Twitter: London Gold Clearing and the Role of the Bank of England

This is just to organize a recent discussion regarding the clearing procedure in the London bullion market and the role played by the Bank of England. Warning: Lots of embedded tweets make this page rather slow.

In their FAQ, GalMarley write

The Bank of England

In addition to the 5 clearers there is the Bank of England, which clears the net gold positions between the 5 clearers each day by making book entry transfers into unallocated accounts in respect of each clearers’ trades. So the balances of the clearers at the Bank of England represents their entitlement to the Bank’s bullion, and within the rules of the LBMA the clearers can treat it is if it were physical reserve – even though nobody outside the bank ever gets to look at the actual metal itself.

The Bank of England is not an LBMA member, but it is – in effect – the LBMA’s central bullion clearer. If it chooses to it can expand the supply of bullion in the clearing market by the creation of notional bullion as unallocated liabilities on its own balance sheet, and it can shorten the supply by buying back from the clearers and reducing the bullion – notional or otherwise – in market circulation.

Is this (still) correct?

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One Response to Twitter: London Gold Clearing and the Role of the Bank of England

  1. Bron Suchecki says:

    “the Bank of England, which clears the net gold positions”

    I think this is poorly worded. the BoE doesn’t clear, it is the LPMCL that coordinates the netting/clearing, with each BB telling the BoE where to transfer their gold. BoE was probably the main common vaulter that the BBs used, but a BB could be willing to hold allocated gold with another BB as well.

    “it can expand the supply of bullion in the clearing market by the creation of notional bullion”

    This is what BBs themselves do for the industry, and I suppose that the BoE could do this as well but this sort of lend into existence banking involves the BoE taking a counterparty exposure to the BB its lends to. I think it is questionable today whether the BoE would do that, particularly for a non UK bank – why would it do it for JP Morgan, wouldn’t the BoE say no our responsibility to help a US bank if it has gold liquidity problems, go to the US Fed.

    “shorten the supply by buying back from the clearers”

    This makes no sense to me and is contradictory to the previous wording which talks about create to lend. Possibly a poor phrasing – no way could I see that the BoE is taking a price exposure.

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