Precious Metal Markets

John Glen Excerpts

Monday 8th July 2019 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

I thank my hon. Friend the Member for Stafford (Jeremy Lefroy) for raising a set of complex but important issues with the rigour and grasp of detail in his analysis that has characterised virtually every speech that I have heard him make in his nine years in the House. I listened carefully to what he said and I am grateful for our earlier conversation, which helped me in preparing what I hope is an appropriate response to the points that he has raised. Although I cannot comment on individual cases, I would also like to express my sympathies for the constituent whose experience he referred to.

The precious metals market is an important part of our economy, as my hon. Friend said, and London is one of the most important gold trading centres in the world. They and markets like them have a real impact on individuals, households and businesses, which includes his constituent. Those markets underpin borrowing costs, exchange rates and the cost of food and raw materials, and they help firms and households to manage financial risks and investments. A well-functioning derivative market fulfils a vital role in that process.

[Jeremy Lefroy]

One point that I should have mentioned but did not is that precious metals, probably with the exception of gold, have many other uses—silver in antimicrobial products and platinum and palladium in exhaust pipes and reducing emissions—so they are extremely important, both as a store of value and in having real practical uses.

[John Glen]

My hon. Friend is absolutely right and draws attention to the ever-expanding functional use of these metals in ever more sophisticated ways.

Precious metals allow businesses around the world to hedge their risks by reducing uncertainty about future prices. For example, a mining company can agree a price today for the gold that it will extract in the next year, safeguarding itself against potential future price movements and providing certainty over its income. Attempted market manipulation, such as the type that occurred in the US, undermines integrity, reduces public confidence and impairs the effectiveness of the financial markets. We take this extremely seriously, and it is therefore vital that we do everything in our power to detect and prevent such abuse.

Additionally, gold plays an important role in nations’ reserve policy. The Treasury’s role is to ensure that its choice for the strategic composition for the benchmark asset allocation of the reserves, including gold, meets the policy objectives of the exchange equalisation account.

My hon. Friend raised several important questions, which I will attempt to answer. I want to refer first to the significant volumes of derivatives and his question about the potential risk for financial systems. Derivatives are an important risk management tool and are used to hedge positions in underlying assets against adverse movements. They allow financial institutions to identify, isolate and manage separately the market risks in financial instruments and commodities. It is internationally recognised in forums such as the G20 that derivatives need sound risk management. Global financial regulators work to ensure that the derivatives market has robust oversight, monitoring, reporting and controls. In the EU, the legislative framework, which includes the market abuse regulation and the markets in financial instruments directive, does this.

The market abuse regulation, or MAR, provides the Financial Conduct Authority, as the relevant national competent authority, with the powers it needs to detect and prevent financial market abuses, such as insider dealing, unlawful disclosure of inside information and market manipulation. The regulation has been regularly revised and updated, most recently three years ago in 2016. MAR covers all financial instruments traded on regulated markets, multilateral trading facilities and organised trading facilities in the EU. It also covers financial instruments not traded on such markets, where the instrument’s price or value is dependent on the price of a financial instrument traded on a regulated market, multilateral trading facility or organised trading facility. Included in this scope are exchange-traded commodity derivatives. This means that gold futures, for example, are in scope of MAR.

MAR imposes stringent requirements on UK trading venues and firms, which have a duty to detect and report market manipulation. Trading venues and firms are required to establish and maintain effective arrangements, systems and procedures to prevent and detect all types of market manipulation.

--- Later in debate ---

Motion made, and Question proposed, That this House do now adjourn.—(Iain Stewart.)

[John Glen]

These arrangements must allow for the analysis of each and every transaction executed, and order placed, modified, cancelled or rejected. UK trading venues are also obliged to report to the FCA, immediately upon detection, all orders and transactions, including any cancellations or modifications, that could constitute market manipulation, attempted market manipulation or any other type of market abuse.

[Jeremy Lefroy]

Is my hon. Friend able to confirm whether there has been any indication, not necessarily just in precious metal markets, of this nefarious practice of spoofing within markets in the UK?

[John Glen]

I am just coming on to that, and I will make reference to some of the observations that have been made.

We are confident under MAR that where market abuse behaviour relates to exchange-traded commodity derivatives, as in the J.P. Morgan case, we have robust transparency systems and controls in place. Furthermore, in terms of enforcement, there have been examples in similar markets where traders have been caught attempting a similar type of market manipulation. For example, in 2013 a trader was fined almost £600,000 by the FCA for the manipulation of exchange-traded oil and gas futures.

The recent J.P. Morgan manipulation case in the US involved activity on a US-regulated exchange. The FCA’s regulatory scope obviously does not extend to oversight and enforcement in the US market. The FCA’s remit covers instruments traded on UK markets. The US authorities, therefore, have a remit over this behaviour, and it is in their competence to act against it on behalf of consumers.

On the manipulation of bullion markets, it is important to distinguish between the underlying market for commodities and the market manipulation of exchange-traded commodity derivatives. With regard to the former, precious metals are global commodities, where price is determined by the forces of demand and supply.

It should be noted that the Government have already taken action to ensure that specific commodity benchmarks for price setting are in scope of the market abuse regime. The London Bullion Market Association gold price and silver price—the global benchmark prices for unallocated gold and silver delivered in London—are within scope of the UK’s domestic benchmarks regime, which is the world’s first framework for regulating benchmarks. This means the administrators of those benchmarks, and those firms submitting to them, became subject to FCA authorisation and regulation. Manipulating the benchmarks is a criminal offence. The benchmarks are also regulated under the EU benchmarks regulation, which will supersede the UK regime when it comes fully into force in 2020.

My hon. Friend raised the potential risk of “paper gold” contracts, which are designed to reflect the market price of gold. Investors may use the contracts for hedging or speculative purposes, and without any overall intention to receive or deliver the physical asset. For example, a customer may have a claim on a bullion bank account provider for an amount of gold without physically possessing it.

This type of activity, relating to unallocated gold, does not guarantee an equal exchange for metal. Therefore, the risk that delivery is not met as part of the contracts should not undermine the overall market, given that this delivery is not guaranteed and the risk is priced into the instrument.

The Government commissioned the “Fair and Effective Markets” review in 2014 to restore trust in fixed income, currency and commodities markets. This review made several recommendations for the commodities markets, including the benchmark reforms I spoke of earlier. The review also established the FICC Markets Standards Board—the FMSB—an industry body to improve standards in wholesale fixed income, currency and commodities markets. The FMSB has already produced several industry-led standards and statements of good practices that have seen widespread adoption. The FMSB also supported work by the London Bullion Market Association to develop and issue the global precious metals code in May 2017. The code applies to the LBMA’s members’ dealings in the bullion market. It sets out the standards and best practice expected from market participants in the global wholesale precious metals market. It covers a wide range of topics, such as conduct, information to clients and the avoidance of market abuse. The code applies to LBMA members, who must publicly attest their compliance with it.

To conclude, I am confident that the robust regulatory framework in place in our country provides the FCA with the right tools in its regulatory perimeter to detect and respond to these attempts and ensure that the market works in a way that is fair and effective for all who wish to participate. I thank my hon. Friend for raising these important issues in the manner that he has. I trust that this response gives him considerable confidence in the sophistication of the regulatory regime that we have in place. There is never room for complacency in these matters. I acknowledge the concerns he has raised and I will take them on board as we look to the future.

[Mr Speaker]

Thank you. The Minister does speak in a most learned fashion on these important matters, responding in kind to the hon. Member for Stafford (Jeremy Lefroy), both of whom have benefited from tutorials from those who are in a position to proffer advice, from a Department renowned for its intellectual cream.

Question put and agreed to.