LBMA Lobbies for the Exemption of Gold From EU Liquidity Rules

The LBMA wants to be exempt from a new regulation that woulld impose strict holding requirements onto banks to backup the assets that they trade.

London Bridge - The Gold Analyst

Last updated on July 19th, 2019 at 11:31 am

The London Bullion Market Association (LBMA) presented figures which show that gold is more liquid than corporate or government bonds and should therefore be exempted from the liquidity rules that will be implemented in the European Union (EU) in 2021.

The rules, called the net stable funding ratio (NSFR), would treat precious metals including gold like other commodities and would require banks to hold assets that match their exposure to serve as buffer against any adverse price movements. These rules are intended to improve the stability of European banks. They are part of Basel III regulations.

In its lobbying efforts, the LBMA argued that the rules are not needed and would only disrupt the bullion clearing system in London which handles $25 billion gold transaction a day. The association calculated the liquidity of the precious metals market in London and compared it with those of corporate and government bonds calculated by the EBA. The analysis included trade data from London and Zurich, which together make up the largest over-the-counter gold trading hub in the world.

The liquidity analysis found that gold had an amihud illiquidity ratio of 0.000018, while silver, platinum and palladium had ratios between 0.0002 and 0.0017. The EBA score for corporate bonds was 0.188 and for government bonds 0.059. A ratio closer to zero indicates liquidity. This means that precious metals are more liquid than both corporate and government bonds.

LBMA chief executive Ruth Crowell said that these are strong evidence that precious metals, especially gold, should not covered by the liquidity rules because they are “high quality liquid asset”

It was reported in January 2019 that the EBA would evaluate whether precious metals should be covered by the liquidity rules. But its deadline for making the recommendation is on April 2021, which is the same month as the implementation of the rules. The LBMA said that the recommendation would be useless since the rules will be enforced with gold and other precious metals still included.