Following the 2008 financial crisis, the international regulatory accord introduced a new set of rules to limit leveraged risk involved in the international banking systems – The Basel III. The implementation of these rules have repeatedly been delayed, and are now slated to go into effect January of 2022.

Under the rules of the Basel III, the required stable funding factor (RSF) for unallocated gold and silver is raised to 85%. This would require bullion “banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.”

The London Bullion Market Association (LBMA) and the World Gold Council (WGC) submitted a protest paper (send on May 5th 2021) in response to the Basel III rules titled – The Impact of the NSFR on the Precious Metals Market.

The protest document, a 58 page explanation of the precious metals unallocated trading market, brought to light some potentially damaging claims to how the precious metals markets operate. One such claim suggests the new rules will “curtail central bank operations” as well as claims that these operations are essential for offsetting storage costs.

The paper insists the new rules will force some clearing banks to “exit the clearing and settlement system, which may even be at risk of collapsing completely.” Perhaps the largest fear of the LBMA and WGC is their expectation the new rules will “prevent LPMCL clearing banks from holding unallocated metal and drain essential liquidity from the clearing and settlement system.”

The rules are expected to go into affect for European banks at the end of June of 2021 and in the UK in January of 2022.

You can read further the document executive summary and link directly to the LBMA website:

The LBMA and WGC response executive summary to the Basel 3 rule changes.
The LBMA and WGC response executive summary to the Basel 3 rule changes.

Unallocated gold and silver products offer investors the chance to buy into a pool of gold and silver credit at a lower cost and premium than owning and storing precious metals in the denomination of their choosing. These unallocated products act as deposits to the bank, similar to a checking and savings account, and become the banks property with the investor holding the liability. The bank then puts the unallocated gold and silver to use for their own benefits.

One of the key uses of unallocated gold and silver at banks is the use of idle stock as reserves. Although a bank is not able to record your property in its reserves, unallocated metals become the banks property and can therefore be used legally. According to the London Bullion Market Association (LBMA) and the World Gold Council (WGC), these unallocated gold and silver deposits are “[…] used by the clearing banks to clear and settle physical metal transactions between market participants. This unallocated metal is fungible and, as such, provides the liquidity of the clearing and settlement system.”

In the case of a bank failure or a financial liquidity crisis, the bank holding your unallocated gold and silver can be forced to sell to pay their own debts and obligations. This counterparty risk exposes the investor to the global credit market.

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