Issue 11

A New Market Standard: ISDA-based Documentation for Precious Metals by Martin Stokes, Vice President, Commodities, Morgan Guaranty Trust Company of New York

Creating standard documentation for use in the over-the-counter bullion market has been an on-going part of the responsibilities of the LBMA's Management Committee, thereby providing participants with greater protection. Having such documentation in place removes a substantial amount of bilateral negotiation and reduces expensive lawyer time. Most importantly, standardised documentation helps establish consistent market practice and conformity of approach, reducing the risks of misunderstandings or disputes.

The initial document produced in 1994, the International Bullion Master Agreement (IBMA), has proved of immeasurable benefit to the market but does have some limitations. Its weak points are the compartmentalisation of bullion exposure and its focus upon purely physical business. In a closeout situation, IBMA effectively allows the netting down of all gold and silver spot and forward trades and options exposures to one single obligation. However, where counterparties have exposures across different market areas, there is an increasing trend toward documenting all types of products under a single master agreement. This gives a non-defaulting party as a contractual matter the ability to net off an in-the-money position in gold and silver with an out-of-the-money position in another business area (such as Foreign Exchange).

Many of our readers will be aware that a working party, established on an LBMA initiative and led by ISDA (International Swaps and Derivatives Association, Inc.) has been toiling for over a year to create a standard Definitions Booklet for bullion transactions govern ed by such agreements as the 1992 ISDA Master Agreement, including platinum and palladium. This document was finally released on 5th March 1998, and the Management Committee of the LBMA would like to express its sincere thanks to all involved in this exercise. Additionally, we welcome closer ties with the London Platinum and Palladium Market.

The ISDA Definitions Booklet has been published in two forms, 1997 ISDA Bullion Definitions, and an abbreviated version, 1997 ISDA Short Form Bullion Definitions. Both publications are intended for use in confirmations of individual gold, silver, platinum and palladium transactions governed by such agreements as the 1992 ISDA Master Agreement. The long version, 1997 JSDA Bullion Definitions, provides documentation for spot and forward trades and options, and for cash-settled swaps, caps, collars, floors and swaptions that are either cash-settled or physically settled on an unallocated basis. It is important to understand that the word 'swap' in this context has the meaning of an outright trade settled for cash against a benchmark such as fixing. A swaption is an option to enter into such a swap.

The short form, 1997 ISDA Short Form Bullion Definitions, is an extraction of the long-form. It responds to the desire of some market participants for a short-form set of definitions covering only bullion spot and forward trades and options that are physically-sett led on an unallocated basis.

The ISDA-based publications can be ordered by fax on an ISDA Publication Order Form that can be downloaded from the Association's website, www., or obtained from the New York (21 2-3321200) or London (44 171 330 355 0) office. IS DA Bullion Definitions costs $50 for members, $100 for non-­ members; ISDA Short Form Bullion Definitions $25 for members, $50 for non-­ members. The minimum order of either is three.

Key Distinction Between the Application of IBMA and the ISDA-Based Documentation

  • IBMA only covers physically settled spot and forward trades and options in gold and silver.
  • IBMA's overall jurisdiction is limited to gold and silver exposures only.
  • In the long-form, if the ISDA Bullion Definitions, the product coverage is much wider than that in the IBMA, incorporating exposures in a variety of cash-settled and derivative transactions.
  • ISDA covers platinum and palladium in addition to gold and silver.
  • The ISDA Bullion Definitions envisages physical trades being settled on an unallocated basis, although there is a provision witl1in the documentation for allocated delivery. This latter, however, would require additional provisions in the individual confirmation.
  • The ISDA Bullion Definitions are designed to be incorporated by reference in transactions governed by such agreements as the 1992 ISDA Master Agreement . The advantage of documenting bullion transactions under the same Master Agreement is that it promotes netting of exposures across all market areas.