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Alasdair Macleod: LBMA gets a lifeline that will pull it away from 'paper gold'
By Alasdair Macleod
Thursday, July 15, 2021
The draft Prudential Regulatory Authority rules complying with Basel 3 regulations have now been issued six months ahead of their implementation to allow banks to adjust for them in time. From now, senior bankers, their lawyers, and bank treasury managers will be planning amendments to their business strategies accordingly.
As a division of the Bank of England, the PRA recognises the importance of gold trading in London and has inserted a clause into the new rules (Article 428f) that will allow the LBMA's centralised settlement system to continue to function. But in line with Basel 3's apparent determination to get banking's exposure to uneven derivative positions substantially reduced, net positions in precious metal derivatives in the form of forwards and swaps will be penalised through their inefficient use of balance sheet resources and will likely be replaced by transactions fully backed by physical gold.
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The London Bullion Market Association has been thrown a lifeline but will likely have to refocus from forward derivatives to physical bullion-backed trading. By responding positively to these developments, the LBMA and its membership can retain and build on its pre-eminent position in global precious metals markets.
This article points out that the market value of forward derivatives in gold is currently the equivalent of 8,675 tonnes. While it would be incorrect to think it will all translate into new bullion demand, there is little doubt that if Basel 3 leads to the demise of the London forwards market, it will lead in turn to a significant replacement in the form of physical demand.
This article also looks at the broader picture for banking in the light of the PRA's new regulations as well as the specifics for precious metal derivatives. ...
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