What will the LBMA achieve through its bullion market review?

London’s bullion market is one of the most complex and advanced in the developed world. In fact, it has become so diverse that the London Bullion Market Association (LBMA) has commissioned a study into the current environment, which will enable it to identify future opportunities for development.

Ernst & Young has been tasked with undertaking the review, but what exactly does the LBMA believe will be uncovered, and how will it shape the market of the future?

How the LBMA functions

The LBMA operates under five functions, each of which contributes to ensuring the transfer of precious metals can run smoothly. All bars traded in the capital are done so through an over the counter market, meaning they are generally conducted between two parties.

This system has been put in place to maintain confidentiality, while also keeping exchange-related risks to an absolute minimum. Every third party transaction that is completed on behalf of London market clients is carried out through the London bullion clearing system.

Each segment of the market in its current form plays a key role, as outlined below.

Clearing system. London Precious Metals Clearing Limited handles all transactions between the LBMA’s cleaning members.

• Vaulting services. All gold and silver bullion traded in the London market is held by seven members of the LBMA alongside the Bank of England. Among their core responsibilities is to make sure that all bullion traded is of a high standard.

Good delivery. Good Delivery Lists have been created for gold and silver bars, so only those produced by refiners can be transacted on the London market.

Pricing and statistics. Market makers within the LBMA continuously offer two-way bids and offer prices for bullion products.

Allocated and unallocated accounts. These operate in a similar way to bank accounts, giving customers an entitlement to specific bars.

It is the functioning of these key areas that the LBMA will take a closer look at through its extensive review.

Ensuring compliance with the Fair and Effective Markets Review

One main area of concern raised by the LBMA is whether changes need to be made to transparency and liquidity to meet the requirements of the Fair and Effective Markets Review. This was established in June 2014 to restore trust in financial markets and reduce the likelihood of high profile abuses of the system.

A consultation on the scheme was held, which led the government to determine that developments in London Gold Fixing should be included in the draft legislation.

Several respondents to the consultation said the LBMA Silver Price was not sufficient enough to provide a major benchmark, especially due to the relatively small amounts of the precious metal being traded. Analysts said the two main precious metal benchmarks used in the UK – the LBMA Silver Price and London Gold Fixing – met all the necessary criteria to be included in the Fair and Effective Markets Review.

An insight into the LBMA review

The LBMA has already set out a number of areas it hopes the review will offer better insight into. Ernst & Young (EY) will be expected to consider a number of different options that could be implemented for the greater good of the bullion market.

CEO of the LBMA Ruth Crowell said: “I invite participants from the global bullion market to engage in the LBMA’s Strategy Study. EY brings momentum and independence to this work which started in 2014.

“We’re looking forward to receiving the report in the summer and sharing the recommendations and findings with members and global market participants.”

Martin Watkins, fintech director and EMEIA co-head of exchanges and FMI at EY, explained that London’s bullion market is an exciting place to be at the moment. Not only is technology improving all the time, but the city is playing an increasingly important role on the international precious metals stage.

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