LBMA scraps GOFO after two more banks head for exit

Dec 5, 2014 - 3:00 PM GMT
by

The London Bullion Market Association (LBMA) decided to scrap its gold forward offered (GOFO) rates after two more parties indicated that they might no longer wish to participate, it has confirmed.

The final rates will be published on Friday, January 30, the association said in a release on Thursday.

“We were reaching a point where losing another member would mean losing critical mass and not being able to calculate a mean,” an LBMA spokesman told FastMarkets today.

Following Société Générale’s exit from the GOFO rate-setting process in October, the number of contributors to the rate stands at its minimum possible level of six.

Deutsche Bank announced its departure from the rate-setting process – as well as from the gold and silver fixes – in April this year. Both it and SocGen are said to have pulled out in line with their broader strategies to scale down their involvement with precious metals.

But it is also widely believed that, with International Organisation of Securities Commissions (IOSCO) regulation playing an increasing central role in the setting of benchmarks, those banks involved were increasingly frustrated with the red tape surrounding the process.

With GOFO set to cease altogether, the market will be winding the clock back 20 years to when it was easier to manipulate the rate at which customers could borrow gold, market observers said – the reason the benchmark was created in the first place.

“This is yet another step in making important gold information opaque,” Sharps Pixley’s Ross Norman said. “There is some irony in that seeking to make gold more transparent and accountable the regulators are making gold precisely the opposite… it’s a case of ‘the operation was a great success but unfortunately the patient died’.”

Still, sources have suggested that an alternative to the rate is being planned, which would be crucial for market transparency.

The six LBMA Forward Market Makers who contribute to GOFO currently are the Bank of Nova Scotia-Scotia Mocatta, Barclays Bank, HSBC Bank, Goldman Sachs, JP Morgan Chase Bank and UBS AG. The GOFO rate represents the rate at which they are prepared to lend gold at on a swap against US dollars, ranging from a one-month rate to an annual rate.

The rates provide a benchmark dataset that is used as the basis for some finance and loan agreements as well as for the settlement of gold interest rate swaps.

It is essentially the equivalent of LIBOR for dealers, central banks and others to swap gold for US dollars with miners who may need gold to meet contracts or investors for short-selling and other purposes.

“The loss of the longer-dated forward curve data is apparently a loss for the market but, if GOFO goes, how will lease rates be calculated?” a trader told FastMarkets back in October.

“Some say that GOFO rates were not realistic to begin with, meaning either that they don’t reflect the market or that they are not really used,” the trader added.

With benchmarking regulation now being handled by IOSCO, there is increased pressure on the LBMA to ensure that the rate-setting process is transparently above board in light of the Libor scandal.

Several banks were fined heavily in 2012 for their role in rigging the Libor rate, the administration of which was stripped from the British Bankers’ Association and passed earlier this year to the Intercontinental Exchange – self-regulation was deemed a failure, leading to greater scrutiny of all pricing benchmarks.

(Editing by Mark Shaw)