The five banks that settle every transaction in London's $6.8 trillion a year gold market are changing the rules of their clearing house to make it easier for newcomers to join.
The reform is part of a broad overhaul of institutions that underpin the world's largest bullion trading center to make them more transparent after accusations of price manipulation by banks and traders and pressure from regulators.
As that pressure increased, the number of banks clearing gold transactions through a company they own called the London Precious Metals Clearing Limited has dwindled from seven to five. They are HSBC, JPMorgan, Scotiabank, UBS and ICBC Standard.
Several banks have attempted to join the group in recent years. ICBC Standard joined in 2016 after months of wrangling over conditions and an application from at least one other, Goldman Sachs, was declined, sources in LPMCL member banks said.
Opening the company up to new members could help make the market more competitive.
Asked about the changes, Ruth Crowell, Chief Executive of London Bullion Market Association (LBMA), which provides administrative services for LPMCL, told Reuters in an emailed statement that LPMCL had recently been restructured.
"One of the benefits of the new structure has been to make the LPMCL more accessible to new members and to clarify the entry requirements," she said. The LPMCL member banks have been considering changes to its rules since a review involving outside consultants that began around three years ago found that LPMCL lacked transparency and adequate governance, four sources in LPMCL member banks said.
In September they set up a new LPMCL company to replace the existing company with the same name, according to documents from Companies House, Britain's companies register.
Crowell said the LPMCL "has recently restructured to reflect the changing corporate and regulatory climate since the Company was incorporated in 2001."
She said the restructuring "was designed to improve transparency, access to join and the corporate governance of the LPMCL, as well as to provide additional safeguards to the market in the form of revised rules incorporating the latest anti-bribery and corruption provisions."
Sources at LPMCL banks said a lack of clear requirements for new joiners had meant any member bank could veto an application.
"You can't have three or four banks making up reasons why people can't join. We spent a lot of time with lawyers making sure it stood up to regulatory
scrutiny," said one of the sources.
The new LPMCL company has a new charter and a list of requirements for applicants, including connection to the LPMCL's Aurum clearing platform and access to a precious metals vault in London, which if completed would guarantee entry, the sources said.
The company also has a new category for non-shareholding members who would pay a subscription to participate.
"Membership can now be categorised into User Members and Equity Members," said Crowell.
The member banks were signing the final papers to complete the reform process, the sources said.
"They needed to make sure it was a fairer, open organisation," said a bullion market source familiar with the restructuring process.
"They had to do it because they are scared they'll find themselves on the end of an anti-trust collusion lawsuit."
Tighter regulation since the financial crisis a decade ago and allegations that several bullion banks manipulated gold and silver prices have forced London's gold market to open up to scrutiny and modernise its key infrastructure.
Gold, silver, platinum and palladium price benchmarks set in the city and used by buyers and sellers worldwide have been taken out of the hands of banks to be run as electronic auctions by exchange operators.
The LBMA has also revealed how much gold is stored in vaults in the city -- 7,841 tonnes as of November last year -- and is collecting data to show for the first time precisely how much gold is traded each year.
Until now the only statistics on the London market have been estimates of turnover by LPMCL, which says gold worth $26 billion traded on average each trading day in London last year.
LPMCL was set up in 2001 to develop an electronic matching system to replace trading by phone or fax between bullion banks. It is not a traditional clearing house, which acts as an intermediary to guarantee and settle trades, but a network of bilateral trading and credit agreements between its member banks.
In 2016 ICBC Standard became the first new member since 2005. Goldman Sachs was rebuffed, two sources at LPMCL banks said. Goldman was told it would not receive the necessary credit lines for it to participate, one of these sources said.
Without new members the club has shrunk. Credit Suisse left in 2001, Rothschilds in 2004, Deutsche Bank in 2015 and Barclays in 2016, all after closing their precious metals operations in London.
And even with the new reforms the barriers to entry are high.
"It's not easy to join. You have to have a lot of capital and a major wholesale business or it's going to take you years to build up and you have to be able to absorb those costs until you do so," said one source at an LPMCL bank.
Sources said membership could fall further because increasing regulation meant clearing was becoming less profitable.
Scotiabank said in February it would restructure and shrink its metals unit. A spokeswoman for Scotiabank declined to comment on whether it would stay a member of LPMCL.
Although fewer members could give those left a larger slice of the business, they are keen to expand the club because it makes it look more transparent and competitive.
"Having only three or four members doesn't look good," said one of the sources.