EU finance ministers reject easing out liquidity rules for trading in bullion in Basel III

Basel III regulations are slated to come into force in 2022. While he London Bullion Market Association (LBMA) wants the net stable funding ratio (NSFR) to be at the 50% mark, EU finance ministers want it secured at 85%, to ensure a non-repeat of the 2007-2009 financial crisis. Basel III norms will impact settlements at the London’s bullion clearing system.

A statement from the London Bullion Market Association (LBMA) disclosed that finance ministers from the European Union have rejected a proposal to dilute new liquidity rules for banks trading in gold.

The development assumes significance since the new rules, slated to take effect in the EU at around 2022, could force a few existing players out of the market.

The new rules form part of regulations known as Basel III. They are aimed at making banks more stable and prevent a repeat of the 2007-2009 financial crisis.

The new rules treat physically traded gold like any other commodity, and thus requirs banks to hold more cash to match their gold exposure as a buffer against adverse price movements.

According to the LBMA, they are likely to be costly and would disrupt London’s bullion clearing system, which settles gold transactions worth around $23 billion a day.

Earlier EU finance ministers had rejected a proposal by the European Parliament to lower the percentage used to calculate the liquidity buffer that banks must hold to 50% from 85%. Instead, the European Banking Authority (EBA) will examine whether to lower the percentage or exempt precious metals from the buffer, which is known as the net stable funding ratio (NSFR), said the European Council and the LBMA.

“We are still optimistic,” said Sakhila Mirza, the LBMA’s general counsel,. “While we were hoping for that 50 percent, ultimately our aim has always been getting an exemption.”

According to the LBMA, whose members include major gold refiners and bullion-trading banks, gold is liquid enough not to need an additional liquidity buffer for clearing and settlement and short-term transactions.

The LBMA feels, once the new rules come into play, it could force a number of banks to stop trading or settling in gold, thus curtailing market liquidity.

London is one of the world’s biggest bullion markets.

Significantly, while Britain plans to leave the European Union this year, the EU’s approach is likely to inform how Britain applies the Basel III requirements.


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