REGULATORY & RESPONSIBLE SOURCING DEVELOPMENTSSakhila Mirza, Executive Board Director and General Counsel

Thursday 16 April 2020

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Responsible Sourcing02

LBMA Update03

Financial Services

PM Markets

Trade Reporting Global

Precious Metals Code

Responsible Sourcing

Supply & Capacity

Logistical Challenges

COMEX/Futures

Vaulting Volatility

Benchmarks

Lockdowns

SFTR (3 months)

NSFR (14 months)

Conflict Minerals

Regulation (8 months)

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ES Aims to reduce systemic risk in the Securities Financing Transaction (SFT) market by increasing transparency

Which precious metals transactions are SFTs?

In scope• Financing loans and leases• Spot and forwards if linked and with FCs for financing purposes• BSB – SBB transactions• Repurchase transactions

Out of scope• Physical loans and leases for industrial/operational purposes• Physically settled gold swaps and commodities rolls• Precious metals transfer tickets

Grey area• Spot/forwards if not linked or with NFCs

SECURITIES FINANCING TRANSACTIONS REGULATION (SFTR)

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ESMA delayed reporting obligations until 13 July 2020 and removed backloading obligation

LBMA’s roleTwo Working Groups established: Policy and OperationsMarket guidance has been published to ensure all market participants take the same approach to identified issues:• Operational/industrial exemption and how to apply on a counterparty basis

• FCs: if the transaction is for non-financing purposes, the exemption can be considered.• NFCs: all transactions are assumed to be conducted for operational/industrial purposes. Use

market-standard representation letter to notify counterparty.• Spot/forwards and how to determine whether they would be linked transactions

• First and second legs sufficiently linked and entered into simultaneously with the same counterparty – operational/industrial purpose exemption may still apply

• Consistently reporting SFTs within agreed templates for each SFT and ensuring method for completing data fields is uniform

SECURITIES FINANCING TRANSACTIONS REGULATION (SFTR)

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ESVoluntary reporting helps to understand the role and size of the Loco London market

56 reporting entities, all of whom are LBMA members. Want to extend to beyond LBMA members: Contact David Gornall, Senior Advisor to LBMA

Daily average values for goldNovember 2018 (started 18/11/18) November 2019 March 2020Approx. 20mln oz/$40bn Approx.32mln oz $47bn Approx. 47mln oz/ $83.1bn

Recent daily high of $100bn for gold

Other data sets include (under subscription):• Volume reports for all four metals• Volume break down for spot, forward and options • Volume in price tranches and options reports

Data is available through NASDAQ. Also later stage will be made available through other data vendors

LBMA TRADE REPORTING

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ES85% hair cut for gold (and other precious metals)

What does that mean for the market?• Fall in market liquidity as banks look to potentially exit• Cost of doing business goes up• Settlement service provided by LPMCL becomes impacted

Time of crisisGold behaves as a safe haven – trading volumes have gone up. Plenty of gold in the market!

Data• LBMA trade data has shown gold is a liquid asset. EBA previously had relied on the Amihud

calculation, which if run with the new data, will classify gold as a extremely high quality liquid asset, as its more liquid than EU sovereign bonds

• Amihud - regulators use this ratio to estimate liquidity trends

What’s next? Sharing data with EBA, and using current crisis to demonstrate golds liquidity. Timeline, EBA report to finalise by April 2021. Share data with them by end of summer for meaningful analysis.

NET STABLE FUNDING RATIO

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Public reporting due no later than 1 January 2021

CONFLICT MINERALS REGULATION

Due Diligence Guidance 5-StepFramework

Corresponding article number in the EU Conflict Minerals

RegulationEstablish strong company management systems 4

Identify and assess risk in the supply chain 5

Design and implement a strategy to respond to identified risks

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Carry out an independent third-party audit of supply chain due diligence

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Report annually on supply chain due diligence 7

The Regulation requires companies importing 3TG into the EU to follow the OECD’s five-step framework:

Who is affected?

• All companies (refiners, mints, banks, traders, retailers etc.) importing 100kgs+ of gold into the EU. This includes doré, bars and coins.

• Non-EU suppliers who need to prove to EU importers they source responsibly.

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How can EU importers get ready?

CONFLICT MINERALS REGULATION

ALL importers (banks, traders, dealers, retailers) must identify refiners in gold supply chain.

Source only from refiners/suppliers in compliance with a recognised due diligence scheme (i.e. all LBMA Good Delivery List refiners comply with LBMA Responsible Gold Guidance).

Formalise management systems in line with LBMA Responsible Gold Guidance and OECD Due Diligence Guidance.

Public reporting no later than 1 January 2021.

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FCAKey resource for updates: https://www.fca.org.uk/coronavirusConsultation deadlines postponed to October 2020Actively reviewing firms’ operational resilience and contingency plansKeep up to date on SFTR via their webpage: https://www.fca.org.uk/markets/sftr

ESMAKey resource for updates: https://www.esma.europa.eu/node/90557Coordinating with NCAs to help business continuityClarified requirements on recording of telephone conversations, postponed deadlines, and coordinated the implementation of short selling measuresKeep up to date on SFTR via their webpage: https://www.esma.europa.eu/sections/securities-financing-transactions

UPDATES FROM THE REGULATORS

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Financial Services

RESPONSIBLE SOURCING JOURNEY Review of the last seven years

2012

Responsible Gold Guidance launched

(later to be part of the Responsible Sourcing

Programme)RGG v.1

2014

First set of audit reports received for 2013 production.

2016

OECD launches the pilot programme to

assess industry schemes alignment

with the OECD guidance. (Alignment

Assessment)

2017

LBMA introduces v.6, which is fully aligned with OECD guidance,

This version makes the LBMA toolkit mandatory

2018

Responsible Silver audit received

(mandatory year)

2019

Responsible Sourcing Programme expanded

in scope to include ESG agenda. RGG v.8

LBMA introduces Responsible Silver Guidance, which is

now part of the LBMA Responsible Sourcing

Programme

RESPONSIBLE SOURCING STRATEGY

Creating Trust

Call to Action –engage responsibly in High Risk Area

Greater Transparency

Accountability across the Value Chain

Position LBMA as a leader for the continuous improvement of Responsible Sourcing standards and business practices to ensure a sustainable precious

metals market

Top Priorities

Priorities ActionTransparency Improving Disclosure

External advisor Synergy engaged to lead on disclosure requirements for both LBMA and Refiners.

Audit ProgrammeUpholding Trust

A detailed review of the Approved Service Providers was also conducted end of 2019. Stakeholder engagement for further development

Advancing StandardsDefining Best Practice

improvements in the overall Responsible Sourcing Programme based stakeholder feedback

ASM and high-risk areasEngaging Responsibly

Involved in various market initiatives to support engagement with ASM – has to be a market collective effort

Value Chain Accountability Building Leverage

Working with miners to develop the miner’s toolkit and bullion bank reporting template

https://www.lbmaresponsiblesourcingsummit2020.com/

RESPONSIBLE SOURCING VIRTUAL SUMMIT

Refineries as the 'Gate Keepers'Dr Mark Pieth, Professor of Criminal Law and Criminology at the University of Basel

“I don’t consider de-risking of certain world regions or of ASM in general is a valid option … there are possibly 100m people worldwide depending economically on ASM”

“Independent third party audits are crucial if you want to show your credibility”

“Let’s accept that most refiners are SMEs with limited resources in legal and compliance”

“Need credible due diligence within the supply chain … could specialised third parties do the due diligence of mines on behalf of the entire community?”

“No antitrust issues with collective due diligence by refiners”

Comments received

Generalist auditing firms should be partnering with specialist mining consulting firms.

Standard setters should create an independent body of specialists that reviews the audit to help auditors with the issue of independence.

The creation of an independent body doing third party mine site assessments could create the risk of “externalising” due diligence responsibility.

For on site assessments, compliance officers are not always on top of ASM realities and field research techniques. The risks are so diverse - it can be difficult for compliance staff to know how to spot integrity, social, and environmental risks

https://www.lbmaresponsiblesourcingsummit2020.com/

RESPONSIBLE SOURCING VIRTUAL SUMMIT

Conflict and High-Risk GoldSasha Lezhnev is Deputy Director of Policy at the Sentry

“Conflict gold is an emerging issue for the gold industry”

“Armed groups either control the mines themselves, control the checkpoints or raid the mines”

“Some responsibly mined gold is not accepted by the market yet … important for companies not de-risk. More education needed around these areas”

“Banks need to develop more expertise in trade-based money laundering due diligence and gold refining more generally”

“There need to be consequences for those who trade inn conflict-affected gold”

WGCICMMIRMA

Upstream (Supply) Downstream (Buy)

LSM / MSM

ASM- Illegal- Panners- Coops

Recycled Gold- Electronics- Jewellery- Grandfathered

Intermediaries- Aggregators- Comptoirs- Traders- Exporters- Brokers- Smelters- Transporters

GDL Refiners

Non-GDL Refiners

Bullion Merchants- Bullion banks- Traders

Investors- ETFs- Pension funds- Collectors- Wealth managers

Exchanges

Central Banks

Fabricators/Mints

Industrial

Jewellery

Electronics

ARMCRAFTGEMRAGSFairtradeSwiss BGSolidaridadCanadaAd hoc initiatives

LBMA RGG/RSGDodd-FrankEU regs

LBMAMoney laundering regs

EU regsBullion Bank reporting

RJC

Dodd-FrankRMI

LBMA engagement

Existing mitigation measures

Value chain actor

Key =

Dodd-FrankRBA

OECD

SGEIndia

VALUE CHAIN APPROACH

What role should LBMA play in enhancing the leverage of refiners, banks and key actors/stakeholders to achieve positive outcomes?

TECHNOLOGY DEVELOPMENTS

Further strengthening

the gold supply chain

Security Feature: covert and overt security features to provide confidence in the bar being what it purports to be.

Centralised Database: For all bars to help address any potential fraud issues

Identifying a technology-based market solution that addresses the risk of duplicate and/or counterfeit bars, as well as the risks arising in relation to supply chain provenance. This initiative builds on the LBMA’s Responsible Sourcing Programme.

LBMA is working with partners and other markets around the world to ensure that we are continuing to advance standards for the common good of the global industry.

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LBMA UPDATELBMA’s role in maintaining market continuity

Delivering more information more regularly and supporting market development

LBMA RulebooksFor Members and AssociatesFor Good Delivery Refiners

Global Precious Metals CodeSets out best practice for market participants in promoting and maintaining market integrityMarket Participants are encouraged to review their compliance with the CodeParticularly the principles under Business Conduct: Pre-Trade and Execution

Engagement Infrastructure providers, market participants, stakeholders, media, regulators and authorities

THANK YOU

SAKHILA.MIRZA@LBMA.ORG.UKWWW lbma.org.uk

@lbmaexecutive

LBMA

LBMA