LBMA Annual Report 2024
Financial Markets
Central Bank and Prudential Regulator Engagement
Gold as HQLA
The path of gold’s reclassification to a Tier 1 High-Quality Liquid Asset (HQLA) is certainly a long-distance journey. But that doesn’t daunt us; the work continues regardless.
LBMA, together with the World Gold Council (WGC), has been actively engaging with central banks as well as prudential regulators this year. While broadly sympathetic to the cause, one of the challenges we face is that a reclassification isn’t high on the priority list of problems or must-fix issues faced by regulators.
Nevertheless, our outreach with these various stakeholders – as well as our education drive on what has changed in the gold market since 2013 when gold wasn’t considered a suitable HQLA by the European Banking Authority (EBA) – will continue into 2025 and we will be updating you, our Members, on significant developments.
They find that gold generally performs similarly to a 30-year US Treasury bond, and that adding gold to a HQLA portfolio enhances its resilience.
Academic Work
The WGC has commissioned an independent academic study to examine gold’s case for HQLA reclassification. Professor Dirk Baur and Dr Lai Hoang find that gold meets all HQLA criteria, namely low bid-ask spreads, high volumes, relatively low volatility and negative correlation with risky assets during stress periods. They find that gold generally performs similarly to a 30-year US Treasury bond, and that adding gold to a HQLA portfolio enhances its resilience.
Compared to other asset classes, academic studies on gold are not particularly common. Even more scarce are academic studies focusing on gold’s potential reclassification as an HQLA - making this study a first of its kind. Once an early edition of the paper has been published, we will share it.
We know these findings won’t surprise anyone who works in our market. However, a significant amount of education is required for those outside our market and that forms a large part of the market’s HQLA drive.
LBMA Trade Data
An initial assessment this year to determine the suitability of LBMA’s Trade Data as a forward benchmark showed that there is sufficient volume of Tom-Next trades to support the calculation of a robust Gold Swap Rate in Arrears.
This daily Tom-Next average rate can be compounded in arrears to form a compounded index which could be published alongside a daily Tom-Next average rate. Regarding this, we are in consultation with a benchmark provider and we will consult with the market over the coming months.
This work also highlighted that some upgrades to the data, in certain areas, was needed and this work should be completed in Q1, 2025.
LBMA Gold and Silver Prices
The LBMA Gold Price and LBMA Silver Price are the global benchmark prices for unallocated gold and silver delivered in London.
The benchmarks are administered by ICE Benchmark Administration (IBA), which is regulated by the FCA. IBA ensures a robust governance framework is in place for the daily auction process and maintains high standards through its Auction Rulebook and the Precious Metals Oversight Committee. This committee, which includes LBMA representation, convened three times in 2024.
Version 2 of the Global Precious Metals Code (GPMC), to which all auction participants have attested, introduces specific principles tailored to auction participants. These principles are aligned with standards from the FICC Markets Standards Board and set clear expectations around policies, procedures, controls, governance, and the management of conflicts of interest. Additionally, the GPMC provides detailed examples of acceptable and unacceptable practices, offering greater clarity on market conduct expectations.
The benchmarks continue to demonstrate significant growth in both participant numbers and the proportion of transactions that are centrally cleared.
The Benchmark Administrator, ICE Benchmark Administration (IBA), regulated by the FCA, is responsible for ensuring there is a robust governance framework over the process and that the appropriate standards are met.
