Precious Metal Markets

John Bercow Excerpts

Monday 8th July 2019 Commons Chamber

[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.