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Download the Article ALCHEMIST ISSUE SEVENTY EIGHT ICE Benchmark Administration and the LBMA Gold Price By Finbarr Hutcheson, President & Chief Executive, ICE Benchmark Administration Ltd. The LBMA Gold Price Additional ways we are working to raise the 1,250 benchmark’s credibility include consulting with the market on key aspects of the process – such as the Seller’s Premium and the publication of non-USD prices – and establishing the 1,225 LBMA Gold Price Oversight Committee, which meets regularly to review key issues related to the benchmark. We are also maintaining our dialogue with the regulators to provide input 1,200 on the new rules they are considering. Finally, we recently published our commercial model to support these ongoing efforts. In this article, $ per fine troy ounce I will provide my perspective on each of these 1,175 topics. 1,150 Bank of China recently The LBMA Gold Price 20-Mar 15 20-Apr 15 20-May 15 20-Jun 15 became the first Chinese 1,250 direct participant, and both “China Construction Bank“ On 20 March 2015, ICE Benchmark Administration Ltd (IBA) and the Industrial and became the administrator for the LBMA1,225 Gold Price, which replaced the London Gold Fix as the principal global benchmark for daily gold Commercial Bank of China Average Volume Average Volume by Auction prices. That day was the culmination of a tremendous amount of have announced their intent Pre-IBA (a) IBA (b) work180 by the London Bullion Market Association1,200 (LBMA), IBA and to join the auction. the day one participating firms – Bank of Nova Scotia-Mocatta, 200 Barclays, Goldman Sachs, HSBC, Societe$ per fine troy ounce Generale, UBS and JP Consulting on Key Changes Morgan Chase (which joined one week1,175 later). That morning, the transition100 from the London Gold Fixing Company Limited phone call Just three weeks after the LBMA Gold Price troy ounces methodology to the electronic WebICE platform was seamless. began, we launched a consultation on three fine 100 aspects of the auction process: the Seller’s I was delighted to witness the first-ever1,150 gold auction, which 20-Mar 15 20-Apr 15 Premium;20-May 15 the non-USD prices20-Jun (EUR 15 and GBP); published000’s fine troy ounces the LBMA Gold Price at000’s $1,171.75. and the fallback procedures if there are not enough direct participants to run an auction. Operating and supervising the auction is orders, whereas volumes since the launch of now part of our daily routine at IBA, but our the LBMA Gold Price can be submitted either The Seller’s Premium is a historical market role as administratorPre-IBA extends (a) beyondIBA (b) the on a net orAM gross basis. PM convention of adding $0.15 to the benchmark daily production(a) Relates of the to benchmarkthe period October price. 2014 to 19 March 2015 (a) Relates to the period from 20 March 2015 to present We are continuously working to raise the Average Volume Average Volume by Auction credibility of theCOMEX: benchmark Annual Goldthrough Contracts increased COMEX: Annual Gold Contracts Pre-IBA (a) IBA (b) 180 participation and volumes(millions) in the auction, high- (millions) quality benchmark48 administration, improved 15 governance and oversight, and in many other 200 ways as well.46 We have expanded the number of direct participants in the auction from four 14.5 (under the44 London Gold Fixing Company) to 100 ten and with more on the way. Bank of China troy ounces 42 recently became the first Chinese direct 14 fine 100 participant, and both China Construction Bank and the Industrial40 and Commercial Bank of 000’s fine troy ounces 000’s China have announced their intent to join the 13.5 auction. 38Compared to the volumes of the last five months of the London Gold Fix, volumes in 36 13 the auction have2012 almost doubled.2013 Volumes2014 prior 2012 2013 2014 Pre-IBA (a) IBA (b) AM PM to the launchSource: of Bloombergthe LBMA Gold Price were on a (a) Relates to the period October 2014 to 19 March 2015 net basis, ie after netting off house and client (a) Relates to the period from 20 March 2015 to present COMEX: Annual Gold Contracts COMEX: Annual Gold Contracts 20 (millions) (millions) 48 15 Chart 3: Consumer Gold Demand (tonnes) 46 450 14.5 44 400 China 42 350 India 14 300 40 13.5 250 38 200 36 13 150 2012 2013 2014 2012 2013 2014 Source: Bloomberg 100 50 0 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1Chart 2014 3: ConsumerQ1 2015 Gold Demand (tonnes) Source: Standard Chartered Research 450 400 China 350 India 300 250 200 150 100 50 0 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Source: Standard Chartered Research ALCHEMIST ISSUE SEVENTY EIGHT for settlement purposes. There is little formal Oversight Committee The Oversight Committee is responsible for documentation on the origins of the Seller’s reviewing all aspects of the determination of Premium, but we believe it was put in place a The LBMA Gold Price Oversight Committee is a the LBMA Gold Price, including the auction long time ago to incentivise miners to bring their key part of IBA’s governance and administration methodology, process and parameters; the metal through London. of the benchmark. The Committee is the eligibility criteria for new direct participants; mechanism by which the market provides and overseeing any changes. The Committee The upshot is that trades between direct ongoing guidance to IBA to ensure the credibility reviews potential conflicts of interest and participants from the auction are not settled and longevity of the benchmark. The committee oversees the administration of the benchmark. using the benchmark price itself, but a different, achieves this goal by making decisions on the Standing agenda items reflect supporting higher value. Consequently, transactions evolution of the process based on changes in benchmark integrity and include reviewing between direct participants and clients settle the market and regulatory environments. The surveillance reports. at a spread around this higher value and not inaugural meeting of the Oversight Committee around the benchmark price. For example, if the was held on 27 February 2015, three weeks The Oversight Committee oversees the benchmark were $1,200.00, direct participant ahead of the go-live, and the Committee has LBMA Gold Price Code of Conduct. All direct transactions would settle at $1,200.15 and now met four times. participants must agree to the Code, which direct participants would settle transactions requires direct participants to have sufficient with selling clients lower than $1,200.15 (e.g. internal systems and controls to mitigate $1,200.05) and transactions with buying clients potential conflicts of interest; staff training and higher than $1,200.15 (e.g. $1,200.25). Due The feedback on the experience; whistleblowing policies; adequate to the requirement for client spreads, it makes record-keeping; and proper compliance and sense that customer business might not settle fallback procedures highlighted audit policies. The Committee will review at the same price as trades between direct the need for daily benchmark the Code regularly and can update it at any participants. However, as a result of the Seller’s appropriate time. “prices in order to protect“ Premium convention, trades based on the auction for the LBMA Gold Price do not settle contractual certainty even if Regulation using the LBMA Gold Price as the mid. Since the there are not enough direct benchmark is intended to represent the price It would be impossible to write anything about of trading activity in the auction, transparency participants to run an auction benchmarks in 2015 without referring to the is not served if the mid-price for settlement is on a given day. regulatory environment. While the market actually different to that established by benefits from and favours clear regulatory the auction. structures, there is always the challenge of interpretation in times of change. It is easy to The Oversight Committee has considered the The Oversight Committee represents a diverse forget that when markets have been functioning feedback from the consultation and has come cross-section of the market, populated by for a time, they benefit from common to the conclusion that removal of the Seller’s respected industry veterans. It includes: Grant interpretation of rules and they adopt accepted Premium would promote a more transparent Angwin (Johnson Matthey Refining); Shekhar practices. With new rules, we need to build up LBMA Gold Price and provide a further benefit Bhandari (Kotak Mahindra Bank); Tony a history of normal practice, and four months of the removal of a tracking error. This new Evanson (Brink’s Global Services); Rob Hayes of running of the gold auction has provided standard will come into effect on 1 January (AngloGold Ashanti); Sakhila Mirza (LBMA); consistency and reassurance to the market. 2016, allowing the market adequate time to Aram Shishmanian (World Gold Council); Simon prepare for the change. If there is sufficient Weeks (Bank of Nova Scotia-Mocatta); and The LBMA Gold Price is now a ‘specified’ interest, IBA will run implementation forums in Tim Wood (Denver Gold Group). Additional benchmark, which means that it is regulated conjunction with the LBMA and ISDA. Please Committee members include Michel Prada by the FCA. It also means that the administrator contact IBA if you would like to attend. and André Villeneuve, two independent non- must be a regulated benchmark administrator executive directors of IBA. Michel Prada served and must comply with the FCA’s rules for The non-USD prices are indicative settlement as Chairman of the Executive and Technical benchmark administrators as set out in prices for trades in the auction and are also part Committees of IOSCO and was a founding MAR 8.3.
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