A Guide to the Loco London Precious Metals Market

2. London Bullion Market Association (LBMA)

The LBMA is the international trade association that represents the market for gold and silver bullion, which is centred in London but which has a global client base, including the majority of the central banks that hold gold, private sector investors, mining companies, producers, refiners and fabricators.

Its membership numbers some 145 companies, which are actively involved in the Loco London bullion market or which provide services to the market, such as supervising, assaying and transportation, and indeed to the miners of the metals themselves.

The bullion market is a truly international market, in that although dealers in other bullion trading centres may trade in their local markets and on commodity exchanges, they also deal extensively in ‘Loco London’ metal. This term means that the gold or silver will be settled in London by a member of London Precious Metals Clearing Limited (LPMCL), either by way of book transfer or physically. The location of the underlying metal will be referred to within the contract with the customer, whether the trade is on an unallocated or allocated basis, but at all times, the metals remain under the physical control of the LPMCL member.

The on-going work of the Association covers quality assurance regarding market participants and refiners, setting and monitoring refining standards, creating trading documentation and fostering the development of good trading practices. The LBMA’s main role is acting as the voice of the precious metal market as well as being a contact point for regulators, investors and clients. It ensures the continued evolution and health of a marketplace for precious metals in which all participants can operate with confidence. Further, it co-ordinates market clearing and vaulting, promotes good trading practices and develops standard documentation. It also sets objective criteria for institutions wishing to enter the market as traders and as custodians. Additionally, during times of crisis, the LBMA is a key player to help avoid any potential market disruption. This was most notably demonstrated during the winding-down of the Silver Fixing in the first half of 2014, when the LBMA co-ordinated a market response in order to make sure there was continuity and the market retained a silver benchmark (now known as the LBMA Silver Price) – more details are provided in section 11.

Central to the LBMA’s quality assurance work is the maintenance and publication of the Good Delivery Lists for gold and silver, which are universally acknowledged as the de facto international standards. In the refining industry, accreditation to the LBMA Good Delivery List is globally recognised as the benchmark for the quality of gold and silver bars, due to the stringent criteria that an applicant must satisfy. The List is used by many precious metals exchanges around the world to define in whole, or in part, the refiners whose gold and silver bars are accepted in their own markets.

Total refined gold production by the refiners on the LBMA’s Gold Good Delivery List tends to be even higher than total world mine production, with the difference reflecting the recycling of material by LBMA Good Delivery refiners including converting 400 ounce bars (also known as ‘large’ or ‘market’ bars) or, indeed, scrap/recycled metal into kilobars. Newly mined gold handled by refiners on the List comprises approximately 85% – 90% of world production.

Additionally, in order to respond to US legislation such as Dodd Frank (signed into law by President Obama on 21 July 2010) and legislation concerning conflict minerals, the LBMA took its role as accreditor of the world’s gold refiners and expanded the scope of its requirements, to include corporate social responsibility, by the creation of the Responsible Gold Guidance (RGG). This framework, based on the OECD Due Diligence Guidance, gives assurance to investors and consumers that all London gold stocks are conflict-free as well as compliant with international anti-money laundering laws.

The LBMA’s office in the heart of the City of London

Without these efforts, there would have been serious disruption to the international gold market when US laws came into force. The notion of responsible metal sourcing has now been expanded into the other precious metals, and the wider category of Responsible Sourcing Guidance is discussed more fully in section 16.

Further, the LBMA promotes good trading practices and develops standard documentation as appropriate. The LBMA has always worked closely with London Precious Metals Clearing Limited (LPMCL), which organises and co-ordinates bullion clearing and vaulting in London, and develops standard documentation appropriate to those activities (more details are provided in section 7). However, in 2017 the LBMA assumed responsibility for the administrative functions of the LPMCL (see section 7 for further details). The LBMA also enjoys a close working relationship with the LPPM and, indeed, there is cross-representation on the Management Committees/Boards of each organisation.

Silver Good Delivery bars

The Members

The broad-based membership of the LBMA includes commercial banks, fabricators, miners, refiners, transport companies and brokers. These companies provide facilities for the trading, production, refining, melting, assaying, secure transportation and vaulting services for gold and silver bullion. Full membership is open to companies and other organisations actively engaged in these activities in the OTC market. There are two categories of full membership: Members and Market Making Members. Non market-making Members are usually referred to as Full Members.

Market Making Members are required to quote prices to each other upon request throughout the London business day, for agreed minimum quantities and tenors in both gold and silver.

The three products relevant to LBMA market making are spot, forwards and options. LBMA Market Makers provide the service in one, two or all three products. They are required to make markets by quoting two-way prices in both gold and silver to the other Market Makers in the same products. Market Makers offering spot, forwards and options are known as Full Market Makers and those providing only one or two of the products are known simply as Market Makers.

In 2017 the LBMA introduced a new category of Exchange Affiliate Membership.In addition to full membership, suitably qualified organisations whose activities are relevant to the London Bullion Market may be affiliated to the LBMA Associates. This is a subsidiary classification of Full Membership which is solely open to any Market Exchange operating company that wishes to become a Member of the LBMA.

LBMA members are organisations participating throughout a precious metals’ transformation from rock to its ultimate form as an investment bar, a piece of jewellery or component in an industrial process. This

starts with providing financing for the miner to source ore several kilometres beneath the Earth’s surface before being transported to a refinery, to be made into bars, which are then stored and protected in a vault, before being sold or perhaps manufactured into the required form. The membership is certainly broad-based in both scope and expertise. Further details on an all aspects of membership can be found on the LBMA’s website.

Evolution of the LBMA

The roots of the London bullion market can be traced to the partnership between Moses Mocatta and the East India Company, which started shipping gold together towards the end of the 17th century (this is dealt with more fully in section 1). It was, however, the introduction of the London Silver Fixing in 1897 and the London Gold Fixing in 1919 that formally marked the beginnings of the market’s structure and of the interaction between members that has created the marketplace as it is today.

The growth in the number and type of market participants in the early 1980s, combined with the introduction of the Financial Services Act in 1986, brought about the formation of the LBMA on 14 December 1987.

Among the more notable changes that the LBMA has undergone in recent years is to have become the intellectual property holder of the four precious metals spot price benchmarks, namely, the:

LBMA Gold Price

LBMA Silver Price

LBMA Platinum Price

LBMA Palladium Price

Full details of these important global benchmarks follow in section 11.

In 2016, the LBMA also underwent two further noteworthy changes. The first extended the scope of the Association to incorporate the platinum and palladium markets. This allows the LBMA to formally support its members’ activities in the PGM market, particularly with regard to regulatory issues. This change also reflects the LBMA’s ownership of the intellectual property rights for the platinum and palladium price benchmarks. The LPPM will continue in its current roles and responsibilities, including most importantly the accreditation of the Platinum and Palladium Good Delivery Lists.

The second change was to further enhance the governance of the Association. The UK Corporate Governance Code was incorporated and determines both the Constitution as well as the operation of the Board. While it is vital for the Board to have a strong voice for its members, it is important that any actual or perceived conflicts between these parties are balanced by having independence on that Board. This independence protects the interests of the wider membership as well as the individuals themselves serving on the Board. To address this, the LBMA has already appointed an independent Non-Executive Chairman and one of up to two additional Non-Executive Directors (NEDs).

Application Requirements

Companies applying for membership of the LBMA need to name three LBMA members as sponsors when submitting their application. These should be members with which the applicant has had a bullion-based trading relationship for at least one year. The LBMA requires each sponsor to supply a letter of recommendation, confirming the applicant’s suitability for membership, together with a description of the scope and duration of their bullion-based relationship. Guidance on membership, including appropriate sponsors, can be obtained from the LBMA on request.

Global Precious Metals Code

Current Members

Responsible Sourcing Newsletter

A Guide to the Loco London Precious Metals Market

Precious Metals Forecast Survey 2024

2. London Bullion Market Association (LBMA)

The Members

Evolution of the LBMA

Application Requirements

1. Introduction

3. London Platinum and Palladium Market