Issue 101

Editorial: Alchemist 101

Sakhila Mirza

By Sakhila Mirza
LBMA General Counsel

The global precious metals markets have seen significant developments since my time at the LBMA. To name a few, the LBMA’s Responsible Sourcing Programme (RSP) and the Global Precious Metals Code (the Code) have helped to strengthen the integrity of the market, and yet regulation like the Net Stable Funding Ratio (NSFR) has the potential to disrupt the effective functioning of the global market.

When I joined LBMA, in 2014, version one of the Responsible Gold Guidance (RGG) was in full swing, with the first set of auditor reports falling on my desk. Fast forward to 2021, not only is LBMA working on the ninth version of the RGG, but LBMA is also strengthening its engagement and collaboration with various stakeholders across the value chain, as well as national authorities, to improve global standards.

The RSP has played a critical role in supporting refiners in identifying, assessing and mitigating their supply chain risks. However, ultimately, the responsibility to ensure that metal is free from threat financing is shared across the entire value chain.

More than ever before, it’s absolutely crucial that all value chain actors map out their supply chains in detail to identify vulnerabilities and weaknesses, and work together to help address risks.

The challenges under COVID-19 have highlighted just how interconnected the world is, and how a failure to have proper supply chain risk management strategy threatens the resilience of any organisation, but also the integrity of the global precious metals market. Whilst audit programmes are necessary in order to help provide a certain level of assurance and comfort, the inherent limitations of any audit programme mean that without a concentrated collective effort, the industry will remain vulnerable to supply chain risks.

This was the catalyst for LBMA’s Call to Action to national authorities, which highlighted three strategic priorities and lead to LBMA’s International Bullion Centres Recommendations focussing on three strategic priorities:

  1. responsible sourcing of recycled gold,
  2. eliminating cash transactions and
  3. support for Artisanal and Small-Scale Mining.

In 2017, LBMA launched the first standalone Global Precious Metals Code, articulating the principles and conduct rules that should be followed by market participants. Even though it was primarily focused on market participants trading in the OTC wholesale markets, several sections were relevant to other stakeholders along the value chain.

The Code was welcomed by the industry as it allowed organisations to benchmark against best practice, and provided clarity on market conventions and expectations.

Whilst all LBMA members confirmed their commitment to the Code, it was always intended that it would be adopted by the wider international markets, non-members included.

LBMA’S RECENT LETTER TO THE UK PRUDENTIAL REGULATOR ONLY FURTHER STRENGTHENS THE MARKET CLAIM THAT GOLD SHOULD BE TREATED AS A HIGH QUALITY LIQUID ASSET

This year, LBMA will be updating the Code to reflect the significant number of developments, including ESG and Sustainability which are such a key element now of the strategic corporate agenda. With the growing emphasis on Diversity and Inclusivity, as well as flexible working conditions, be it from the office or home, the Code will focus on addressing these developments, as well as updating the existing rules so that they continue to remain relevant.

Amongst the biggest threats to the precious metals value chain is the impact of NSFR. The industry relies strongly on the need for financing, through gold loans and leases, as well the services provided by the London Precious Metals Clearing Limited (LPMCL).

Imposing an 85% haircut on the market will be hugely detrimental, potentially undermining the effectiveness of the LPMCL system and increasing the cost of doing business for the end user, including miners and refiners. In particular, the NSFR proposal fails to take account of the quantitative evidence, which suggests that in a liquidity crisis, gold acts as an extremely liquid asset. LBMA continues to engage with regulators and share this evidence, and strongly encourages regulators to recognise the unique characteristics of gold.

LBMA’s recent letter to the UK prudential regulator, supported by our liquidity study, only further strengthens the market claim that gold should be treated as a High-Quality Liquid Asset. Had the liquidity data been available back in 2013, it is highly likely that the authorities would have supported LBMA’s stance. Although I have only referenced a few key developments, the work of LBMA, continues to grow, and I have the pleasure of learning more about market innovation (Digital Gold and Gold Bar Integrity, to name a few).

If you would like to find out more about these, then please do get in touch. As always, LBMA welcomes engagement from market participants, to help shape the strategic direction. I know my time in the precious metals market has only been made easier by talking to the market.

Sakhila Mirza, Executive Board Director & General Counsel

In her role as General Counsel of the London Bullion Market Association and also an Executive member of the LBMA Board, Sakhila has been involved in, and taken the lead on, a number of projects for the Association.

This has included, but not limited to: working closely with the CEO on the strategic direction of the LBMA; transitioning all of the four precious metals benchmarks onto electronic platforms by working with service providers as well as regulators; leading the draft and launch of the Precious Metals Code; working with external service providers to enhance transparency in the precious metals market by launching the LBMA trade reporting initiative; and providing for lobbying efforts on behalf of members on a number of issues, for example EU Conflicts Minerals regulation, Net Stable Funding Ratio amongst other regulations.