LONDON: The London Bullion Market Association is considering whether to partner with an exchange to produce its gold-lending reference rate to ensure it can meet tighter rules coming on financial benchmarks, its new head said.
The Gold Forward Offered Rate (GOFO), the equivalent of LIBOR for the gold market, is used as a benchmark for dealers, central banks and others to swap gold for U.S. dollars with miners who may need gold to meet contracts or investors for short-selling and other purposes.
LBMA Chairman David Gornall told Reuters last month that the 150-member trade body could charge its members more or even stop providing GOFO if stiffer new regulation makes it too expensive to run.
“We are still in deliberation. It’s one of the options, but … we have been approached by a few exchanges, and it’s definitely something that the board will be considering in terms of which direction we take now that we have come to a crossroads on the benchmark,” incoming Chief Executive Ruth Crowell told Reuters in her first interview since being appointed last week.
Crowell is currently deputy CEO of the LBMA, the trade body for the wholesale over the counter (OTC) market for gold and silver bullion, and will succeed Stuart Murray as the new CEO at the end of December.
Regulators are pushing for new rules on commodity benchmarks after the LIBOR (London Interbank Offered Rate) was entangled in a manipulation scandal last year.
The LBMA has found itself at a turning point as it needs to decide whether to remain a trade association or become an organized trading platform, given that regulation is likely to discourage opaque bilateral trades, which currently dominate the wholesale gold market.
REGULATION BY 2014
Madrid-based IOSCO (International Organization of Securities Commissions) has been looking at how to oversee market benchmarks since 2012, and GOFO is likely to come under scrutiny soon.
“We will get a little more clarity next year, but basically for the next three years there is going to be a lot of back and forth”, before the rules are settled, Crowell said.
British watchdog Financial Conduct Authority said earlier this year it could start to regulate physical commodity benchmarks from 2014.
The LBMA currenlty sets GOFO each day by polling its eight major bank dealers on the rates at which they are prepared to lend gold. It also publishes the gold forward curve, used for valuing end-of-day positions.
The association already has links with the London Metal Exchange (LME), which together with LCH.Clearnet launched the Synapse clearing system for OTC gold forward trades in December 2010 using the LBMA forward rate curve.
The LME declined to comment on whether it has offered to manage GOFO for the LBMA.
The Synapse service has recorded only modest activity, however. Only 930,000 gold ounces were matched and cleared year-to-date, compared with 208.5 million ounces transferred in London bilateral trade.
Activity could pick up if regulation demands it, however, Crowell said.
“The current cleared product is a bit of a chicken-and-egg situation. Everyone is waiting to know whether forwards will have to be cleared in the EU on a mandatory basis,” she said.
“Until that is known, it is difficult for the members to decide whether to change the existing way of trading.”
Regulation is the most immediate challenge for the future of the LBMA, Crowell said. One of her aims is to make more trade data available to the market.
“One of the things I have always been pushing for is for us to have … turnover data that can be seen by the market, not only for regulators but also for investors wanting to know the size and the liquidity of the market,” she said.
Further engagement in Asia, as the gold market moves eastwards, is another focus, she added.
“We wouldn’t rule out opening an office in Asia, but more important in the future is making sure that we maintain and enhance the links that we already have, particularly in terms of getting more Asian members.”
As well as GOFO, the trade body also sets standards for ethical gold mining and for refining and assaying gold and silver bars. (Reporting by Clara Denina; Editing by Jan Harvey and Jane Baird)