The London Bullion Management Association (LBMA) is a London-based,
globally active, trade association for “the promotion and regulation of
commerce relating to the London Bullion Market”. The “London Bullion
Market” here collectively refers to the London Gold Market and the London
Silver Market. The remit of the LBMA has very recently also been extended to
cover the London
Platinum and Palladium Market (LPPM).
While it is generally known to many, vaguely or otherwise, that the Bank
of England has a vested ‘interest’ in the London gold market,
the consistently close relationship between the Bank of England and the
LBMA tends not to be fully appreciated. This close and familial relationship
even extends to the very recent appointment of a very recently departed Bank
of England senior staff member, and former head of the Bank of England
Foreign exchange Division, Paul Fisher, as the new ‘independent‘
chairman of the LBMA Management Committee (a committee which has recently
been rechristened as a ‘Board’). Note that at the Bank of England, the Bank’s
gold trading activities fall under the remit of the ‘Foreign Exchange’ area,
so should be more correctly called Bank of England Foreign Exchange and Gold
Division. For example, a former holder of this position in the 1980s, Terry
Smeeton, had a title of Head of Foreign Exchange and Gold at the Bank of
England.
What is also unappreciated is that the same Paul Fisher has in the past,
been the Bank of England’s representative, with observer status, on this very
same LBMA Management Committee that he is now becoming independent chairman
of. This is an ‘elephant in the room’ if ever there was one, which the
mainstream financial media in London conveniently chooses to ignore.
As you will see below, the UK’s Financial Conduct Authority (FCA) also has
a close, and again, very low-key but embedded relationship with this LBMA
Management Committee.
At the ‘Behest’ of the Bank of England
The LBMA states in one of its Alchemist magazine articles, that its
Association “was
established at the behest of the Bank of England” in 1987,
with Robert Guy of N.M. Rothschild, the then chairman of the London Gold
Fixing, spearheading the coordination of the Association’s formation.
Elsewhere, in a recent summary
brochure of its activities, the LBMA states that it was “set up in
1987 by the Bank of England, which was at the time the bullion market’s
regulator”, while a recently added historical timeline on the LBMA
website, under the year 1987, states “LBMA established by the Bank of
England as an umbrella association for the London Bullion Market.”
‘Established at the behest of“, “set up by” or “established
by“, take your pick, but they all clearly mean the same thing; that the
Bank of England was the guiding hand behind the LBMA’s formation.
Prior to the formation of the LBMA, and before a change of regulatory
focus in 1986, the London Gold Market and London Silver Market had primarily
followed a model of self-regulation, but the Bank of England had always been
heavily involved in the market’s supervision and operations, especially in
the Gold Market. Even reading a random sample of the Bank of England’s archive
catalogue material will make it patently clear how close the Bank of
England has always been to the commercial London Gold Market. For scores
of years, the London Gold Market to a large extent merely constituted the
Bank of England and the five member firms of the London gold fixing,
namely NM
Rothschild, Mocatta & Goldsmid, Sharps Pixley, Samuel Montagu, and
Johnson Matthey.
According to the 1993 book, “The International Gold Trade” by
Tony Warwick-Ching, a combination of the advent of the Financial Services Act
of 1986 which introduced supervisory changes to the UK’s markets, and the
growing power of other bullion banks and brokers in the London precious
metals market in the 1980s, acted as a combined impetus for the LBMA’s
formation in 1987.
As Warwick-Ching stated:
“The LBMA was partly a response to a growing demand of concern who
were not members of the [gold] fixing for a greater involvement at the heart
of the bullion market.”
Morgan and J.Aron join the Party
Specifically, according to its Memorandum
of Association, the LBMA was formed into a Company on 24 November 1987 by
N.M. Rothschild & Sons Limited, J.Aron & Company (UK) Limited,
Mocatta & Goldsmid Limited, Morgan Guaranty Trust Company of New York,
Sharps Pixley Limited, and Rudolf Wolff & Company Limited. This company is
“a company limited by guarantee and not having a share capital”. Given their
participation from the outset, presumably J Aron (now part of Goldman Sachs)
and Morgan Guaranty (now part of JP Morgan Chase) were members of the ‘growing
demand of concern‘ contingent alluded to by Warwick-Ching, who wanted a
bigger say in the gold market’s inner sanctum.
Signatories to the original LBMA
Memorandum of Association
The authorising subscribers of the original Memorandum, on behalf of their
respective companies were, Robert Guy (Rothschild), Neil Newitt (J. Aron),
Keith Smith (Mocatta & Goldsmid), Guy Field (Morgan Guaranty Trust), Les
Edgar (Sharps Pixley), and John Wolff (Rudolf Wolff & Company), and they
requested that “We, the subscribers to the Memorandum of Association,
wish to be formed into a company pursuant to this Memorandum.” The
original steering committee of the LBMA comprised five of the above, Robert
Guy (Chairman), Guy Field (Vice Chairman), Keith Smith, John Wolff, Neil
Newitt, as well as Jack Spall of Sharps Pixley, the father of Jonathan Spall
(current consultant to the LBMA). Note that the incorporation filing at UK
Companies House for the LBMA is dated 14 December 1987, about 3 weeks after
the date listed on the original Memorandum of Association.
As early as April 1988, there were 13 “Market Maker” members and 48
‘Ordinary’ members in the LBMA. The market maker members had to be ‘listed
money market institutions’, which meant that they were institutions listed
under section 43 of the Financial Services Act 1986 (on a list actually
maintained by the Bank of England) who conducted various transactions,
including bullion market transactions, which were exempt from authorisation.
The Shadowy Observers: Bank of England
According to the LBMA website:
“The Bank of England has been intrinsically linked with the London
bullion market since its foundation in 1694.”
“Although the Bank isn’t a member of the LBMA, members of the LBMA
hold gold custody accounts with the Bank”
“The Bank’s vaults hold approximately two-thirds of all the gold held
in London vaults and as such plays a significant role in the liquidity within
the London gold market. Customers are able to buy or sell gold to other
customers, by making or receiving book entry transfers,
with ownership transferred in the Bank’s back office system… The service
provides a very important element of the gold market infrastructure in
London, helping LBMA members and central banks to trade in a secure and
efficient way.”
A Bank of England presentation to the 2013 LBMA conference in Rome,
titled the-bank-of-englands-gold-vault-operations,
gives a good overview of the Bank’s provision of book entry transfers to its
central bank and bullion bank clients for the smooth running of the London
Gold Lending Market, a market which is totally opaque and completely
undocumented. In fact the Bank of England sits at the heart of this gold
lending market.
Furthermore, on the clearing
side,
“The London bullion clearing members role involves a considerable
degree of direct client contact, electronic interfaces between the clearing
members and close liaison with the Bank of England…”
From its very foundation in late 1987, the Bank
of England was involved in the first steering committee of the LBMA and
the activities of the Association. And to this day, Bank of England
‘observers’ attend LBMA Management Committee monthly meetings.
As a historical account of the LBMA’s 1987 formation states:
“From the Steering Committee’s
inception, The Bank of England, which held
responsibility for the supervision of the wholesale bullion market, was
involved in the Association’s affairs and assisted in the drafting of the
relevant Code of Conduct. Observers continue to attend
Management Committee Meetings to the present day.”
This steering committee ultimately became the LBMA Management Committee,
and, in the last few months, has become the LBMA ‘Board’. So the Bank of
England is, for all intents and purposes, a highly active partner within the
LBMA’s governance structure. As a confirmation of this point, at the
LBMA annual general meeting in July 2014, the then chairman of the LBMA Management
Committee chairman, David Gornall, of Natixis stated
in his speech that:
“The LBMA is also privileged in having an observer from the Bank of
England on the Management Committee. The Bank’s presence is of inestimable
benefit to us.”
As to what inestimable benefit David Gornall was referring to, or in what
way a Bank of England observer participates on the LBMA Management Committee,
was not elaborated on. Nor can it be gleaned from any meeting minutes from
LBMA Management Committee meetings, because such minutes are not made
publicly available (See below).
For anyone not familiar with the concept of an observer on a corporate
committee or board, it does not refer to someone who just sits there and
observes, as the name may suggest. An observer refers to an attendee at the
committee / board meetings who actively participates in discussions but who
has no voting rights on committee / board resolutions. Observers can and
do fully participate in meeting apart from voting. When voting occurs, they
may (or may not) be asked to leave the room.
At the LBMA annual general meeting in June 2013, David Gornall, also
chairman of the LBMA Management Committee at that time, revealed that
not only was there a Bank of England observer on the Management committee,
but there was also an observer from the UK financial regulator, the Financial
Conduct Authority (FCA), on the same committee:
“The LBMA is also privileged in having observers from both the Bank of
England and the FCA on the Management
Committee. Their presence is of inestimable benefit to us.”
In fact, there are many such references within various LBMA related speeches.
At the LBMA Precious Metals Conference in September 2013, Matthew
Hunt of the Bank of England stated:
“More specifically on gold, even though we are not active traders in
the market but we are a large custodian, some of the people in our team
responsible for gold observation sit on the LBMA Management
Committee and the LBMA Physical Committee as observers. Thus
we retain a significant engagement with the gold market via that
route.”
Notably the Bank of England has a team of people responsible for gold
observation, but not for the observation of other commodities such as zinc,
lean hogs, live cattle, heating oil, soybeans, sugar, beaver pelts etc etc.
In March 2013, Luke Thorn of the Bank of England, while addressing a LBMA
Assaying and Refining Seminar, stated:
“We are not a member of the LBMA, but we continue to play a key role
in the London market. We have observer status on
the Management, Physical and Vault Committees.”
There are therefore Bank of England observers on 3 LBMA Committees. So,
who are these Bank of England and FCA observer representatives? That is not
an easy question to answer. There is no mention on the LBMA website’s committee page, and has never
been any mention, of any Bank of England observers or FCA observers on the
LBMA Management Committee (now Board). Nor are there any published
minutes on the LBMA website of any LBMA Management Committee meetings, or the
meetings of any of the other five LBMA sub-committees, such meeting
minutes as would generally list the attendees of such meetings. More about
the lack of minutes below.
Turning briefly to the physical and vault committees, the LBMA website has
a listing for its physical committee and does mention that a Bank of
England observer called Jennifer Ashton currently is on this committee.
According to the LBMA’s good delivery summary:
“The Physical Committee is made up of industry experts from the
physical bullion market. It is responsible for monitoring, developing and
protecting the Good Delivery List and works closely with sub-Groups such as
the LBMA Referees and the LBMA’s Vault Managers Working Party”
There is however, no formal listing of the Vault Manager ‘s group as a
LBMA committee within the LBMA’s committee listings section. The only
informative reference to such a committee on the LBMA web site is in the good
delivery rules explained section, which states:
“The Vault Managers Working Group, comprising the Bank
of England and representatives from those LBMA members with their
own vaulting facilities in London, meet regularly to
consider issues relating to bar quality and vault procedures.
Vault Managers are required to document every case of bar rejection and
provide the associated information to the LBMA Executive”
Who is on this committee from the Bank of England, let alone from any of
the other committee member companies is not disclosed.
Turning again to the identities of LBMA Management Committee observers,
and going back slightly further to the LBMA Annual General Meeting on 20
June 2012, the Chairman, the omnipresent David Gornall of Natixis London
Branch, stated:
“Talking of the Management Committee, let me remind you that we are
very fortunate to have observers from both the Bank of England and the
FSA on the committee. I would like to thank Trevor Stone
and Don Groves for their participation in
our affairs”.
From a speech at the 2009 LBMA annual conference by Michael Cross, the
then Head of Foreign Exchange at the Bank of England, we learn that the Bank
of England’s Banking Services area:
“is where Trevor Stone and his
colleagues, who will also be known to many of you, work. The Banking Services
area provides wholesale banking and custody services to a wide range of bank
customers”
These ‘Banking Services’ functions at the Bank of England are similar
to Central
Bank and International Account Services (CBIAS) services offered to
central bank customers by the New York Fed, and include gold custody
services.
The Embedded Observers – FCA, Don Groves
On 30 September 2013, the ever-present David Gornall in another speech,
this time to the LBMA annual conference in Rome, had this to
say:
“We are grateful for the communication and feedback on our work from
regulators, particularly that of own regulator the FCA. We are delighted to
be joined by Don Groves of the FCA during
tomorrow’s financial market regulation session. Don is a
long-time observer on the LBMA Management Committee and we
thank him for his participation and continued dialogue on our regulatory
questions facing the London Market.”
The next day, on 1 October 2013, at the same conference, Ruth Crowell, the
then Deputy CEO of the LBMA (and current LBMA CEO) introduced
Don Groves as follows:
“With that, I am going to turn it over to Don Groves
from the Financial Conduct Authority. Don is a technical
specialist in the market contact area of the FCA’s Market Monitoring
Department, where he is responsible for reviewing allegations of market
misconduct, including market abuse and insider dealing.
Don specialises in the UK commodity markets and has been in market conduct
for a number of years. We are also very privileged to have
Don as an observer on the LBMA’s Management Committee.“
Groves joined the FCA in 1999, and left the FCA in March 2015. While his LinkedIn profile
has very detailed listings of his duties while at the FCA, there is no
reference to the fact that he ever sat on the LBMA Management Committee,
which strikes me as odd, unless that is a deliberate omission. A
previous version of Groves’ LinkedIn profile states:
“I am considered to be an expert in Market Conduct matters and
market abuse in the UK. I conduct project work pertaining to market
conduct issues, contribute to the drafting of European legislation pertaining
to market abuse and am an experienced public speaker. My main area of
interest is the UK’s commodities markets.
Is it not odd that a FCA regulator was a long-time observer sitting on the
LBMA Management Committee, but that the FCA has never had anything
to say about the London Gold Market. Perhaps it’s because of the following,
which gives the impression of a compliant and embedded
regulator. As the FT wrote in October 2013 in an article titled “Gold
and oil benchmarks face tighter regulation“:
“I don‘t want to give the impression that the UK is picking
on the bullion market or anything else,” Mr Groves told the London
Bullion Market Association precious metals conference in Rome. “But a
consumer focus is what politicians are looking at…so there’s going to be more
focus from us as regulators, on consumer issues.”
“However, [Groves]admitted the regulator did not know enough
about physical markets and had launched a project to increase its knowledge.
“We are going out as the FCA and learning about those markets,” he said.
What exactly the FCA was doing sitting on the LBMA Management Committee
remains unclear, because, to reiterate, there are no publicly available
minutes of the Committee’s meetings. At a guess, perhaps Groves was “learning
about physical markets“, specifically the physical gold market.
Its also relevant to note that the Bank of England and FCA both crop up as
observers when the LBMA holds various seminars, such as the seminar it held
in the City of London on 24 October 2014 to showcase various solution
providers that were competing to provide the infrastructure for the LBMA Gold
Price fixing auction competition that was running at that time:
According to the LBMA press
release, “Both the Bank of England and the Financial Conduct
Authority attended the seminar as observers.”
Where are the LBMA Mgt Committee Meeting Minutes?
Through the Non-Investment Products Code (NIPs), the Bank of
England interfaces closely with the UK’s foreign exchange, money and
bullion markets. The Bank of England
explains NIPs as follows:
“The Non-Investment Products Code
This Code has been drawn up by market practitioners in the United
Kingdom representing principals and brokers in the foreign
exchange, money and bullion markets to underpin the
professionalism and high standards of these markets.[1]
It applies to trading in the wholesale markets in Non-Investment
Products (NIPs), specifically the sterling, foreign exchange and bullion
wholesale deposit markets, and the spot and forward foreign exchange and bullion
markets.”
“Footnote [1]: Co-ordinated by the Foreign
Exchange Joint Standing Committee, the Sterling
Money Markets Liaison Group and the Management
Committee of the London Bullion Market Association”
Of the three, the Foreign Exchange Joint Standing Committee is
chaired and administered by the Bank of England. The Sterling Money
Markets Liaison Group (now known as the Sterling Money Markets Liaison
Committee) is also chaired
and administered by the Bank of England.
On the Bank of England’s web site, there are very extensive informational
resources about the Foreign
exchange Joint Standing Committee and the Sterling
Money Markets Liaison Committee, but surprise, surprise, there
is nothing about the LBMA Management Committee. The Bank of England
website offers publicly accessible documents of all meeting minutes of the FX
Joint Standing Committee, including the representatives names of attendees
and the banks and institutions represented at each meeting. These meeting
minutes are highly detailed. See May
2016 FX Joint Standing Committee minutes as an example. Likewise, for the
Sterling Money Markets Liaison Committee, the minutes of every meeting have
been uploaded to the Bank of England website and are publicly accessible.
These minutes are highly detailed. See for example the February
2016 Sterling Money Markets Liaison Committee meeting minutes.
However, the only tiny piece of information offered about the LBMA on the
Bank of England website is as follows:
“The Bullion element of the NIPs Code is being replaced by a new code
which will be established by the London Bullion Markets Association (LBMA).
Further information on the bullion code can be found on the LMBA website.”
Conveniently, the Bank of England passes the buck back to a web site
(LBMA’s website) which is notoriously bereft of any information about the
meetings of the LBMA Management Committee, the agendas of such meetings, the
minutes of such meetings, and the attendees at these meetings. Why is this
opacity allowed by the FCA and Bank of England when the foreign exchange and
money market brethren have to submit to published minutes of their meetings,
which in many cases involve the same banks and institutions? Could it be that
discussion of the London Gold Market is highly secretive and a no-go area,
and that the institutions involved have a free pass from the Bank of England
and FCA to continue their discussions in private, away from the public eye?
Mark Carney and Paul
FIsher
Pièce de Résistance
Arguably, the pièce de résistance of these Bank of
England / FCA relationships with the LBMA Management Committee, is the fact
that Paul Fisher, the newly appointed ‘independent‘ Chairman of the
LBMA Board, formerly known as the LBMA Management Committee, has already
previously been the Bank of England’s “observer” on the LBMA Management
Committee.
In his speech
to the 2004 LBMA Annual Conference in Shanghai, Fisher, the then Head of
Foreign Exchange at the Bank of England, while discussing the “Non-Investment
Products Code”, a code which regulates the bullion market, the foreign
exchange market, and the wholesale money market, stated that:
“In the bullion section, the work is led by the LBMA and the whole is
coordinated by the Bank of England. Partly on that basis, I
am glad to be invited to the LBMA’s Management Committee meetings as an
observer. I’d just like to pay tribute to the
professionalism and integrity with which I see the Management Committee
operating for the best interests of the global marketplace for bullion.”
One of the more bizarre parts of Fisher’s appointment, in my view,
is that when the LBMA announced in a press release last July (2016)
that Fisher was being appointed as the new LBMA chairman, there was no
mention of the fact that he had previously attended the LBMA Management
Committee meetings. One would think that this would be a very relevant when
considering the ‘independence’ of the appointment?
On hearing the news on 13 July about the appointment of the Bank of
England’s Paul Fisher as ‘independent’ non-executive chairman of the LBMA
Board, James G Rickards, the well-known gold author and commentator, tweeted
the below, which succinctly sums up the elephant in the room, which the
mainstream media chooses to ignore.
Banks pick central banker to head #gold market. Like
putting an oil exec in charge of Tesla: https://t.co/mwHzNQCBZU
pic.twitter.com/k2oJJPdYnh
— Jim Rickards (@JamesGRickards) July 13,
2016
This appointment reinforces the link, or bridge, between the two entities,
which is now even more set in stone than previously. It’s as if the Bank of
England, at this time, has felt the need to put it’s man directly at the head
of the LBMA. The timing may be relevant, but in what way is not yet clear.
A forthcoming article looks at this appointment of a former Bank of
England Head of Foreign Exchange as the new ‘independent’ Non-Executive
Chairman of the LBMA Board, considers what, if anything, is independent
about the appointment given the extremely close relationship between the Bank
of England and the LBMA, and examines the appointment in the context of the
UK Corporate Governance Code, which now governs the Constitution and operation
of the LBMA Board.
Ronan Manly
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