01 November 2015

Meet the LBMA Market Making Bullion Banks and 'Loco London'

While much of the conversation regarding gold and silver centers on the Comex, the London Bullion Market Association which has a 200+ year history is lesser known amongst American readers.  It has a significant role in the global physical bullion markets.

Show below from the LBMA website is a thumbnail sketch of the current major bullion bank market making players there.   This has changed a bit since NM Rothschild relinquished their seat and chairmanship in 2004.

The daily price fixes came under quite a bit of scrutiny specially in the  precioius metals price rigging scandal in 2014.

There are many more banking member of the LBMA, but they do not provide market making functions at this time.

This is from the LBMA website.

Of the fifteen LBMA Market Makers, five are full Market Makers and nine Market Makers. The five Full Market Makers quoting prices in all three products are:

  • Barclays Bank Plc
  • Goldman Sachs International
  • HSBC Bank USA NA *
  • JP Morgan Chase Bank *
  • UBS AG
*Also provide vaulting operations for physical bullion in London

The ten LBMA Market Makers who provide two way pricing in either one or two products are:
  • Citibank N A (S)
  • Credit Suisse (S,O)
  • Deutsche Bank AG (S,O)
  • Mitsui & Co Precious Metals (S)
  • Morgan Stanley & Co International Plc (S,O)
  • Societe Generale (S)
  • Standard Chartered Bank (S, O)
  • Bank of Nova Scotia -ScotiaMocatta (S, F)
  • Toronto-Dominion Bank (F)
  • BNP Paribas SA (F)
(S=Spot, O=Options, F=Forwards)

Definitions of Spot, Forward and Options

Spot (S). The current price in the physical market for immediate delivery of gold. This is normally taken to mean loco London delivery two working days after the date of the deal.
Forward (F). A transaction in which two parties agree to the purchase and sale of gold at a future date, commonly 1, 3, 6 and 12 months but also for longer dated tenors or dates into the future (see table above). Forward contracts are an important part of many swap arrangements.
Options (O). This gives the holder the right, but not the obligation, to buy or sell gold at a pre-determined price by an agreed date, for which he pays a premium (or a cost). The premium is the amount of compensation the seller receives from the buyer. The right to buy is commonly referred to as a call option and the right to sell as a put option.

Also from the LBMA website:

Loco London
The term Loco London refers to gold and silver bullion that is physically held in London. Only LBMA Good Delivery bars are acceptable for trading in the London market. The Loco London concept has evolved within the market. In the second half of the 19th century, gold from Californian, South African and Australian mines was sent to be refined and sold in London.

With this business as a base, and in tandem with the increasing acceptance of the London Good Delivery List, clients from all over the world opened bullion accounts with individual London bullion dealing houses. It soon become evident that these Loco London accounts, which were used to settle transactions between bullion dealer and client, also could be used to settle transactions with other parties, by transfers of bullion in London. Today all third party transfers, on behalf of London market clients, are effected through the London bullion clearing system. Each segment of the market is described below.

Note: In this case 'loco' may derive from the Latin word 'locus' meaning to put in the place or location. It is not an acronym that I know of, and is ordinarily not capitalized in LBMA documents. It does not imply that the London gold trade is 'loco' in the modern sense, although it is understandable why some should think so. I suspect that the loco London rule was intended to rule out gold held in vaults outside of the general vicinity of London and especially overseas. Remember that this is a very old organization with a long history. Shaken by claims of fraud and price manipulation, it seems to be in decline now, becoming a price leveraging paper market like New York, with the physical precious metals markets moving more to Asia.

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