Twitter: London Gold Clearing and the Role of the Bank of England
21 August 2015 1 Comment
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.
@VictorCleaner Sure. Questions. Q1: Can Bank of E explain mechanism of transfers over LPMCL clearing banks gold a/cs at BoE, using example?
— Ronan Manly (@ronanmanly) August 18, 2015
@VictorCleaner Q2: how does LPMCL's AURUM link to BOE gold bar a/c'ing system, is it SWIFT messaging or other routes?
— Ronan Manly (@ronanmanly) August 18, 2015
@VictorCleaner Q3: if LPMCL member bank had a gold clearing obligation > amount of gold in its BoE gold a/c, does BoE cover with other gold?
— Ronan Manly (@ronanmanly) August 18, 2015
@VictorCleaner BoE only answer was: BoE is not a member of LPMCL. See LMPCL website. Thank u for writing to Bank. Sorry we can't help more.
— Ronan Manly (@ronanmanly) August 18, 2015
@ronanmanly "The London bullion clearing members role involves a considerable degree of direct client contact, electronic interfaces between
— Victor The Cleaner (@VictorCleaner) August 18, 2015
@ronanmanly …the six members and close liaison with the @bankofengland." From http://t.co/EDRuk86h3x
— Victor The Cleaner (@VictorCleaner) August 18, 2015
@VictorCleaner @bankofengland Exactly…
— Ronan Manly (@ronanmanly) August 18, 2015
@ronanmanly @bankofengland If I remember correctly, the LBMA members were able to fall back on BoE in case of shortage of reserves.
— Victor The Cleaner (@VictorCleaner) August 18, 2015
@ronanmanly @bankofengland Think 1997 and then Brown's Bottom. But I guess the next time, the BoE will **not** want to step in. Let's see.
— Victor The Cleaner (@VictorCleaner) August 18, 2015
@ronanmanly @VictorCleaner well..if they are not a member..the answer was sufficient wasn't it ?
— Freegold (@freegolds) August 18, 2015
@freegolds @VictorCleaner I didn't ask BoE about LPMCL. I asked BoE about process as regards clearing a/cs of banks that are LPMCL members
— Ronan Manly (@ronanmanly) August 18, 2015
@freegolds @ronanmanly Wait.Did the BoE **use to be** a member?And now they aren't? I remember they did have a role in the clearing process.
— Victor The Cleaner (@VictorCleaner) August 18, 2015
@VictorCleaner @freegolds BoE never member. Founded 2001 by 7. Current 5 + Rothschild until 2004. Credit Suisse in 2001. Barclays from 2005
— Ronan Manly (@ronanmanly) August 18, 2015
@bronsuchecki @ronanmanly BoE would be the central bank when the LBMA members are the ordinary banks.Provides emergency reserves.As in 1997.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @ronanmanly It wasn't "lender of last resort" in banking analogy. It was shipping tangible cash for a central bank reserve.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly Don't think this is the case. BoE plays the role of the central bank in this case, with the Brits'
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly national gold as the ultimate reserve. This must go back a long time, probably till 1920s.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly And even in 1997-1999 it was still the case. Note that BoE gold sales (1999) were different from
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly all other gold sales by European CBs. BoE sold into the market. All other European CBs sold through
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly BIS. BIS means that the allocated gold goes straight to the intended recipient (Arabs? China?), and
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly the unallocated transactions are merely a bookkeeping exercise. BoE sales in contrast went to
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly LBMA members. I guess these were transactions of the sort Ronan asked BoE about.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly Not neccessarily. They need not peg XAU to a fixed dollar price. But they may provide XAU credit as
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @Silver_Watchdog @ronanmanly additional liquidity to the market. An interest rate target (rather than an exchange rate target).
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @mortymer001 @bronsuchecki @ronanmanly If, say, Dutch CB sells via BIS to, say, the Arabs, then this removes one liability
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @mortymer001 @bronsuchecki @ronanmanly (XAU balance that is threatened to allocate) and one asset (some XAU loan that is now
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @mortymer001 @bronsuchecki @ronanmanly paid back because the Arabs pay with unallocated) from the aggregate LBMA balance sheet.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @mortymer001 @bronsuchecki @ronanmanly If the BoE sells into the (LBMA) market and allows allocation, then the aggregate LBMA
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@costata001 @mortymer001 @bronsuchecki @ronanmanly balance sheet (in XAU) grows. Different.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly Hence Ronan's question about the BoE and my comment re 1997-1999.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly No. BoE is more. They are the supervisor and regulator of the London bulion market. They can lend
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly to and provide (emergency) liquidity to LBMA members.If a member now has an (unallocated) balance
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly with the BoE, some (perhaps other) member may still end up with a claim on the clearing pool that
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly exceeds the amount of allocated gold that is reallocated during the clearing. So there is a
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly residual unallocated claim on the BoE. I guess Ronan wants to ask whether the BoE also "settles"
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@bronsuchecki @Silver_Watchdog @ronanmanly this and provides allocation. Of course, they won't answer. That's dynamite.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog Yes. That's exactly what I was asking about. Questions were prompted by what GalMarley wrote..
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog "Bank of England is not an LBMA member, but is – in effect – LBMA's central bullion clearer"
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog "If it chooses it can expand supply of bullion in clearing market by the creation of notional"
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog " bullion in clearing mkt by creation of notional bullion as unallocated liabilities on its.."
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog "own balance sheet, and it can shorten supply by buying back from the clearers.."
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog "..and reducing the bullion – notional or otherwise – in market circulation."
— Ronan Manly (@ronanmanly) August 19, 2015
@ronanmanly Great job. This clarifies a lot. :o)
— Mortymer (@mortymer001) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog See the two paragraphs about Bank Of England as gold clearer https://t.co/OqjZZezixv
— Ronan Manly (@ronanmanly) August 19, 2015
@ronanmanly @bronsuchecki @Silver_Watchdog Yes, that's the article that I remembered when I replied to your earlier tweets. Still valid??
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@ronanmanly @bronsuchecki @Silver_Watchdog Two thoughts: (1) Next time, the BoE will *not* play this role. (2) #Brentry is on the agenda.
— Victor The Cleaner (@VictorCleaner) August 19, 2015
@mortymer001 I'm not sure who, at GalMarley, wrote that though. Maybe Paul Tustain. I'll ask bullionvault….
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog "…entry transfers into unallocated accounts in respect of each clearers' trades."
— Ronan Manly (@ronanmanly) August 19, 2015
@VictorCleaner @bronsuchecki @Silver_Watchdog "Bank of England, clears net gold positions between the 5 clearers each day by making book .."
— Ronan Manly (@ronanmanly) August 19, 2015
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?
Victor The Cleaner 
“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.