Banks clearing gold trades in London can apply for an exemption from more stringent capital standards due in January 2022, a British regulator said on Friday, eliminating what some said was a danger to the workings of the market.
London is the world’s greatest physical precious metals trading center. Its clearing system, worked by a small group of big banks with deposit of metal in vaults – JPMorgan, HSBC, ICBC Standard and UBS – settles gold exchanges worth around $30 billion per day.
The impending principles, known as the net stable funding ratio (NSFR), are essential for Basel III guidelines intended to make banks more stable and forestall a rehash of the financial crisis of 2008-09.
The principles deal with physically traded gold like some other ware, expecting banks to hold more money to match with their gold exposure as a buffer against unfavorable price moves.
The London Bullion Market Association (LBMA), an industry body, has campaigned against them, saying they are superfluous and could constrain a few banks – including clearing banks – to quit trading.
Following a discussion, the Bank of England’s Prudential Regulatory Authority (PRA) said on Friday it had “chosen to correct its way to deal with valuable metal possessions identified with deposit taking and clearing exercises.”
It said it had introduced an “interdependent precious metals permission” which would diminish the size of the necessary capital cushion.
“This is one of the central issues about what we’ve been requesting these previous years,” said Sakhila Mirza, the LBMA’s chief counsel. “Clearing will be exempt.”
The PRA said it would not classify gold as a great fluid resource, which would have liberated different exchanges, for example, precious metals loans and leases from the high capital necessity.
The LBMA says gold is fluid enough not to require an extra liquidity cushion for clearing and settlement and momentary exchanges.
JPMorgan and HSBC declined to remark. ICBC Standard didn’t promptly react late on Friday.
A representative for UBS said: “UBS agrees with the PRA’s choice, which upholds strength in bullion cleaning and avoid upset to the London market.”
