HSBC sees surge in value-at-risk limit breaches, cites ‘delivery disruptions in gold market’

HSBC sees surge in value-at-risk limit breaches, cites ‘delivery disruptions in gold market’ by Anna Golubov for KitCo News

British multinational investment bank HSBC Holdings Plc, which is one of the biggest players in the gold trading space, repeatedly breached its trading limits during the chaotic market conditions set off by global lockdowns in March, according to the bank’s quarterly filing.

HSBC said it felt “delivery disruptions in the gold market,” citing it as one of the reasons why it breached its own value-at-risk limits 12 times in March. This is something that does not happen more than three times a year under normal circumstances.

In March, gold prices saw extreme volatility, plunging from $1,700 an ounce to well below $1,500 an ounce and then suddenly climbing back up to above $1,600 an ounce. On top of that, huge price spreads developed between between spot (London market) and futures (New York) prices due to temporary closures of major refineries across the globe and logistical issues connected with lack of air transport.

The divergence in prices was the highest in four decades at the end of March, rising to about $70. Under normal conditions, the difference between spot and futures prices does not vary more than a couple of dollars from each other.

HSBC described the gold market as “highly illiquid on news of refinery closings,” which led to wild swings in trading profits in March, according to the filing.

The bank reported that its metals trading revenue for the quarter saw a loss of $1 million due to the COVID-19 situation, the bank noted, citing “market volatility and unfavorable valuation adjustments on exchange for physical transactions.” In comparison, during the same period last year, HSBC saw a profit of $38 million.

The bank’s average annual metals trading revenues has been around $215 million for the past three years, Bloomberg reported.

There were other contributing factors to the unusually high number of profit-and-loss limit breaches, including volatility in credit spreads, interest rates, and volatility in palladium.

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