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LONDON: Which is the biggest Over-the-Counter (OTC) market for gold and silver in the world? It is the bustling city of London where bullion trade in the OTC market continues to boom, often beating futures trading in gold and silver.

According to a posting from the London Bullion Market Association (LBMA), the capital city of United Kingdom is the focus of the global OTC market for gold and silver, with a client base that includes the majority of the central banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.

Members of the London bullion market typically trade with each other and with their clients on a principal-to-principal basis, which means that all risks, including those of credit, are between the two counterparts to a transaction. This is known as an ‘Over the Counter’ (OTC) market, as opposed to an exchange traded environment.

The London bullion market is a wholesale market, where minimum traded amounts for clients are generally 1,000 ounces of gold and 50,000 ounces of silver.

Unlike a futures exchange – where trading is based around standard contract units, settlement dates and delivery specifications – the OTC market allows flexibility. It also provides confidentiality, as transactions are conducted between the two principals involved.

Records trace bullion transactions in London back to the 17th century with the formation of the oldest original member of the market, Mocatta and Goldsmid, in 1684. It was, however, the introduction of the London Silver Fixing in 1897 and the London Gold Fixing in 1919 that marked the beginning of the market’s structure and of the co-operation between members that has created the marketplace as it is today.

The five members of the London Gold Fixing dominated the UK marketplace until 1980 when, fuelled by oil price inflation and spiralling international tension, gold reached $850 per ounce and silver $50. The level of activity and profitability in the market drew increasing global attention, which resulted in an influx of international players to London and set the market on course to become the centre of the international arena that it is today.

The growth in the number and type of market participants in the early 1980s, combined with the introduction of the Financial Services Act in 1986, brought about the formation of the LBMA in 1987.

The LBMA is the London-based trade association that represents the wholesale gold and silver bullion market in London. London is the focus of the international Over-the-Counter (OTC) market for gold and silver, with a client base that includes the majority of the central banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.

The LBMA was formally incorporated in 1987 in close consultation with the Bank of England, which was the bullion market’s regulator at that time. The primary regulator for the bullion market in the UK is now the Financial Services Authority, with which the Association maintains a close working relationship.

The LBMA Good Delivery List is now widely recognised as representing the de facto standard for the quality of gold and silver bars, in large part thanks to the stringent criteria for assaying standards and bar quality that an applicant must satisfy in order to be listed. The assaying capabilities of refiners on the Good Delivery List are periodically checked under the LBMA’s Proactive Monitoring programme.

The ongoing work of the Association encompasses many areas, among them refining standards, trading documentation and the fostering of good trading practices.

Some examples:

• In the refining industry, the LBMA Good Delivery List is widely recognized as representing the de facto standard for the quality of gold and silver bars, in large part thanks to the stringent criteria that an applicant must satisfy before being listed. In January 2004 the LBMA introduced proactive monitoring of refiners on the List, an important initiative which further enhances the reputation of the List and the refiners on it.

• In conjunction with the foreign exchange and money markets in London, the Association has developed the Non-Investment Products Code, which provides a code of conduct by which all Members and Associates are required to abide.

• The LBMA’s annual Precious Metals Conference is now the premier professional forum for the world’s bullion market.

With inputs from reports from London Bullion Market Association

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