JPMorgan And Citi are 90% of The U.S. Gold Derivative Market

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by VBL
Saturday, Jul 09, 2022 - 21:52

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Due to Accounting Changes, JPMorgan had $330 billion in March 2022 vs. $28 billion in Dec. 2021– an increase of over 1,000%.

The public is treated like mushrooms: kept in the dark and fed a lot of sh*t. But every once in a while the door opens and we get to see what is really going on.


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  • Gold derivative risk exposure held by FDIC banks jumped 520% in one quarter
  • This was due to an accounting change where Gold derivatives were previously grouped in with Exchange-Rate currency contracts
  • As a result, JPM’s observed exposure jumped by over 1,000% from December 2021, to March 2022
  • JPM and Citi have had 90% of the Gold market derivative risk with almost all of it categorized elsewhere for some time.

The Chart

About midweek last a chart reflecting changes in bank holdings of precious metals derivatives began circulating. It has caused much speculation as to the reason for an enormous jump in amounts of derivatives held by US FDIC insured commercial banks in 2022.

Here is our attempt to explain: what it is, what happened, what it implies, and why it exists. Nobody has a monopoly on the truth. We want to shine some light, get the conversation going and minimize the noise.

Table of Contents

  1. What it is.
  2. JPMorgan And Citi are 90% of The Gold Market
  3. Why The Change?
  4. Where were Gold Derivatives prior to the change?
  5. Why were they “Exchange Rate Risk” Before?
  6. What Advantage did this Give Banks?
  7. Why is This Wrong?
  8. Footnotes


1- What it is.

The above graph is a representation of precious metals derivative contracts outstanding to which a US Bank is counterparty. The Office of the Comptroller of the Currency (OCC) releases this report (attached at bottom) quarterly, listing derivatives held at Wall Street and other US Banks. It is a derivative accounting report (without risk recommendations) for our whole banking system (end excerpt).

Gold Derivatives Outstanding ending March 31st, 2022 ( Dec 31, 2021 inset)…

For the first quarter (90 days) of 2022, the number of Gold derivative contracts jumped by an astounding 520% from 79.28 billion to $491.86 billion. Did activity increase that much? No. Is something going on? Yes. There was an accounting change. The prima facie reason for this, as stated by the OCC is in a footnote highlighted below.

Starting January 1st, 2022, the largest banks became required to move all gold derivative risk, not currently in the “Precious Metals” risk category pictured above into that very category. Which Banks had the biggest changes? JPM, Citibank, and Goldman1 did. But JPM and Citi really stood out. (end excerpt).

The report in question…


2- JPMorgan And Citi are 90% of The Gold Market

The two banks that stand out and carry the lion’s share of changes are JPMorgan and Citi. JPMorgan Chase rose $330 billion as of March 31, 2022 and Citibank held $114 billion in precious metals derivatives.

Notional Derivative Contracts Held by Banks at end of March 2022

Continues Here...


3- Why The Change.

Why would a Gold option/future be classified as an “Exchange rate contract” to begin with?

Last year, more or less, the rule change under Basel 3 in Europe forced Bullion banks and their customers to restate Gold derivative risk as notional2. Simply put, using notional value deleverages a position for risk purposes. Even more simply: banks had to answer this question: “How much can you really lose if it goes all to hell?”. This Basel 3 change necessitated banks either: set aside more risk capital,... (end excerpt)

Banks Get Bullion Bypass Friday Night

1-Britain carves out exemption for gold clearing banks from Basel III rule: Banks clearing gold trades in London can apply for an exemption from tighter capital rules due in January 2022, a British regulator said on Friday, removing what some said was a threat to the functioning of the market.

That was a year ago. Now the US is getting it’s own golden ducks in a row given the new reality out of Russia and possibly China.

Russia Forced Our Hand

The OCC accounting change is, in our opinion, an attempt to bring uniformity (with Basel 3) to Western governance of Gold (remonetized) derivatives. It solidifies our position on the west’s Gold and potential back door destabilization during times of war. This action also discourages regulatory arbitrage by Banks between the EU and US markets as well.

It is very consistent with a world where a mercantile behavior is the norm as a result of diminished trust along nations. Much more on that in our write up entitled Gold: "A crisis is unfolding. A crisis of commodities"- Zoltan Pozsar:

..if you believe that the West can craft sanctions that maximize pain for Russia while minimizing financial stability risks and price stability risks in the West, you could also believe in unicorns.- Source

Zoltan’s version of Exeter’s pyramid….

From that analysis, Pozsar explained in his own way that without collateral (an effect of sanctions on Russia as war retaliation), financial markets must shrink or destabilize. The accounting change is an attempt to protect the real players and dissuade speculators. Continues Here...


4- Where were Gold Derivatives prior to the change?

Gold contracts are to foreign exchange contracts what zebras are to a centipede.- Pam and Russ Martens' Wall street Parade

That is a question easily answered with a little digging, but harder to understand the “Why were they there to begin with?” follow up. We will try to answer both questions.

A section of the footnote pictured above answers the Where were they? question. It states (our emphasis):

“Beginning January 1, 2022, the largest banks are required to calculate their derivative exposure amount for regulatory capital purposes using the Standardized Approach for Counterparty Credit Risk …(excerpt)

What is an Exchange Rate Contract?

It is a form of swap for one monetary unit to another that is also linked to exchange rates. It can be in the form of swap, option, swaption, etc. But it has to do with interest rates on foreign currencies.Continues Here...


5- Why were they “Exchange Rate Risk” Before?

The broad simple answer is: the market structure had a flaw in it, possibly set up this way for good reason back in the day4 (although we severely doubt it was kept like this so long for justifiable reasons). But why were they accounted for like interest rate swaps?

One Possible Explanation

If physical gold wasn’t money since 1971, why were its derivatives bucketed with Forex risk even while the asset itself became demoted to a cash and carry commodity? And what, if any interest rate trades were conducted using Gold as collateral5?

One possible explanation: Once upon a time before the 1990s Gold was treated like money by banks, even if the gold standard ended in 1971. We believe this categorization may have something to do with a legacy rule that they never changed once gold was demonetized. (end excerpt).

Exchange Rate Risk minus Gold still went up in Q1…

It was probably successfully lobbied at some point by Bullion Banks that Gold derivatives are really proxies for FX market trades, and not so much a call on physical bullion itself, since noone ever took delivery. Almost noone took delivery, so it’s not bullion risk as much as it is interest rate risk? Fancy that!  Continues Here...


6- What advantage did this give Banks?

You would have to ask Banks for specifics but here is our take as long time participants in the industry with some academic knowledge6.

Categorizing Gold derivatives not as Gold lowers stated capital at risk for carrying gold positions. When you (a bank) combine that with ability to borrow from the Fed, your ROI under VaR explodes higher. Further, if your clients are:

  • marking their books to market daily while you are not,
  • borrowing off their Visa/ Mastercard while you have access to the Fed,
  • and unable to allocate their own risk in a non-notional way while your risk is placed under “exchange rate risk”

What About that Risk?

Your shareholders never knew you had 90% of the whole Gold derivative market risk on your books. But let’s face it, your bank was so plugged in to the market that you’d see a problem from miles away. You were the conduit of all trade. You are the house. Besides, we know what happens if you fail, you rake them down with you. That will never happen.

The risk to you was not big at all. You *are* the market as far as your government is concerned. So you keep doing it with their blessing. You are a capitalist, here to make money. You play the cards you are dealt, even though you are dealing. But why not? Your government told you to shuffle, make the rules, and deal the cards yourself? (excerpt)

So Why Change?

Noone had incentive to stop the game from going until it behooved them personally. And now, in the wake of Basel 3, Russian collateral off the market, and a war in Europe it certainly behooves them. Kind of like how Pay for Order flow recently changed. Half the world seceded from our financial markets. That means we had to tighten up our risk to prevent attack now. It is no longer in their interest to have a market structure like this, even though it was wrong to begin with from a free market point of view. But there are admittedly things we cannot know about the biggest picture of all, what ever that may be. What was wrong about it then?


7- Why is This Wrong?

The real risk here is and has always been to the market itself. Even if you can rationalize the damage done to investors for decades on behalf of the bigger picture10, the banks playing this way were at immense (end excerpt).

It Wasn’t Acceptable and Can’t be Tolerated Anymore

The answer is: They can’t accept it and that is why it was kind of off-balance sheet to begin with, but blessed by the Fed going back to Greenspan. And now, given the Russian problems you can’t rationalize it at all anymore12. Once upon a time Gold was a threat to the US dollar’s hegemony and had to be kept in its place. Now...

OCC Report

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