Managing Counterparty Risk in Bullion Banking

Direct physical possession minimizes certain types of counterparty risk, but introduces significant logistical and security challenges. Conversely, utilizing third-party vaulting or logistics providers inherently introduces counterparty risk.

When utilizing commercial custodians, the legal structure of the storage agreement is a critical factor. The documentation dictates how the asset is treated in the event of the provider's financial distress.

Allocated and Segregated Storage

Allocated storage is a structure where the client holds title to specific, identifiable physical metals, often documented by refinery serial numbers. Segregated storage further dictates that these assets are kept physically distinct from the provider's own inventory.

In many legal frameworks, properly allocated and segregated assets do not form part of the custodian's balance sheet, which may offer structural protections in insolvency scenarios.

Unallocated Accounts

Unallocated accounts generally represent a liability of the provider—a promise to deliver metal rather than a bailment of specific bars. If an institution operating an unallocated program faces insolvency, account holders may find themselves classified as general unsecured creditors.