LBMA Gripes About Gold's "HQLA" Status as Fed Preps for Repo Trouble Ahead

Starting June 26, the Fed will add a new, permanent liquidity tool for repos. No bank will use it, as they don't have the necessary balance sheet space to do so.

Gold's HQLA Status in Basel III

People have been asking me about the so-called "high quality liquid status" of gold as per Basel III regulations. So I found a paper by the LBMA talking about it from late 2024. Here are the highlights (my bold):

The rules were finalised by the Basel Committee on Banking Supervision in 2010 and included the concept of High-Quality Liquid Assets (HQLA) to be held as a liquidity reserve. Like all Basel rules, they were subsequently implemented according to specific legislation in each jurisdiction. In 2013, the European Banking Authority created its own list of assets that could be used as HQLA; gold was not included.

Level 1 consists of cash, central bank reserves and government bonds (or equivalent), whilst Level 2 contains less liquid assets such as qualifying covered bonds, corporate bonds, residential mortgage-backed securities, equities that meet certain conditions and other assets. Level 2 assets cannot comprise more than 40% of the total liquidity reserve. Considering that assets such as equities and residential MBS are considered HQLA, albeit level 2, it’s head scratching to understand why gold is missing from this list.

Back in 2013, there was an uninformed perception of gold and a broad lack of understanding of the market dynamics and its infrastructure; it was perceived to be an asset with too much volatility.

It’s reasonable to argue that in the intervening years much of that perception challenge has changed – in 2010, the official sector purchased a paltry 79.2 tonnes of gold, but by 2023 that buying had surged to 1,030.4 tonnes (source: WGC). A central bank community that continues to buy a lot of gold reflects gold’s merit within the financial system.

We feel very confident to state that had the gold trading data available today been accessible in 2013, gold would have undoubtedly been classified as either an extremely High-Quality Liquid Asset or a High-Quality Liquid Asset.

Gold doesn’t deserve a reclassification simply because the data now shows that it meets the criteria; perhaps more importantly, gold has demonstrated through the GFC, through COVID-19 and through the US banking crisis that it contributes to the stability of the financial system. The process for change is long and drawn-out, but we are hopeful that change will happen.

Fed Actively Planning for Incoming Repocalypse

The NY Fed reports that the central bank will be offering early morning repo auctions starting June 26, indefinitely:

In accordance with the FOMC's authorization and continuing directive, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York plans to adjust the Standing Repo Facility (SRF) to conduct a daily morning overnight SRF operation on each business day beginning Thursday, June 26, 2025. These daily morning SRF operations will be conducted from 8:15 to 8:30 a.m. Eastern Time (ET), and will facilitate earlier settlement of awarded positions on the Bank of New York (BNY) tri-party repo platform. The regularly scheduled afternoon SRF operations will continue to take place on each business day from 1:30 to 1:45 p.m. ET.

The additional daily morning SRF operations are intended to further enhance the effectiveness of the SRF in its ability to support the effective implementation of monetary policy and smooth market functioning.

June 26 will be 2 business days before