A Guide to the Loco London Precious Metals Market
7. London Precious Metals Clearing Limited
LPMCL is at the heart of the Loco London (OTC) system, supporting the most widely traded global market for gold, silver, platinum and palladium. It is a daily clearing system of paper transfers whereby LBMA members offering clearing services utilise the unallocated precious metals accounts they maintain between each other, not only for the settlement of mutual trades, but also for third-party transfers.
These transfers are conducted on behalf of clients and other members of the market in settlement of Loco London bullion activities – always remembering of course that if a South African gold mining company were to sell metal to a bank based in Australia, for example, then this sort of trade would almost invariably settle over metal accounts in London and, hence, be a Loco London trade.
The system of utilising the unallocated metal accounts that each clearer maintains with each other minimises the physical movement of precious metals, thus reducing costs and avoiding the security risks involved in the physical movement of precious metals.
The Loco London clearing system is overseen and managed by LPMCL, which is jointly owned and managed by those LBMA members that not only provide a comprehensive clearing service in the London market, but that also have applied for and been granted membership of LPMCL. In 2017, the LBMA assumed responsibility for the administrative functions on behalf of the LPMCL.
LPMCL has in place rules that set out the framework under which its members operate the clearing system, covering two main areas:
- the right any LPMCL member has over any other LPMCL member to call on the unallocated account with any other LPMCL member, and
- the timing under which instructions for transfers and allocations may be given and effected.
Calls made on unallocated accounts will be either for the purpose of:
- physical delivery
- to call for all or part of a credit balance to be transferred to a signatory where the caller has a debit balance, or
- for allocation of precious metals.
Calls may be for physical, credit or balance sheet purposes. The credit purpose ensures that bullion account balances between dealers as a result of clearing activities do not breach credit limits at the end of each day. Crucially, allocated metal is not a credit risk on the institution where the account is held – it is simply an arrangement for storage. Clearly, institutions will have credit exposure to the clearing member where they maintain their unallocated account. This credit risk can be reduced, to zero if required, by the act of allocation.
Transfer instructions for members’ own purposes and for client transfers may be made until 4.00pm London time on the day of settlement, although the earlier in the day that client transfer instructions are communicated to the clearer, the better. LPMCL members then have until 4.30pm to effect transfers or call for allocation for credit purposes between themselves.
The rules put in place by LPMCL enhance the financial security of the clearing by enabling ‘netting’ of clearing activities to be set off with all other obligations between any two LPMCL members. The netting facilities are applicable for all four widely traded precious metals.
Certain members of the global OTC bullion market offer vaulting services. The updated list can be found on the LBMA’s website. They either use their own vaults for the storage of physical bullion or have the use of the storage facilities of a third-party provider. Some third-party vaults will be dedicated to the use of a single bullion clearer, whilst other vaults will be available to a number of bullion clearers and the vault’s own customers.
It is important that such third-party vault providers are able to meet LPMCL’s timing requirements regarding giving/receiving allocations or physical delivery.
The Bank of England primarily offers gold accounts to central bank customers and to certain commercial firms that facilitate, either directly or indirectly, access for central banks to the liquidity of the OTC gold market. Further details can be found on the Bank of England’s website.
In July 2017 the LBMA published for the first time the amount of gold and silver physically held in London vaults (published three months in arrears). As at end March 2017, there was 7,449 tonnes of gold valued at the time at $298 billion and 32,078 tonnes of silver valued at $19 billion.
The vaults of members used in the clearing process will primarily contain London Good Delivery bars, but coins, kilobars and so on may be also be stored in these facilities.
Costs for storage and insurance of bullion are subject to negotiation with each individual member of LPMCL.
To reiterate from earlier, a good delivery bar produced by an accredited refiner only becomes and remains London Good Delivery whilst it continues to be accepted by a London vault. Thus the London vault managers act as ‘gatekeepers’ to the Loco London market.
More formally, the vault managers are precious metals experts who manage the vaults approved by the individual members of LPMCL and who have achieved LBMA Approved Weigher status. They are the gatekeepers of the London market and, hence, they play a pivotal quality control role in maintaining and sustaining the Good Delivery standards across the market as metal moves in and out of their custody. They also play a quality assurance role in terms of the product invested in by the client whose metal is placed in their custody.
To ensure the integrity of this key role, the LBMA is in the process of developing the Vault Operators Accreditation Scheme. Until this scheme is finalised, the following provisional standards apply.
Vault Operators Accreditation Scheme
The LBMA has devised a comprehensive set of vault operator competencies in conjunction with participating vaults. In combination with the Good Delivery Rules, these act as a valuable benchmark for the knowledge and skills required of vault operators. The aim of this initiative is to provide an online platform to set out the learning resources and assessment tools to help each LBMA member ensure that their vault operators meet the required standards. To provide a flexible and effective learning and assessment environment, the aim is to integrate the following components:
- Online Managed Learning Environment – to act as the single online portal for vault staff to go through the programme, which will allow managers and external assessors to access and track the vault operator’s progress through the whole learning and assessment experience.
- The ability to upload evidence of operators meeting the competencies.
- E-learning modules to provide learning and guidance to help those undertaking the course acquire core knowledge to underpin their role as vault operators in line with the LBMA’s and the market’s standards.
- Multiple-choice tests designed to check operators’ knowledge on each topic.
- Guidance for managers on the knowledge to be tested and how to help vault operators gain the required knowledge.
Ultrasonic testing of a gold bar
When a gold bar is weighed on a scale, the Dead Weight (A) is truncated (deducted) by 0.002 troy ounces to allow for scale turning (B). The subsequent weight is rounded down to the nearest 0.025 ounces (C) to define the Gross Weight (D). It is the gross weight that is multiplied by the Assay (E) to six decimals, with the final three decimals providing the rounding factor (F) determining whether the resultant weight is rounded up or down to the nearest 0.001 of a troy ounce (G).
|A Dead Weight|
|B Scale Turning|
|C After Turning Deduction|
|D Gross weight|
|F Fine weight (6 decimals)|
|G Fine Weight|
If the Dead Weight had simply been multiplied by the assay then, in this case, it would deliver 398.146 fine ounces versus 398.120 fine ounces as per the above. Extrapolating the differential between the two methodologies over a 10,000 ounce trade, it would deliver a cost variance of approximately $312,000 at $1,200 per troy ounce.
Silver is a little less complex, but there is truncation to the nearest 0.1 ounce and a further rounding factor to take into account to determine the Gross Weight or Gross Troy Ounces (GTO). The key here is that silver is valued and traded at GTO, and the assay is not used in the weight calculation to determine the weight of metal on the metal account.
To reiterate, for gold, the trading unit is one fine troy ounce, but for silver one troy ounce. The significance of this differentiation is that, in the case of gold, the unit represents pure gold irrespective of the purity of a particular bar, whereas for silver, it represents one ounce of material, of which a minimum of 999 parts in every 1000 will be silver.
In essence, these calculations are applied to the weighing process that populates the bar list that is sent to the Bullion Operations Team at the accredited vault, which then credits the FTO (Fine Troy Ounces for gold) and the GTO (Gross Troy Ounces for silver) to the Metal Account. Once the vault has confirmed these weights, a trade can be settled, with the value of the trade determined as a multiple of the weights confirmed by the vault and the price agreed at the point of trade.
Gold bars have been traditionally weighed using a beam balance. When weighing a gold bar, it must ‘turn the scale’ when the correct weight is placed on the scale: this means that the indicator needle on the beam balance must move at least two divisions of 0.001 ounce each in favour of the bar. If a bar does not turn the scale, then the recorded weight is reduced by 0.025 of an ounce – the equivalent of a human hair.
For silver, the traditional methodology is a little different in that the bar weight is expressed in multiples of 0.1 of an ounce (which is the smallest weight used for a beam balance which is recognised as appropriate for weighing silver). Note that these scales are not as sensitive as those used for gold and other high-value metals, which for the purposes of this Guide means platinum and palladium.
When using a beam balance, the bar must turn the scale when the correct weight is placed on the scale: this means that the indicator needle on the beam balance must move at least two divisions of 0.002 ounce each in favour of the bar. If a bar does not turn the scale, then the recorded weight is reduced by 0.1 of an ounce.
Weighing Platinum and Palladium
The rules regarding platinum and palladium are slightly different and are reproduced below from the LPPM website.
The principle applied to the weighing of LPPM Good Delivery platinum and palladium plates or ingots is that the weight stamped on a plate or ingot should be the minimum weight. The producer/refiner should expect to be credited with the stamped weight, and any subsequent physical movement of such plate or ingot out of the clearing system should also reflect the stamped weight on the relevant weight list. The LPPM however accepts that there can be minor differences in weighing equipment, and for practical and clarity purposes has set out the following rules:
The weight in grams, kilograms or troy ounces (if in grams to one decimal place, if in kilograms to four decimal places and if in troy ounces to three decimal places).
Weight lists shall be produced in troy ounces or converted from kilograms using a standard conversion rate from kilograms to troy ounces of 32.1507465 to produce a five-decimal figure. If upon conversion to troy ounces the last two digits are 75 or greater, the third decimal place should be rounded up and if the last two digits are 74 or less, the third decimal in the troy ounce weight should remain unchanged.
For plates/ingots dated 2014 or before, once the troy ounce weight is established either by conversion or stamped on the plate/ingot, subsequent weighing tolerances shall be:
Minus: 0.006 troy ounces
Plus: no upward limit, the management of this upward limited is to be at the vault manager’s discretion.
For plates/ingots dated 2015 and onwards, once the troy ounce weight is established either by conversion or stamped on the plate/ingot, subsequent weighing tolerances shall be:
Minus: zero, the plate or ingot must weigh a minimum of the stamped weight
Plus: no upward limit, the management of this upward limited is to be at the vault manager’s discretion.
While electronic scales have been existence and in widespread use for many years, traditionally, they have not been considered accurate enough for use within precious metal vaults given the precise measurements required. However, in 2010, it was determined that the technology had improved to the extent that electronic sales were considered to be as accurate as the Victorian engineering that underpins the beam balance scales.
Hence, in London’s precious metal vaults, the electronic scales are now deemed the primary weighing methodology – particularly given the rapid results achieved. While there are no specific rules regarding which scales may be used, it is market practice to use Sartorius Gold Bullion Scale Model GBB 14202S-OCE electronic scales for gold, platinum and palladium. Given the lower value of silver, the scales used for this metal are not required to be as accurate. However, for all four metals, if there are any areas of dispute, the traditional beam balance scales are utilised.
It is worth emphasising that the requirements for accuracy are so demanding that even drafts from fans or air conditioning could affect the results from the scales and, hence, these are not used in areas where precious metals are weighed.
6. Good Delivery – Platinum and Palladium
A primary function of the LPPM is its involvement in the promotion of refining standards by maintenance of the LPPM Good Delivery List and a regime of Proactive Monitoring