The volatile spot market tends to change rapidly, whereas the forward
interest rate is likely to stay the same during the time that the
transaction is being quoted. Hence, market convention is generally for
the spot price to be quoted and then rolled, rather than an outright
forward price to be requested – although the swap/forward interest rate
will normally be agreed in advance of the transaction.
Although most of the examples that have been given are for gold, these conventions apply across all four metals.
These are swaps that start on a future date – rather than spot – and
can be for any period. For example, a ‘3s 9s’ or ‘3 x 9’ would be for a
six-month swap starting in three months’ time and maturing in nine
However, it is worth noting that the front price, i.e. the basis
price for the swap, would not be the spot price but instead the
three-month outright forward price – as calculated in the section above.
For good order’s sake, it is worth mentioning that a six-month swap
starting in three months is likely to be a different rate from a
six-month swap out of spot.
Short Dated Forwards
In order to facilitate short-term adjustments to dealers’ forward
books or to clients’ positions, swap rates are available in the market
for short periods close to the spot value date. These ‘short-dated’
swaps are generally available for the following periods:
- Overnight: From today till the next business day and generally only used in extremis.
- Tom-next: Short hand for ‘tomorrow to the next business day’. In other words, from the next business day to the spot date.
- Spot next: From spot to the next business day.
- Spot a week: For one week from the spot date.
It is important to appreciate that there is no lender of last resort
in the precious metals markets. Dealers offering clearing services will
therefore usually finalise their short-term metal liquidity position one
day in advance. As a result, customers should not depend on being able
to borrow metal on an ‘overnight’ (today until the next business day)
Delivery of currency and metal is effected on the so-called ‘spot
date’ for the first leg of the swap/forward transaction. Excluding
public holidays, it means that a trade entered into on a Monday will
settle on a Wednesday and a trade entered into on a Friday will not
settle until the following Tuesday. Forward transactions will be quoted,
unless specified to the contrary, from the spot date to the requested
As raised in section 4, while there must be two good London business
days between trade date and spot, if a US holiday falls between the
trade date and what would otherwise be the good spot date from the
London holiday schedule, the US holiday is generally ignored. It is
worth noting though that metal will not settle on US holidays.
Sometimes it can be the case that certain institutions will prefer to
have two clear business days in each of London and New York to ensure
that there is sufficient time for both currency and metal to settle.
Therefore, it is worth clarifying with the quoting institution to ensure
that any possibility of confusion in minimised.
The forward date of the transaction will need to be a good business day in London and New York. If it is not then it will be rolled forward to the next business day in both centres. Unless this means that the
settlement date would fall into a new month. In which case the ‘End End convention’ applies.
‘End End’ Convention
Value dates for standard forward quotations are at calendar monthly
intervals from spot. This means that if on 1 January, 3 January is the
spot date, then the one-month date will be 3 February. Should that day
be a non-business day (in either the metal or currency clearing centre),
the value will be for the next good business day in both centres so
that the date moves forward.
This is invariably the case except at month end, when the value date
will be kept in the same month, which reflects the number of months
being quoted for. For example, if one calendar month forward is 30
September and that falls on a Sunday, the one-month value date will be
brought back to Friday 28 September.
If dealing spot for value 28 February (in a non leap year) and
transacting a one-month trade then the maturity date should be 31 March.
However, it may be sensible to clarify this is the case to avoid any
In the forward market, subject to credit limits, London’s Market
Makers/Full Members quote for at least 50,000 fine ounces for gold swaps
versus US dollars, and for at least one million ounces of silver up to
one year. In respect of platinum and palladium, the minimum quote is for
Contango or Backwardation
Gold is almost invariably a ‘contango’ market. Silver is generally a contango, and platinum and palladium vary between contango and backwardation.
In the examples above, the currency interest rate was above that of the gold interest rate. Hence, the swap figure – the net of the currency and metal interest rates – was positive. In turn, this means that the forward price is greater than the spot price, which is the definition of a contango market.
Clearly, then, a backwardation is the opposite – where the forward
price is below the spot price. The calculations are exactly the same
with the swap rate as the net of the currency and metal interest rates.
To partly rework the gold example used earlier in this section for
PGMs, if a theoretical USD one-year interest rate was 10% for borrowing
USD and 14% for lending platinum, then the platinum swap rate would be
10% - 14% = -4% for one year. Clearly, these rates are enormously out of
line with the current market low-rate environment, but in the interests
of clarity, extreme off-market rates are once more being used.
In this instance, a one-year platinum swap could be quoted as -4% to
-3% (so the lower number is always quoted first). If a counterpart
traded at -4% then the quoting bank would sell and buy platinum – in
other words, lend metal. On the other hand, if the institution
requesting the quote traded at -3% then the bank making the price would
buy and sell platinum – in other words, borrow metal.
In the first instance, the quoting bank lends platinum at -4% where it sells and buys the metal:
Bank sells to its client 10,000 ounces of platinum at $1000 per troy ounce value spot
Bank buys from its client 10,000 ounces of platinum at $959.444 per troy ounce value spot plus 365 days
The calculation for the price for one-year forward is: