Tokay Zeynalov

Solution Specialist, Central Banks, SimCorp

How we help central banks manage the nuances of gold as an asset class

Central banks are buying more gold than at any time since data collection began in 1950. They currently account for a record 33 percent of monthly global demand for gold.  

Naturally, central banks increase their gold shares amid economic uncertainty. Today, there is added fuel with the current geopolitical situation—advanced economies stock up on gold in light of the geopolitical risk whereas emerging markets do so more as a response to sanctions risk.  

Given the continuing geopolitical tensions today, gold will continue to stockpile. Are reserve managers equipped to deal with this rising trend and manage gold risk in its various forms from the physical bar to the allocated, unallocated gold and futures? 

The limitations of current inventory for gold management

It’s not uncommon to hear that central banks are tracking physical gold bars in excel files with little audit and bookkeeping capabilities. The inability to manage gold inventories efficiently introduces serious operational risks in the form of incorrect exposures and ultimately, trading on the wrong inventory.  

With the SimCorp platform, our central bank clients maintain a comprehensive set of allocated gold characteristic through an agile data model. This includes individual serial numbers, weights, purity, vault and other data points critical for accurate inventory management. This granular approach offers full control and transparency of all gold holdings across different locations. Importantly, where gold bars are used as underlying collateral to financial transactions, these are immediately taken off from any trading activity. Needless to say, it also opens up a security gap for using an unaudited system to track inventory.   

Gold instrument coverage

The inability to model different types of financial instruments with gold particularly in legacy systems (i.e. gold deposits, swaps or certificates) severely limits the bank’s potential to grow their reserve portfolios when the opportunity arises. 

Reserve managers also need to consider gold as a return asset depending on prevailing bond yields. With their added return mandate, they must respond to the relative cost/return equation. One of the key benefits of our system is the ability to support an extensive list of gold instruments to take advantage of rapidly changing market conditions. We support reserve managers process gold whether it is allocated, unallocated or through derivative contracts. 

Gold holding exposures

It’s critical for reserve managers to have an accurate and timely view of gold reserves to achieve their return mandate at reasonable risk levels. This is true whether gold assets are managed as part of the strategic asset allocation or as a monetary reserve asset.  Being able to price allocated gold accurately (individual gold bars) can also be a challenge if the characteristics of the underlying asset are not available or are incomplete.

SimCorp provides a total reserve view which includes incorporating and supporting nuances of managing gold tranches specifically. Our integrated front office suite allows reserve managers to leverage real time positions, performance, risk and projection of cash and gold balances to stay in control of inventories and liquidity management. Accuracy and timeliness of valuations is warranted by the support for standard market data from vendors and real time pricing.

As a reserve manager, you also need the ability to simulate gold transactions using full order management capabilities including real-time pre-trade compliance as well as validate integrated pre and post trade compliance before gold order execution.

Manual processes in the back office

With the potential for disconnect between systems in a legacy infrastructure, the trade processing of gold may lead to a myriad of manual processes. Like most financial instruments, gold transactions require trade confirmations, settlement instructions/advice and reconciliation to be automated to achieve operational efficiency. The lack of accounting standards to treat gold also exacerbates the challenges. Here’s a look at how SimCorp helps reserve managers with this asset class.  

The integrated nature of SimCorp’s platform ensures the trade processing of gold related transactions is fully automated. The matching and settlement instructions can be processed using the standard SWIFT commodity messaging to enable higher straight through processing (STP) rate. The platform’s reconciliation engine can connect to your custodians and core banking systems to ensure position accuracy at start of each day.   

Given the various adopted standards for reporting gold, SimCorp’s accounting engine maintains multiple accounting frameworks to cater for both monetary and non-monetary gold holdings based on the prevailing regimes.

Gain a total portfolio view including gold in one platform

We have an active community of 10 central bank clients that allow us to gather reserve managers’ best practices as well as handle the more nuanced gold requirements.

Imagine the power of managing gold on the same platform as all your other asset classes for a total portfolio view of all your exposures, real-time. With a multi-asset platform, our central bank clients have a full instrument coverage from physical gold to ETC and derivatives. Gold is embedded into our system’s common data model and standard workflows front to back including inventory management, trading, compliance, trade processing, reconciliation, accounting and reporting.