBC said that it wanted to become an LBMA market maker:

“‘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 seems to be clearly indicating that it is ready and willing to be a direct participant at day 1 launch on 20th March. Chinese newspaper, China Daily, in a 3rd March article titled “More Chinese banks to take part in setting the global gold price” stated that:

“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.