Sunday, December 18, 2011

BIS/WGC - Response to Basel Committee on Banking Supervision’s Consultative Document: “International framework for liquidity risk measurement, standards and monitoring, December 2009”

Response to Basel Committee on Banking Supervision’s Consultative Document: “International framework for liquidity risk measurement, standards and monitoring, December 2009”


Market-related characteristics
Gold also meets the four market-related requirements set out by the BCBS. Namely, gold has an active and sizeable market, committed market makers, a low market concentration and often enjoys “flight to quality” inflows.

“Active and sizeable market: the assets should have active outright sales and repo markets at all times (which means a large number of market participants and a high trading volume)”, BCBS. Most gold trading takes place in the global OTC market, which is centered on gold stored in London. The wholesalers in the OTC market are represented by the London Bullion Market Association (LBMA). There are currently 57 full members of the LBMA8, which include fabricators, brokers, refiners and shippers. Calculating daily trading volume is complicated by the numerous channels through which gold trading takes place. But we estimate that, at a minimum, average daily turnover in the gold market is c. US$100 billion. This is based on published statistics for futures traded on COMEX and TOCOM, the largest two futures exchanges, together with estimated average daily trading volumes from OTC trades cleared via London.

LBMA clearing volumes have been multiplied by a factor of three, in line with traders’ minimum estimates for actual dealing turnover that is settled using gold stored in London (some estimates are as high as eight). However, these calculations exclude all trading on exchanges elsewhere, such as Shanghai, Hong Kong, Istanbul, Taiwan and various Indian cities, as well as all OTC trades that are not settled via London, so in reality daily trading volumes are likely to be much higher. In terms of the overall size of the gold market, GFMS, the leading independent precious metals research consultancy, estimates that at the end of 2009 the total above ground stock of gold was 165,500 tonnes. This equates to US$5.2 trillion in value terms, when converted at the average 2009 gold price. Around US$1.8 billion is estimated to be held by private individuals, in the form of coins and bars, and by official institutions. Thus, even excluding the jewellery and industrial sector, the gold market is much larger than individual corporate debt issues and even sovereign debt markets. The combined market value of conventional and index-linked UK gilts, for example, was US$713 billion in 2009.

Spot gold typically settles on T+2, but can easily be traded on a T+1 basis if required. There is also an active gold leasing market between central banks and bullion banks. Typically an institution buying gold will vault the gold with the bullion bank it is purchased from, for a vaulting fee which will vary according to the quantity of gold, rather than taking physical delivery of the gold bars. There are some similarities here with ETFs, which have recently attracted investors from pension funds, endowments and even the insurance sector. The ETF shares are 100% backed by gold bars, but the individual investor does not take physical possession of the bars. “Presence of committed market makers: quotes will be available for buying and/or selling”, BCBS. There are currently nine market making members of the LBMA: The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank, Deutsche Bank, Goldman Sachs International, HBSC Bank USA, JP Morgan Chase Bank, Mitsui & Co Precious Metals Inc, Société Générale and UBS AG who must quote each other in gold trading throughout the day ( There are also committed market makers for the various gold exchange-traded products.
“Low market concentration: a diverse group of buyers and sellers in an asset’s market increases the reliability of its liquidity”, BCBS. Unlike financial assets, the gold market is not solely dependent on investment as a source of demand. In the five years to 2009, 61% of demand came from the jewellery sector, 26% from investment and 13% from industrial uses..."


Operational requirements
"Operationally, the BCBS states that “high quality liquid assets” should ideally be central bank eligible. London Good Delivery Gold bars, the benchmark trading vehicle in the global OTC market, are not currently central bank eligible at the European Central Bank (ECB). However, the list of eligible assets varies widely from central bank to central bank, and over time, we see no reason why gold could not become eligible for open market operations at the world’s major central banks..."

[Mrt: The this still valid statement?]


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