Why Have Chinese Banks Disappeared From LBMA Gold Auctions?

There has been an unprecedented departure of all the Chinese banks from the LBMA Gold Price auctions.

These departures have gone uncommented by the LBMA, the FCA, the mainstream media, the auction administrator ICE Benchmark Administration, and by the Chinese banks themselves.

The exit of the Chinese banks raises questions as to what this has done to the auction liquidity and price discovery as the auctions are not reflecting supply and demand of gold from China – the world’s largest gold miner, gold importer and gold consumer.

Fox Guarding the Henhouse

When the twice daily LBMA Gold Price auction was launched on 20 March 2015 to replace the infamous and manipulated London Gold Fixing, one of the mantras from the ‘Fox Guarding the Henhouse’ London Bullion Market Association (LBMA) at that time was that the new improved auction would include an expanded list of participants beyond the old ‘Gang of 5’ cartel of Fixers which had been Barclays, HSBC, Société Générale Scotia and Deutsche Bank.

The strategy was to ditch the tainted London Gold Fixing auction and let the banks operating The London Gold Market Fixing Limited to step back into the shadows, while wheeling out an all new singing and dancing LBMA Gold Price auction.

This news auction would be independently administered on an electronic auction platform, but with LBMA “owning the intellectual property rights."

The administrator chosen to run the LBMA Gold Price auction was ICE Benchmark Administration (IBA). The LBMA incorporated a company called ‘Precious Metals Prices Limited’ on 1 December 2014 to manage the intellectual property rights of the LBMA Gold Price, as well as the intellectual property rights of the LBMA Silver Price, LBMA Platinum Price, and LBMA Palladium Price.

This “Precious Metals Prices Limited” company was established by LBMA CEO Ruth Crowell and LBMA legal counsel Sakhila Mirza, both of whom are still company directors of this company.

The rebranded LBMA Gold Price auction also had one important regulatory change, namely that the LBMA Gold Price became a regulated benchmark under the supervision of the UK’s Financial Conduct Authority (FCA).

Chinese Banks Welcomed: 2015 – 2016

In the run-up to the re-launch of the “same old wine in a new bottle” in February 2015, Finbarr Hutcheson, the then president of ICE Benchmark Administration (IBA) – which was awarded the contract to administer the new look auction – said that “expanding the number of participants in the auction will increase the transparency and robustness of the data used to calculate the benchmark, giving a better representation of the market price.”

In the same press release, the then and now LBMA CEO Ruth Crowell added that:

“I’m delighted to see a high level of interested participants for the March launch. The intention and the interest has been very positive and creates a more diverse pool of participants which includes Chinese banks. We look forward to having enhanced numbers of participants for day one for the LBMA Gold Price.”

When it came to the crunch, only cartel insiders such as Goldman Sachs and JPMorgan became additional direct participants in the auction from ‘day one’, as no Chinese banks were allowed to join the LBMA Gold Price auctions from ‘day one’ even though Bank of China, the Industrial and Commercial Bank of China (ICBC), and China Construction Bank (CCB) were fully eligible. See BullionStar article from 13 March 2015 “Chinese Banks as direct participants in the new LBMA Gold and Silver Price auctions? Not so fast!”.

However, these three massive Chinese banks did join the daily ‘unallocated gold’ LBMA Gold Price auctions in piecemeal fashion over the next 15 months during 2015 and 2016.

First was the LBMA member Bank of China in mid June 2015. This was such a momentous event that it garnered significant financial media coverage across the world from China to London to New York and everywhere in between.

On 16 June 2015, the Financial Times lauded the development as follows:

“A Chinese bank will join the group of western banks that help set the price of gold in London, giving the world’s biggest consumer of the precious metal a greater say in the process.

State-owned Bank of China’s participation in the twice daily auction, which gold miners and consumers use as a benchmark, will allow the international price to better reflect supply and demand in China, the bank said.

“Although being the world’s largest gold producer and consumer, China has never played a major role in the global gold fixing,” Yu Sun, general manager of Bank of China’s London branch said.

Adding a Chinese bank reflects the shift in gold demand to Asia…Bank of China’s direct participation will also help the Chinese gold market become more international, Mr Yu said.

Then on 30 October 2015, the second Chinese megabank and LBMA member, China Construction Bank (CCB), joined the LBMA Gold Price auction, an event even covered by the Wall Street Journal, which said:

“China Construction Bank Corp. will become the second Chinese bank to join the group of lenders setting the benchmark used to price billions of dollars’ worth of daily gold trades.”

Commenting on the addition of CCB, the then president ICE Benchmark Administration (IBA), Finbarr Hutcheson, said:

“We are delighted to welcome China Construction Bank as a direct participant to the gold auction. The LBMA Gold Price has seen increased underlying liquidity this year which is helping attract further new participation…"

Shenzhen Government, SGE, China Gold Association & Shanghai Futures Exchange call for delegates to support China’s role as biggest gold consumer & producer of gold by responsible sourcing, promoting Chinese pricing methods & engaging with China’s innovative financial instruments.

— LBMA (@lbmaexecutive) October 14, 2019

Then on 11 April 2016, it was announced that the third Chinese megabank, Industrial and Commercial Bank of China (ICBC), – also a LBMA member – would join the LBMA Gold Price auction starting on 16 May 2016.

In a press release, ICBC said that:

“China is the largest producer and the second largest consumer of gold. ICBC’s role of LBMA gold fixing prices marks an important leap of China’s gold market towards globalization, and will further strengthen China’s impact in global precious metal market.”

Around the same time, ICBC Standard Bank PLC (a subsidiary controlled by ICBC), became a member of the London ‘paper’ precious metal clearing system known as London Precious Metals Clearing Limited (LPMCL).

Commenting on the addition of ICBC to the LBMA Gold Price auction, the then president of ICE Benchmark Administration (IBA), Finbarr Hutcheson, was back, and in a press release said:

“We welcome ICBC’s participation in the LBMA Gold Price. ICBC brings the total to thirteen direct participants, a quarter of which are Chinese firms.”

While the then and current LBMA CEO, Ruth Crowell said that:

“I am very pleased to welcome the third Chinese bank to join as a direct participant in the auction process. This demonstrates the international appeal and liquidity of the auction.”

But there’s more, for on 7 June 2016, it was announced that a 4th Chinese megabank, Bank of Communications, would join the LBMA Gold Price auction starting on 8 June 2016. Bank of Communications had become a full member of the LBMA a year earlier on 6 July 2015, and so was eligible to be a direct participant in the ‘gold’ auction’.

By now you know the drill. Finbarr Hutcheson, the then President, ICE Benchmark Administration, was back, welcoming Bank of Communications to the auction, and he said that:

“We are pleased to welcome Bank of Communications to the gold auction.

The increased interest from firms in China to participate in the auction demonstrates the growth in importance across the globe of the LBMA Gold Price.”

Ruth Crowell, LBMA CEO also acknowledged the addition, saying that:

“I am pleased to welcome the Bank of Communications as the fourth Chinese bank to join the LBMA Gold Price. ” 

Why are the 3 big Chinese banks no longer participating in the LBMA Gold Price auctions?

ICBC, Bank of Communications and Bank of China.

Did they get booted out by the LBMA or did they scarper once they realised the pricing is rigged?

Enquiring minds would like to know. pic.twitter.com/QEWI7paqKX

— BullionStar (@BullionStar) October 4, 2023

Chinese Banks Disappear: 0 + 4 = 4 – 4 = 0

So far so good. This addition of four of China’s largest banks, all of which are heavily involved in the Chinese gold market, to the daily LBMA Gold Price auctions over 2015-2016, was a major shift in the gold benchmark price setting process, and signalled that the Chinese banks had arrived on the global stage.

On the LBMA website, it clearly stated that there were 4 Chinese banks in the LBMA Gold Price auctions:

At one stage in 2017, there were 4 Chinese banks in the LBMA Gold Price auction, as the LBMA stated:

“The direct participants who have been accredited to contribute to the LBMA Gold Price are: Bank of China, Bank of Communications, China Construction Bank*, Goldman Sachs International, HSBC Bank USA NA, Industrial and Commercial Bank of China (ICBC), INTL FCStone, JP Morgan, Jane Street Global Trading LLC, Morgan Stanley, Societe Generale*, Standard Chartered*, The Bank of Nova Scotia – ScotiaMocatta, The Toronto Dominion Bank and UBS*. (*Date of participating in the cleared auction to be determined)."

Given the above, I think you’ll agree that its rather odd and suspicious then that all of these Chinese banks have recently disappeared from the LBMA Gold Price again. Yes, that’s correct. They have all disappeared.

At the current time, there is not even one Chinese bank left in the London gold auction. The most recent to leave was Bank of China, where ICE Benchmark Administration (IBA) bizarrely claims that Bank of China itself requested that it be temporarily suspended from the LBMA Gold Price auctions.

This is stated on the IBA website under the Auction Participant list where an asterisk next to Bank of China’s name is explained to mean “* Subject to a temporary period of suspension as requested by Bank of China."

Who ever in the history of the world requested a self-suspension? No one.

When I recently pointed out this bizarre development to some interested parties, they also noticed that ICBC and Bank of Communications had completely disappeared from the current auction participant list.

As recently as July 2022, both Bank of Communications and ICBC, along with Bank of China, had all been on the list of Current Auction Participants. See screenshot below.

The LBMA website page which has an Accredited List of participants still lists Bank of China and ICBC, but that list is very out of date as it doesn’t even mention three of the current participants, namely Virtu Financial, Edgewater Markets and Koch Commodities Europe Ltd.

China Construction Bank

A quick word about the 4th Chinese bank, China Construction Bank. China Construction Bank left the LBMA Gold Price auction along with three other banks in April 2017 and appears to have never returned. The four banks – China Construction Bank, UBS, Standard Chartered and Societe Generale – left the auction at that time (or were suspended) as they refused to adapt their systems to embrace a change where ICE had introduced trade clearing into the auction using ICE Gold Daily Futures contracts.

ICE had made this change to counter the impending launch in July 2017 of cleared gold futures contracts by rival the London Metal Exchange (LME). Both ICE and the LME introduced these futures (as they said) so as to offer participants an ‘on exchange’ clearing option in light of higher regulatory capital requirements for clearing /trading off exchange.

At the time (in May 2017), Reuters said that:

“UBS, Standard Chartered and Societe Generale are highly unlikely to rejoin the auction, according to three sources familiar with the matter."

In the case of Standard Chartered, this proved not true, as Standard Chartered is currently back in the auction as a direct participant. See list.

In the case of China Construction Bank (CCB), it looks like CCB left the auction in 2017 and did not return. But that was for a different reason and that was more than 6 years ago.

Crickets from IBA, LBMA, FCA, MSM

When the Chinese banks joined the LBMA Gold Price auction during 2015 – 2016, there was, as you can see above, much fanfare and publicity, from the LBMA, from ICE Benchmark Administration and from the mainstream media. Now when the Chinese banks have all departed there is complete silence. Crickets.

And also silence from the UK regulatory the FCA. Surely the regulatory authorities have a view on why three huge Chinese banks that are heavyweights in the gold market have suddenly left one of the most important Regulated Benchmarks, a benchmark which in fact the FCA itself regulates?

In short, nothing has been publicly disclosed on these developments, which is very suspicious. So there has been no transparency and there has been no administrator or regulatory accountability for these developments.

There is also the issue of benchmark liquidity and price discovery. Back in 2015-2016, the IBA was clamouring to point out that the addition of Chinese banks into the auctions would “increase the transparency and robustness of the data used to calculate the benchmark" and “give a better representation of the market price.”

So now that the Chinese banks have disappeared, this implies that there is a decrease “in transparency" and a worse “representation of the market price." And all the while the LBMA Gold Price is used in everything from the daily valuation of gold-backed to ETFs to the valuation of billions of dollars worth of ISDA gold swaps and other gold derivatives, to the strike prices of options, to the month-end valuations of central bank gold holdings.

Back in 2015, the Financial Times was gushing to point out that the addition of Chinese banks to the auctions would “give the world’s biggest consumer of the precious metal a greater say in the process“, and that it would, in the words of the Bank of China “allow the international price to better reflect supply and demand in China."

So now that there are zero Chinese banks as direct participants in the LBMA Gold Price auction, this “gives the world’s biggest consumer of the precious metal" no say “in the process", and “the international price" does not “reflect supply and demand in China."

Back in May 2017, Reuters even commented on what happened when 4 banks left the LBMA Gold Price auction:

“Lower liquidity – which fuels volatility – led to the benchmark diverging more widely from the underlying spot price, according to the analysis of ICE and trading data, leaving gold buyers and sellers around the world with large unexpected gains or losses."

Fast forward to now, and maybe the lack of Chinese banks in the London auctions is a contributory reason as to why the Shanghai gold premium has diverged so much lately above the LBMA Gold Price.

Shanghai Gold Premium (vs London LBMA paper price) still elevated near all time highs pic.twitter.com/WZSDefcOZL

— BullionStar (@BullionStar) September 28, 2023

By the way, there are still 8 Chinese banks listed as full members of the LBMA, but none of them are direct participants in the LBMA auction. These 8 banks are:

– Bank of China – listed as a UK company (suspended from LBMA auction)

– Bank of Communications, China Construction Banking Corp, ICBC (ex LBMA auction) – listed as Chinese companies

– China Minsheng Bank, Industrial Bank Co, Ping An Bank, Shanghai Pudong Development Bank (never were direct participants in the auction) – listed as Chinese companies

But interestingly, none of these 8 banks were listed as being delegates at the recent LBMA/LPPM conference this month in Barcelona. Even Bank of China was not listed as being there, whose CEO is Wenjian Fang and who is on the LBMA Board of Directors.

Do the Chinese bank departures from the LBMA auctions have a geo-political rationale? And why are no Chinese banks direct participants in the LBMA Silver Price auction?

And for that matter why are no Chinese banks direct participants in the LBMA Platinum Price auction and LBMA Palladium Price auction, the latter 2 of which are controlled by a cartel of (BASF, Goldman Sachs, HSBC, ICBC Standard*, Johnson Matthey and StoneX). *Only ICBC has an indirect link.

And what do the Chinese authorities think of these developments about the auctions? Maybe the Chinese authorities actually told the Chinese banks to exit the auction, so as focus on bigger fish to fry using the physically determined Shanghai Gold Benchmark on the Shanghai Gold Exchange, as opposed to the trading of unallocated synthetic gold (gold credit) in the LBMA ‘Gold’ Price auction.

Conclusion

As an experiment, and to validate that I wasn’t being biased, I asked the normally non-committal ChatGPT 3.5 what it thought of the disappearance of Bank of China and the other Chinese banks from the LBMA Gold Price auctions.

My Question – “What do you think of the news that ICE Benchmark Administration claims that the Bank of China itself requested that it be suspended from the LBMA Gold Price auction ( *Subject to a temporary period of suspension as requested by Bank of China), and especially in the context that there were 3 Chinese banks in the auction (Bank of China, Bank of Communications, ICBC) and now there are none?”

ChatGPT answer – “The news that ICE Benchmark Administration (IBA) claims that the Bank of China itself requested its suspension from the LBMA Gold Price auction is highly unusual and noteworthy.

The probability of a major financial institution like the Bank of China voluntarily requesting its own suspension from such an auction is extremely low.

In the context of financial markets, suspensions are typically imposed by regulatory authorities or exchanges in response to various factors.

This event is unique and raises questions about the specific reasons behind the Bank of China’s suspension and the role of regulatory authorities in this matter.

The absence of all Chinese banks, including Bank of China, from the auction after previously participating is also a significant change that warrants further scrutiny and investigation by relevant financial industry regulators and media so as to ensure transparency and integrity in the functioning of financial markets.”

So there you have it. Even the annoyingly C3PO-like AI chatbot that quite often prevaricates like a diplomat, for once has a definitive answer. Over to the MSM for an investigation.