Global Precious Metals Code
Annex 1: Illustrative Examples
The examples provided in the Precious Metals Global Code are intended to illustrate the principles and situations in which the principles could apply.
The examples are highly stylised and are not intended as, nor should be understood or interpreted as, precise rules, prescriptive or comprehensive guidance. Moreover, the examples are not intended to provide safe harbour nor are they an exhaustive list of situations that can arise; in fact, it is expressly understood that facts and circumstances can and will vary. In some examples, specific market roles are used to make the example more realistic, but the illustrated behaviour applies to all Market Participants.
The examples are grouped under leading principles based on the key principle that is being illustrated. However, in many cases, a number of leading principles may apply to each illustrated example.
Examples marked by an “✔” illustrate conduct to be avoided; examples marked by a “✖” illustrate conduct that the Precious Metal Global Code aims to foster and reinforce. The Examples Annex can be expected to be updated over time as features of the Precious Metals market evolve.
Similar to other sections of the Precious Metals Global Code, these illustrative examples should be interpreted by Market Participants in a professional and responsible manner. Market Participants are expected to exercise sound judgement and to act in an ethical and professional manner.
Governance, Compliance and Risk Management
Market Participants should have practices in place to limit, monitor and control the risks related to their Precious Metals market trading activity
A Client of a bank accesses Precious Metals market liquidity only through the E-Trading Platform offered by the sales/trading business of the bank and has no other source of liquidity. The Client has not evaluated the risks of relying on just one source of liquidity. In response to an unexpected market event, the bank adjusts the liquidity provided through its E-Trading Platform, which had the effect of severely impacting the ability of the Client to manage its positions. As the Client has no contingency in place to access the market (including relationship with the voice sales/trading business), the Client’s ability to trade is compromised.
Market Participants should have practices in place to limit, monitor and control the risks related to their trading. In particular, Market Participants should be aware of the risks associated with reliance on a single source of liquidity and incorporate contingency plans as appropriate. In this example, the Client is unaware that its reliance on a single source of liquidity poses risks to its business and has no contingency plan in place, which severely limits its ability to manage its positions.
A Market Participant X has a significant Client franchise and maintains several channels to access liquidity, including two Prime Brokers and some bilateral agreements. For operational efficiency, the Market Participant routes the majority, but not all, of its flows through one of its Prime Brokers but has a smaller representative part of its portfolio channelled regularly to the other Prime Broker and to its bilateral relationships.
Market Participants should be aware of the risks associated with reliance on a single source of liquidity and incorporate contingency plans as appropriate. In this example, the Market Participant has opted to maintain and use several liquidity sources as appropriate to the nature of its business.
Market Participants should have Business Continuity Plans (BCPs)
A Market Participant uses a back-up site in the same region and relies on staff in the same area as its primary site. The Market Participant has not developed a Business Continuity Plan appropriate to the nature, scale and complexity of its business. During a civil emergency, the Market Participant finds that it is unable to access either the primary or the backup site because the two sites share the same telecommunications path. It also finds that it cannot reach staff essential to its business.
Market Participants should have business continuity plans in place that are appropriate to the nature, scale and complexity of their business and that can be implemented quickly and effectively. In this example, despite maintaining a primary and a backup site, the Market Participant did not have a business continuity plan that was robust to the disruption. In the two examples below, the Market Participant has made a business continuity plan that is, in each case, appropriate given the nature, scale and complexity of its operations.
A Market Participant selects a backup site that is geographically distant and whose infrastructure can be controlled by staff in the distant location.
A Market Participant decides that it will not maintain a backup data centre and, in the event that its data centre is unavailable, will reduce or eliminate its positions by telephoning one of the Market Makers with whom it has a relationship and trade by voice only until its data centre is available again.
Market Participants should identify and protect Confidential Information.
Asset manager to bank Market Maker: Bank ABC just called me with an Axe to buy spot Gold. Are you seeing buying as well?
Market Participants should not disclose or solicit Confidential Information, including information about Clients’ Axes or trading activity. In the example above, the asset manager discloses and solicits Confidential Information, in this case another bank’s Axe.
In the example below, the asset manager refrains from soliciting Confidential Information.
Bank ABC to asset manager: We have an Axe in spot Gold. Do you have any interest? Asset manager to bank Market Maker: Thanks for calling but we don’t have interest in spot Gold today.
Hedge fund to bank Market Maker: Are you long Silver?
Market Participants should not solicit Confidential Information, including information on current positioning or trading activity, without a valid reason to do so. In the acceptable example below, the hedge fund asks for market views and not specific positioning.
Hedge fund to bank Market Maker: What do you think of Silver here?
A bank has been asked by a Client to provide a quote for 1,000 ounces of Platinum. The bank does not actively market make in Platinum. The bank Market Maker calls another bank Market Maker: I’m being asked to quote a two-way price for 1,000 ounces of Platinum. Can you show me your Platinum pricing matrix so that I can get a feel for the spread to quote?
Market Participants should not disclose or solicit Confidential Information, including information about Clients’ trading activity. In the example above, the bank Market Maker discloses and solicits Confidential Information – in this case, the Client interest and the proprietary spread matrix information, respectively. In the example below, the bank requests only information pertinent to their needs.
A bank has been asked by a Client to provide a quote for 1,000 ounces of Platinum. The bank does not have a franchise Platinum, so their Market Maker calls another bank Market Maker: Can you give me a two-way price for 1,000 ounces of Platinum?
A bank has implemented an institution-wide policy designating trade recommendations produced by the Commodities Research Department as confidential until published to all Clients simultaneously. Bank commodities research analyst to hedge fund: Our view on Palladium has shifted in line with our new consumption forecasts and I’m publishing a new bullish trade recommendation later today.
Market Participants should not disclose Confidential Information. In this example, the analyst has disclosed Designated Confidential Information – its trade recommendation – to an external party prior to publication.
In the examples below, the commodities research analyst and bank Market Maker disclose research after it has been published.
Bank commodities research analyst to hedge fund: I’m calling to check that you’ve received our bullish Palladium trade recommendation published an hour ago in line with our new consumption forecasts.
A hedge fund manager attends a portfolio review with a large Client. At the review, the manager learns that the Client will soon be shifting part of its Precious Metals allocation into another non- Precious Metal asset class. The manager is asked for advice, but not awarded the allocation mandate. Upon leaving the meeting, the manager makes a call to his own trading desk to inform it of the impending trade.
Market Participants should not disclose Confidential Information except to those individuals who have a valid reason to receive such information. In particular, information obtained from a Client is to be used only for the specific purpose for which it was given. In this example, planned currency re-allocation is Confidential Information and has been disclosed to the hedge fund manager for advice only. It should not be disclosed to the trading desk.
A fund asks a bank to work a large buy order of Gold for the Benchmark Process. Immediately after the call, the bank contacts a different Client hedge fund and says: “I have a large buy order of Gold to work ahead of the Benchmark Process for a Client. I think this may move the market upwards in the next 20 minutes, and I can work some flow for you as well.”
Past, present and future Client trading activity is Confidential Information that should not be disclosed to other Market Participants.
Communicating Market Colour appropriately
A corporate Client has left a 24-hour call level for spot Gold with a counterparty and the call level has been just breached. Bank salesperson to corporate Client: Gold just traded through your call level. The market has dropped 200 ticks in the last 15 minutes, there has been large selling across a variety of names and prices have been gapping. The market continues to be better offered. We don’t know the trigger but there has been some chatter on the internet about a central bank selling but it has not been confirmed on any of the main news channels.
Market Participants should communicate Market Colour appropriately and without compromising Confidential Information. In this example, the salesperson shares information about recent market developments, with the flow having been sufficiently aggregated and the information from a third party having been attributed clearly.
Bank salesperson to hedge fund: We’ve seen large spot Palladium demand from XYZ (where “XYZ” is a code name for a specific Client) this morning.
Market Participants should communicate Market Colour appropriately, sharing flow information on an anonymised and aggregated basis only. In the example above, the information reveals the identity of a specific Client.
Market Participants should communicate in a manner that is clear, accurate, professional and not misleading.
An asset manager calls three banks and says: “Can I get a price for 500,000 ounces of Silver please? This is my full amount.” The asset manager buys 500,000 ounces of Silver from each of the three banks in a total amount of 1,500,000 ounces of Silver.”
Market Participants should communicate in a manner that is clear, accurate, professional and not misleading. In this example, the asset manager deliberately misleads the banks in order to potentially secure better pricing. If asked, the asset manager could choose to decline to disclose whether that request to transact is for the full amount.
A sell-side institution has a large amount of illiquid 10 delta call options to sell. A trader at the institution contacts several Market Participants, saying that he is hearing of a very large buyer of 10 delta calls, when this is in fact not the case.
Market Participants should communicate in a manner that is not misleading. In this example, the trader communicates false information with the intent of moving the market in his own interests.
Market Participants should have clear guidance on approved modes and channels of communication
A sales person has a number of filled orders to confirm to the customer but has left the office early. Not having access to a recorded line, he subsequently texts his confirmations from his own unrecorded personal cell phone to the Client.
It is recommended that communication channels be recorded, particularly when being used to transact. In the example above, the sales person confirms transactions on an unrecorded line. In the example below, the sales person strives to find a way to have the transactions confirmed via recorded means.
A sales person has a number of filled orders to confirm to the customer but has left the office early. Not having access to a recorded line, the sales person contacts his office colleagues, who then contact the customer to confirm the transactions using recorded means.
Business Conduct: Pre-Trade and Execution Market Participants should be clear about the capacities in which they act
A Client asks a Market Participant to buy Gold on their behalf in the market. The Market Participant has an agreement with the Client stating that it acts as an Agent and that the Market Participant will add a fee. The Market Participant executes the order in the market, showing a post-trade execution analysis of the fills and adding the fee.
Market Participants should be clear about the capacities in which they act. In this example, the Market Participant has made clear in advance the capacities in which it acts and that it would add a fee. Specifically, the Market Participant executes the Client’s request in an Agent capacity and is transparent about the nature of execution and the associated cost.
A Client asks a Market Participant to buy Gold at Market Order. The Market Participant and the Client have a Principal-based relationship, stipulated in their terms and conditions. The Market Participant fills the Client’s order in accordance with the terms agreed, possibly using its own inventory and the available liquidity in the market.
Market Participants should be clear about the capacities in which they act. In this example, the Market Participant has made clear in advance the capacities in which it acts, by previously disclosing the terms and conditions under which they will interact. Specifically, the Market Participant and the Client, acting as Principals, agree to execute the transaction.
Market Participants should handle orders fairly and with transparency
A bank receives a large order from a fund (Client) to sell Gold at the London PM Benchmark Process. According to their pre-agreed terms and conditions, the bank and the Client have agreed that the bank will act as Principal and may hedge Benchmark transactions depending on market conditions. The bank hedges some of the order amount before the fixing window since it judges that the fixing window is too illiquid to clear such a large amount without affecting the market rate to the Client’s disadvantage. The bank also keeps some of the risk on its book and does not trade the full amount in the market, therefore lessening the market impact of the Client’s order in the fixing, with the intention of benefiting the Client.
Market Participants are expected to handle orders with fairness and transparency. In this example, the Client and the bank have agreed that the latter will act as Principal. The bank executes the transaction in a manner that benefits the Client by lessening the market impact of the Client’s order on the market.
A Market Participant has orders from several Clients to buy Silver. The Market Participant has disclosed to the Clients its policy that electronic orders are processed in the order in which they are received from Clients. The Market Participant fills first an order of another customer even though that order was received after other orders.
Market Participants should make Clients aware of factors that affect how orders are handled and transacted, including whether orders are aggregated or time prioritised, and have clear standards in place that strive for a fair and transparent outcome for the Client. In this example, while the Market Participant has made the Client aware of its order-processing policy, it does not provide execution accordingly by executing the orders in a sequential way.
A Client calls a Market Participant to execute a series of trades, stating that it is relying on the agency agreement they have in place. The agency agreement includes a pre-negotiated transaction fee. While executing the trades, the execution desk of the Market Participant adds an additional undisclosed spread to every trade it executes, resulting in the Client paying above the pre-negotiated transaction fee.
A Market Participant handling Client orders in an Agent role should be transparent with its Clients about its terms and conditions, which should clearly set out fees and commissions. In this example, the Market Participant charges a fee in excess of the pre-negotiated fee and this is undisclosed to the Client.
A Dealer, acting as a Principal, is working an order for a Client. The Client has instructed the Dealer to sell 1,000 ounces of Platinum at a specified price or better. The Dealer buys 500 ounces at the price instructed by the Client before the price rises. However, the Dealer only executes and confirms 100 ounces with the Client, keeping the balance in the Dealer’s inventory to benefit from the favourable price action.
Market Participants filling a Client order should fully fill the Client orders they are capable of filling within the parameters specified by the Client. The example illustrates a behaviour known as “under-filling” where the dealer will keep some of the execution for his own book if price action is favourable. In doing so, the Market Participant did not act fairly but in a way designed to disadvantage the Client.
Dealer A tells voice broker B that he has a large amount to execute at the London AM Benchmark Process and wants some help establishing a favourable rate to benefit the Dealer. Broker B then informs Dealer C, who has a similar order, and they all agree to combine their orders so as to make a greater impact in or before the Benchmark Process.
Market Participants should handle orders fairly and with transparency, should not disclose confidential Client trading information and are expected to behave in an ethical and professional manner. The collusion illustrated in this example to intentionally influence a Benchmark is neither ethical nor professional. It divulges information about Client trading activity to an external party and is non- competitive behaviour that undermines the fair and effective functioning of the foreign exchange market.
Dealer A is aware of a barrier level which, if triggered, will result in the Client’s option being knocked out, resulting in the Client receiving zero payment. Dealer A enters large orders in the Gold Benchmark Process and on other trading venues in order to intentionally move the market to an artificial level to trigger the barrier events, for the sole purpose of self-gain.
Market Participants must only transact in and around the Benchmark Process for legitimate purposes and market-making activity. Any order activities must be transacted bona fide.
A Market Participant should only Pre-Hedge Client orders when acting as a Principal, and should do so fairly and with transparency
A bank and a Client have agreed that the bank acts as Principal and may Pre-Hedge the Client’s orders. The bank has a large Stop Loss buy order for the Client. The bank expects that there are many similar orders in the market at this important technical level and recognises the risk for substantial slippage during execution. The bank decides to Pre-Hedge part of the order and starts buying modest amounts in advance without any intent to push up the market price. However, the market spikes through the Stop Loss level due to other Market Participants also buying ahead of the technical level. The order is triggered, but as a result of Pre-Hedging, the bank is able to provide an execution price close to the Stop Loss level.
Market Participants should only Pre-Hedge Client orders when acting as Principal and when the practice is used with the intention to benefit the Client. Stop Loss Orders are conditional on breaching a specific trigger level and many cases orders are placed at significant levels in the market with the potential for substantial slippage when the level is reached. In this example, the bank has utilised Pre-Hedging to build up inventory in advance. The bank’s risk book is better positioned than it would otherwise be, had it not Pre-Hedged, to enable the bank to protect the Client from slippage and thus benefit the Client.
A Market Participant wishes to sell a large amount of Gold. Before doing so, the Market Participant executes a number of small, successive purchases of Gold on a widely viewed E-Trading Platform with the intention of moving the market price higher and inducing other
Market Participants to buy Gold. The Market Participant then executes the original large sell order in one or more E-Trading Platforms at a higher price.
Market Participants should not request transactions or create orders with the intention to disrupt market functioning or hinder the price discovery process, including strategies designed to result in a false impression of market price, depth or liquidity. This example illustrates a strategy intended to cause artificial price movements and give a false impression of market price.
A Client stands to gain by moving the market close higher on a COMEX Gold Contract. It calls a bank just ahead of the close and places a large closing order, and then instructs the bank to “buy the amount as close to the close as possible”.
Market Participants should not request transactions or create orders with the intention to disrupt market functioning or hinder the price discovery process, including strategies designed to result in a false impression of market price, depth or liquidity. The Client’s request in this example is intended to result in a false impression of market price and depth.
A hedge fund is long an exotic Gold put. Gold has been weakening towards the option’s knock- in level during the afternoon. Knowing that liquidity will be lower during the Asian hours, due to a major holiday, and intending to knock in the option, the hedge fund leaves a large Gold Stop Loss sell order for the Asian open with bank A at a price just above the knock-in level. At the same time, it leaves a limit buy order with bank B for the same amount of Gold, but at a level just below the knock-in level. Neither bank A or B are aware that the hedge fund is long the exotic Gold put.
Market Participants should not request transactions or create orders with the intention of creating artificial price movements (PTE Principle 8). In this example, the hedge fund has sought to profit (to knock-in the option) by leaving orders designed to cause artificial price movements inconsistent with prevailing market conditions.
Mark Up should be fair and reasonable
A bank receives a Client Stop Loss sell order for spot Gold at a certain level. When that level is traded in the market, the bank executes the Stop Loss Order with some slippage. However, the bank fills the Client at a slightly lower rate after taking Mark Up and without having previously disclosed to the Client that the all-in price for executing a Stop Loss was subject to Mark Up.
Mark Up should be fair and reasonable and Market Participants should promote transparency by disclosing to Clients that their final transaction price may include Mark Up and that it may impact the pricing and execution of orders triggered at a specific level. In this example, the bank has not disclosed to the Client how Mark Up will affect the all-in price for the order.
A bank charges a corporate higher Mark Up than other corporates of the same size, credit risk and relationship, exploiting the corporate’s relative lack of sophistication in understanding and challenging the pricing of its bank.
Mark Up should be fair and reasonable, and can reflect a number of considerations, which might include risks taken, costs incurred and services rendered to a particular Client, and factors related to the specific transaction and to the broader Client relationship. The application of Mark Up in this example is not fair and reasonable as it discriminates between Clients based only on their level of sophistication. In the example below, the different Mark Up charged to each of the Clients is motivated by differences in the broader Client relationship – in this case, the volume of business.
A bank charges corporates of similar size and credit standing different Mark Up because the broader Client relationship differs, for example, the volumes of business these Clients transact with the bank are of very different magnitudes.
Market Participants employing last look should be transparent regarding its use and provide appropriate disclosure to Clients.
A Market Participant sends a trade request to an anonymous liquidity provider to buy 10,000 ounces of Gold at a price of US$1,200.50 via an ECN while the displayed price is US$1,150/US$1,201. This trade request is bilaterally understood to be subject to a 100ms last look window before it is accepted and confirmed by the anonymous liquidity provider. During this 100ms window, the liquidity provider places buy orders at levels below the US$1,201 price. If these buy orders are filled, the liquidity provider confirms and fills the Market Participant’s trade request, but when these orders are not filled, neither is the Market Participant’s trade request.
Market Participants should only use last look as a risk control mechanism to verify factors such as validity and price. In this example, the liquidity provider misuses the information contained in the Client’s trade request to determine if a profit can be made and has no intent to fill the trade request unless it has can secure a profit.
A Client sends trade requests that are subject to a last look window and its liquidity provider has disclosed for what purposes last look may be used. The Client reviews data related to its average fill ratios on such transactions. The data provided suggests that its average fill ratio is far lower than expected and the Client follows up with its liquidity provider to discuss reasons for this.
Market Participants employing last look should be transparent regarding its use and provide appropriate disclosures to Clients. It is also good practice to have ongoing dialogue between parties regarding how their orders have been handled. In this example, the Market Participant’s transparency has enabled to the Client to make an informed decision about how its orders are handled and fosters dialogue between the two parties.
Market Participants providing algorithmic trading or aggregation services to Clients should provide adequate disclosure regarding how they operate
An aggregator routes an order to an E-Trading Platform that is presently showing a price worse than that shown on other E-Trading Platforms, which the Aggregator also has access to. The provider of the Aggregator benefits from more favourable brokerage rebates than have been offered by the E-Trading Platform. These rebates have not been disclosed to the Client.
Market Participants providing aggregation services to Clients should provide adequate disclosure regarding how they operate. In this example, fees applicable to the service were not disclosed. Note that, even if the Aggregator’s routing algorithm had not taken account of the rebate, the Client would have expected these rebates to be disclosed.
Business Conduct: Post Trade
Market Participants should confirm trades as soon as practicable, and in a secure and efficient manner
A Client executes a transaction in spot Gold on a single-bank platform and is immediately provided with a trade confirmation via the bank’s platform. After having checked the trade details received from the bank, the Client is able to immediately send a confirmation message for the trade to the bank.
Market Participants should confirm trades as soon as possible, and in a secure and efficient manner. In this example, the bank’s straight-through processing and initiation of the confirmation process results in the Client being able to send a corresponding confirmation message within a short time frame.
A Market Participant executes a Silver transaction with its parent entity via phone. Both the local entity and its parent confirm the deal directly via a common secured electronic platform.
Market Participants should confirm trades as soon as possible, and in a secure and efficient manner. In this example, both entities use a common secured electronic platform to confirm the deal – an alternative to marketwise automated trade confirmation matching systems.