October 03, 2012

25 Years: LBMA celebrates its silver anniversary

A review of the last 25 years

The London Bullion Market Association (LBMA) was established at the behest of the Bank of England as a result of developments in the London financial markets that culminated with Big Bang in 1986 and the subsequent regulatory changes, which led to the Bank of England assuming formal supervision of the bullion market.

Development of the London bullion market
In the early 1980s, the bullion market was characterised by rising gold prices, with a then record gold price of $850 an ounce, the explosion of western investor demand, the dramatic dishoarding from Asia and the birth of bullion banking. As a result, a number of foreign banks sought to open their own bullion trading rooms in London, including Morgan Guaranty, Credit Suisse and Nova Scotia. Negotiations with Customs and Excise resulted in them becoming associate members of the market, which meant that their wholesale trades could benefit from exemption from VAT under the Terminal Markets Order (TMO). This meant more competition but at the same time it only enhanced the position of London in the international bullion market.

In 1982, following protracted discussions with the London Metal Exchange (LME), representatives from the gold market formed their own company, the London Gold Market Ltd, which became joint owner with the LME of the London Gold Futures Market (LGFM).

A trading floor was built at Plantation House and the shareholders, particularly the members of the Fixing, provided good order flow and price support. However, lack of domestic investor and speculator interest meant that the futures market struggled and within three years the LGFM closed.

Regulatory Changes
By the mid-1980s other regulatory changes were underway. Work had already started at the Treasury on the drafting of the Financial Services Bill, which led to the creation of the Securities Investment Board and the various self-regulating organisations, which were later subsumed by the Financial Services Authority. The members of the gold market were already concerned about the possible repercussions this would have for them.

Much more important for the bullion market was that the then Chancellor of the Exchequer (Nigel Lawson) was demanding a new approach to banking supervision. Big Bang in 1986 was a piece of legislation which arose as part of the legacy of Margaret Thatcher who recognised that the City of London needed to reform in order to remain competitive with other international financial centres. The eventual outcome was that the Bank of England assumed formal supervision of the foreign exchange and bullion markets. Discussions took place with the Bank, which now needed a formal body to represent the bullion market. A small group of associate members drafted their own proposals and came to discuss them with the Bank. The gold market had to take account of the new responsibilities of the Bank and it recognised that the market had to be more democratic. The decision to allow individual companies the right to become, if they so wished, associate members of the London Gold Market (as most of them subsequently did), certainly helped achieve this. Indeed it had proved so successful that there were now more than 50 of them.

N M Rothschild’s had chaired the Gold Fixing since it started in 1919. Robert Guy, Rothschild’s representative at the fixing, (and who had himself been chair since 1974), wrote to all the associate members informing them that he been asked by the Bank of England “to give some thought to the organisation of the market in the light of the forthcoming enactment of the Financial Services Bill”. Robert then formed a steering committee (drawn from associates as well as members) to assist the bank in its drafting of a Code of Conduct.

The foundation of the LBMA
In February 1987 Robert wrote again to everyone: “We are now turning our minds to the creation and constitution of the London Bullion Market Association” and invited all to give their views. The outcome was that the LBMA was incorporated on December 14, 1987, and the first Extraordinary General Meeting was held on May 12, 1988. The formation of the LBMA replaced the roles previously carried out by the London Gold Market and the London Silver Market.

This is an abridged version of the article by Robert Guy, which first appeared in the 25th Anniversary edition of the Alchemist (Edition 68, October 2012). You can download a full copy of the article here