4. Can you provide a specific example of where a bailment agreement may be used with regard to daily gold transactions? 

Yes.

1.  London Bullion Market Association

On May 5, 2021, the London Bullion Market Association (LBMA) and the World Gold Council (WGC) submitted a letter to the UK Prudential Regulation Authority (PRA) regarding Basel III and the impact of the Net Stable Funding Ratio (NSFR) on the gold market.

2. Delay in Basel III Implementation

Before delving further, it’s important to note that on January 17, 2025, the PRA, in consultation with HM Treasury, announced a one-year delay in the implementation of Basel 3.1 in the UK, moving the effective date to January 1, 2027. This extension was granted to allow time for greater clarity on the United States’ own implementation plans.

3. Focus of the Letter

Although the letter primarily addressed the NSFR provisions in Chapter 12 of the consultation paper—and the unintended consequences these would have on the precious metals market—it also provided valuable insight into the operation of the London Precious Metals Clearing Limited (LPMCL).

4. Key Insights from the Letter

• LPMCL Overview: LPMCL, a not-for-profit organization, is responsible for the clearing of precious metals in the London Bullion Market. It is owned and operated by four LBMA clearing members: HSBC, ICBC Standard Bank, JPMorgan, and UBS.
• NSFR Exemption Request: The letter requested an NSFR exemption for precious metals held by LPMCL members in connection with clearing services.
• LPMCL’s Advice to the PRA: The LPMCL advised the PRA of the following:
  • Unallocated gold, when deposited or lent, is treated as a currency by market participants.
  • When gold functions as a currency, it requires no cash funding when used as the underlying asset in financing transactions.
  • If properly recognized, gold loans backed by equivalent deposits from central banks and financial institutions should not be adversely affected by NSFR.
  • The PRA should consider reclassifying gold as an Extremely High-Quality Liquid Asset (HQLA).

5. Allocated vs. Unallocated Metal

• Allocated Metal:
  • Assigned to specific owners.
  • Not recorded as an asset or liability by clearing banks.
  • Held off-balance sheet and excluded from Required Stable Funding (RSF) calculations.
• Unallocated Metal:
  • Not assigned to specific owners.
  • Treated as an asset on the clearing bank’s balance sheet, with the depositor considered an unsecured creditor.

6. Gold as a Currency

The letter also includes four examples illustrating that cash is not required for precious metal transactions, particularly in lending and borrowing. It states: “Gold is a unique asset class, which can behave like a commodity but also as a currency. In all lending/borrowing scenarios, gold is always treated as the currency. A common misconception is that gold has no interest rate. In reality, market participants address funding requirements—driven by price and time risk—through gold-denominated loans. Lending and borrowing gold is standard practice in the precious metals market.”

7. Broader Implications

The letter demonstrates three key points:

1. The fundamental characteristics of a bailment agreement.
2. The treatment of gold as a currency in financial transactions.
3. How an off-balance sheet asset—such as the Philippine gold—can be brought on-balance sheet through a bailment agreement structured as a lending/borrowing arrangement.

8. Final Note

The LPMCL and LBMA jointly reported that, in February 2025, more than 20 million ounces of gold—valued at over USD 60 billion—were cleared daily through the London market..