Over-the-counter swaps tied to gold forward rates totalling US$10bn notional have been torn up by industry providers this week in preparation for the discontinuation of the Gold Forward Offer Rate fixing on January 30.
The London Bullion Markets Association (LBMA) announced its intention to discontinue fixing of the rate – traditionally used to determine gold leasing prices – in early December following the exit of multiple bank contributors from the rate-setting process.
Contributors Deutsche Bank and Societe Generale both pulled out due to concerns around tightening rules governing rate-setting procedures from the International Organisation of Securities Commissioners. Regulators globally have cracked down on rate-setting procedures in the wake of bank manipulation of Libor and ISDAFix rates.
The elimination of the outstanding swaps was administered by triOptima, a post-trade processing firm that provides swap compression services in rates and credit markets, in conjunction with the LBMA.
“This was a one-off triReduce compression cycle that we ran after consultation with LBMA to help the dealers eliminate their outstanding portfolios before the end of the benchmark,” said Mattias Palm, triReduce business manager, in a statement.
“It was an efficient way to get the trades off the books without spending a lot of time and effort to negotiate bilaterally with their counterparties. We were pleased to support LBMA members in an orderly transition.”
Twelve dealers took part in the cycle – addressing 99% of outstanding interest rate swaps struck between dealers and tied to GOFO.
“LBMA members took advantage of the opportunity to participate in a triReduce compression run for gold IRS so they could terminate their portfolios before the discontinuation of the GOFO fixing rate,” said Ruth Crowell, CEO of LBMA, in a statement.
“TriOptima was able to quickly and effectively help wind down the market.”
While the cycle cut out a large portion of dealer-to-dealer volumes, market participants raised concerns about outstanding transactions between dealers and customers. Further, the removal of the rate could reduce transparency in a market that many producers and consumers rely on for hedging future revenue or supply.
“I’m puzzled as to how this market is going to work in the future,” said Robin Bhar, gold strategist at SocGen.
“I suppose you can ask your dealer for quotes directly, but the good thing about the rate was that it was public and you had more transparency into the process.”
The exits of Deutsche Bank and SocGen left LBMA with only six contributing banks – the minimum required by law – prompting the LBMA decision to discontinue.
