Business Conduct Leading Principle

Market Participants are expected to exercise care when negotiating and executing transactions in order to support a robust, fair, open and transparent Precious Metals market.

Pre-Trade

PTE Principle 1

All Market Participants should obtain sufficient information to know each Client in advance of any business being transacted, and then on an ongoing basis, subject to each Market Participant’s existing appropriate regulatory obligations

5.1.1

All Market Participants should ensure that they have appropriate, proportionate, independent due diligence systems and controls in place. Sufficient information should be gathered on every Client and made available to those responsible for setting up a Client account or carrying out appropriate due diligence.

5.1.2

Market Participants should have a clear understanding of all Applicable Law on the prevention of money laundering and terrorist financing.

5.1.3

Market Participants should have internal processes in place to facilitate the prompt reporting of suspicious activities (for example, to the Compliance officer or appropriate public authority, as necessary). Effective training should be provided for relevant staff to raise awareness of the serious nature of these activities, and reporting obligations, while not revealing their suspicions to the entity or individual suspected of illegal activities. Such training should be regularly updated to keep pace with the rapidly changing methods of money laundering.

5.1.4

Due diligence should not just be completed at inception, but as an ongoing obligation and formal review. This should also be completed on a periodic basis, using a risk-based approach.

5.1.5

The Market Participant should have a policy that sets out the components of the risk-based approach and what constitutes appropriate due diligence for each category of Client.

PTE Principle 2

All Market Participants should ensure that proportionate and responsible business practices, appropriate to their business, are adopted

5.2.1

All Market Participants should have appropriate and proportionate systems and controls to demonstrate compliance with industry schemes that address Responsible Sourcing, for example, where relevant, the LBMA Responsible Sourcing Programme.

5.2.2

All Market Participants should refer to leading industry standards in adopting best practices, such as the OECD Due Diligence Guidelines for Responsible Supply Chains of Minerals. Wherever possible, Market Participants should strive to incorporate the spirit of these best practices in their activities.

PTE Principle 3

Market Participants should be clear about the capacities in which they act

5.3.1

Market Participants should understand and clearly communicate their roles and capacities in managing orders or executing transactions. Market Participants may have a standing agreement or other terms of business as to their roles that govern all trades, or may manage their relationship by determining their roles on a trade-by-trade basis. If a Market Participant wishes to vary the capacity in which it or its counterpart acts, any such alternative arrangement should be agreed by both parties.

5.3.2

A Market Participant receiving a Client order may:

  • act as an Agent, executing orders on behalf of their Clients pursuant to the Client mandate and without taking on market risk in connection with the order; or
  • act as a Principal taking on one or more risks in connection with an order, including market and credit risk. Principals act on their own behalf and there is no obligation to execute the order until both parties are in agreement. Where the acceptance of an order grants the Principal executing the order some discretion, it should exercise this discretion reasonably, fairly and in such a way that is not designed or intended to disadvantage the Client.

Execution

PTE Principle 4

Market Participants should handle orders fairly and with transparency in line with the capacities in which they act

5.4.1

Market Participants are expected to handle orders with fairness and transparency. How this is done, and what the relevant good practices are, vary depending upon the role in which those Market Participants are acting. In addition, certain order types may entail additional considerations, as described below.

5.4.2

Irrespective of their role, Market Participants handling orders should:

  • Have clear standards in place that strive for a fair and transparent outcome for the Client;
  • Be truthful in their statements;
  • Use clear and unambiguous language;
  • Make clear whether the prices they are providing are firm or merely indicative;
  • Have adequate processes in place to support the rejection of Client orders for products they believe to be inappropriate for the Client;
  • Not enter into transactions with the intention of disrupting the market; and
  • Provide all relevant disclosures and information to a Client before negotiating a Client order, thereby allowing the Client to make an informed decision as to whether to transact or not. Such disclosures can be made as part of the general information a Market Participant provides to its Clients at the beginning of the relationship, and/or when circumstances change.

5.4.3 Market Participants should make Clients aware of such factors as:

  • How orders are handled and transacted, including whether orders are aggregated or time prioritised;
  • The potential for orders to be executed either electronically or manually, depending on the disclosed transaction terms;
  • The various factors that may affect the execution policy, which would typically include positioning, whether the Market Participant managing Client orders is itself taking on the associated risk or not, prevailing liquidity and market conditions, other Client orders and/or a trading strategy that may affect the execution policy;
  • Where discretion may exist or may be expected, and how it may be exercised.

5.4.4

Market Participants handling Client orders in a Principal role should:

  • Disclose the terms and conditions under which the Principal will interact with the Client, which might include:
    • That the Principal acts on its own behalf as a counterparty to the Client;
    • How the Principal will communicate and transact in relation to requests for quotes, requests for indicative prices, discussion or placement of orders and all other expressions of interest that may lead to the execution of transactions; and
    • How potential or actual conflicts of interest in Principal-dealing and market-making activity may be identified and addressed;
  • Have market-making and risk management activity (such as hedging) commensurate with its trading strategy, positioning, risk assumed, and prevailing liquidity and market conditions.

5.4.5

Market Participants handling Client orders in an Agent role should:

  • Communicate with the Client regarding the nature of their relationship;
  • Seek to obtain the result requested by the Client;
  • Establish a transparent order execution policy that should supply information relevant to the Client’s order which may include:
    • Information on where the firm may execute the Client’s orders;
    • The factors affecting the choice of execution venues; an
    • Information as to how the Agent intends to provide for the prompt, fair and expeditious execution of the Client’s orders.
  • Be transparent with the Client about their terms and conditions, with clearly set out fees and commissions applicable throughout the time of the agreement; and
  • Share information relating to orders accepted on an Agency basis with any market- making or Principal trading desks only as required to request a competitive quote.

5.4.6

Market Participants operating E-Trading platforms should:

  • Have rules that are transparent to users;
  • Make clear any restrictions or other requirements that may apply to the use of the electronic quotations;
  • Establish clarity regarding the point at which market risk may transfer; and
  • Have appropriate disclosures about subscription services being offered and any associated benefits, including market data (so that Clients have the opportunity to select among all services they are eligible for).

5.4.7

Market Participants serving as Interdealer Brokers (IDB) should meet similar expectations as described above for Market Participants handling Client orders in an Agent role.

5.4.8

Market Participants acting as Clients should:

  • Be aware of the responsibilities they should expect of others as highlighted above;
  • Be aware of the risks associated with the transactions they request and undertake; and
  • Regularly evaluate the execution service they receive.

PTE Principle 5

Market Participants should handle orders fairly, with transparency and in a manner consistent with the specific considerations relevant to different order types

5.5.1

Market Participants should be aware that different order types may have specific considerations for execution. Examples include, but are not limited to, the following:

Example 1: Market Participants handling a Client’s Stop Loss Order should:

  • Obtain from the Client the information required to fully define the terms of a Stop Loss Order, such as the reference price, order amount, time period and trigger; and
  • Disclose to Clients, where appropriate, whether risk management transactions may be executed close to a Stop Loss trigger level, and that those transactions may impact the reference price and result in the Stop Loss Order being triggered.

Indicative Examples of Unacceptable Practices:

  • Trading or otherwise acting in a manner with the intention to move the market to an artificial level in order to trigger the Stop Loss level; and
  • Offering Stop Loss Orders on a purposefully loss-making basis.

Example 2: Market Participants filling a Client order, which may involve a partial fill, should:

  • • Be fair and reasonable based upon prevailing market circumstances and any other applicable factors disclosed to the Client, in determining if and how a Client order is filled, paying attention to any other relevant policies;
  • Make a decision on whether, and how, to fill a Client order, including partial fills, and communicate that decision to the Client as soon as practicable; and
  • Fully fill Client orders they are capable of filling within the parameters specified by the Client, subject to factors such as the need to prioritise among Client orders and the availability of the Market Participant’s credit line for the Client at the time.

Example 3: Market Participants handling a Client’s order to transact at a particular Benchmark:

  • Should refer to Principle 11 of this chapter.

5.5.2

Market Participants handling orders that have the potential to have sizable market impact should do so with particular care and attention.

PTE Principle 6

A Market Participant should only Pre-Hedge Client orders when acting as a Principal, and should do so fairly and with transparency

5.6.1

Pre-Hedging is the management of the risk associated with one or more anticipated Client orders, designed to benefit the Client in connection with such orders and any resulting transactions.

5.6.2

Market Participants may Pre-Hedge for such purposes and in a manner that is not meant to disadvantage the Client or disrupt the market. Market Participants should communicate their Pre-Hedging practices to their Clients in a manner meant to enable Clients to understand their choices as to execution.

5.6.3

In assessing whether Pre-Hedging is being undertaken in accordance with the principles above, a Market Participant should consider prevailing market conditions (such as liquidity), and the size and nature of the anticipated transaction.

5.6.4

While undertaking Pre-Hedging, a Market Participant may continue to conduct ongoing business, including risk management, market making and execution of other Client orders. When considering whether Pre-Hedging is being undertaken in accordance with the principles above, Pre-Hedging of a single transaction should be considered within a portfolio of trading activity, which takes into account the overall exposure of the Market Participant.

5.6.5

When a Market Participant is acting as an Agent, the Market Participant should not Pre-Hedge.

PTE Principle 7

The Mark Up applied to Client transactions by Market Participants acting as Principals should be fair and reasonable

5.7.1

Mark Up is the spread or charge that may be included in the final price of a transaction in order to compensate the Market Participant for a number of considerations, which might include risks taken, costs incurred and services rendered to a particular Client.

5.7.2

Market Participants should promote transparency by documenting and publishing a set of disclosures regarding their Precious Metals business that, among other things:

  • Makes it clear to Clients that their final transaction price may be inclusive of Mark Up;
  • Help Clients understand the determination of the Mark Up, such as by indicating the factors that may contribute to the Mark Up (including those related to the nature of the specific transactions and those associated with broader Client relationships, as well as any relevant operating costs);
  • Disclose to Clients how Mark Up may impact the pricing and/or execution of any order linked to or triggered at a specific level; and
  • Make it clear to Clients that different Clients may receive different prices for transactions that are the same or similar.

5.7.3

Firms should have policies and procedures that enable staff to determine an appropriate and fair Mark Up. These policies and procedures should include at a minimum:

  • Guidance that prices charged to Clients should be fair and reasonable, considering applicable market conditions and internal risk management practices and policies; and
  • Guidance that staff should always act honestly fairly, and professionally when determining Mark Up, including not misrepresenting any aspect of the Mark Up to the Client.

5.7.4

Market Participants should have appropriate processes to monitor whether their Mark Up practices are consistent with their policies and procedures, and with their disclosures to Clients to the extent reasonably possible.

5.7.5

Mark Up should be subject to oversight and escalations within the Market Participant.

Note: see Annex 1 for a set of illustrative examples regarding Mark Up.

PTE Principle 8

Market Participants should not request transactions, create orders or provide prices with the intent of disrupting market functioning or hindering the price discovery process

5.8.1

Market Participants should not engage in trading strategies or quote prices with the intent of hindering market functioning or compromising market integrity. Such strategies include those that may cause undue latency, artificial price movements or delays in other Market Participants’ transactions, and result in a false impression of market price, depth or liquidity. Such strategies also include collusive and/or manipulative practices, including but not limited to those in which a trader enters a bid or offer with the intent to cancel before execution (sometimes referred to as “spoofing”, “flashing” or “layering”) and other practices that create a false sense of market price, depth or liquidity (sometimes referred to as “quote stuffing” or “wash trades”).

5.8.2

Market Participants providing quotations should always do so with a clear intent to trade. Prices provided for reference purposes only should be clearly labelled as such.

5.8.3

Market Participants should give appropriate consideration to market conditions and the potential impact of their transactions and orders. Transactions should be conducted at prices or rates based on the prevailing market conditions at the time of the transaction. Exceptions to this, such as historical rate rollovers, should be covered by internal compliance policies.

5.8.4

Without limitation, Market Participations handling Client orders may decline a transaction when there are grounds to believe that the intent is to disrupt or distort market functioning. Market Participants should escalate as appropriate.

PTE Principle 9

Market Participants employing last look should be transparent regarding its use and provide appropriate disclosures to Clients

5.9.1

Last look is a practice utilised in Electronic Trading Activities whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price. Market Participants receiving trade requests that utilise the last look window should have in place governance and controls around its design and use, consistent with disclosed terms. This may include appropriate management and compliance oversight.

5.9.2

A Market Participant should be transparent regarding its last look practices in order for the Client to understand and to be able to make an informed decision as to the manner in which last look is applied to their trading. The Market Participant should disclose, at a minimum, explanations regarding whether, and if so how, changes to price in either direction may impact the decision to accept or reject the trade, the expected or typical period of time for making that decision and, more broadly, the purpose for using last look.

5.9.3

If utilised, last look should be a risk control mechanism used in order to verify validity and/or price. The validity check should be intended to confirm that the transaction details contained in the request to trade are appropriate from an operational perspective and there is sufficient available credit to enter into the transaction contemplated by the trade request. The price check should be intended to confirm whether the price at which the trade request was made remains consistent with the current price that would be available to the Client.

5.9.4

In the context of last look, the Market Participant has sole discretion, based upon the validity and price check processes, over whether the Client’s trade request is accepted or not, leaving the Client with potential market risk in the event the trade request is not accepted. Accordingly, and consistent with related principles in the Code:

  • Last look should not be used for purposes of information gathering with no intention to accept the Client’s request to trade.
  • Confidential Information arises at the point the Market Participant receives a trade request at the start of the last look window, and use of such Confidential Information should be consistent with the principles on Information Sharing.
  • Market Participants should not conduct trading activity that utilises the information from the Client’s trade request during the last look window. Such trading activity would include
    (1) any pricing activity on E-Trading Platforms that incorporates information from the trade request, and (2) any hedging activity, that incorporates information from the trade request. Such activity would risk signalling to other Market Participants the Client’s trading intent could move market prices against the Client. In the event that the Client’s trade requests were subsequently rejected, such trading activity could disadvantage the Client.

    This guidance does not apply to an arrangement that features all of the following characteristics
    :
    • 1. An explicit understanding that the Market Participant will fill the Client’s trade request without taking on market risk in connection with the trade request by first entering into offsetting transactions in the market; and
    • 2. The volume trade in the last look window will be passed on to the Client in its entirety; and
    • 3. This understanding is appropriately documented and disclosed to the Client.

5.9.5

It is good practice for Market Participants to be available to engage in a dialogue with Clients regarding how their trade requests have been handled, including the appropriate treatment of information associated with those trade requests. Such dialogue could include metrics that facilitate transparency around the pricing and execution of the Client’s trade requests and assist a Client in evaluating the handling of its trade requests in order to evaluate whether the execution methodology continues to meet its needs over time.

PTE Principle 10

Market Participants providing algorithmic trading or aggregation services to Clients should provide adequate disclosure regarding how they operate

5.10.1

Market Participants may provide Clients with algorithmic trading services, which use computer programmes applying algorithms to determine various aspects including price and quantity of orders.

5.10.2

Market Participants may also provide aggregation services to Clients, and services that provide access to multiple liquidity sources or execution venues and that may include order routing to those liquidity sources or venues.

5.10.3

Market Participants providing algorithmic trading or aggregation services to Clients should disclose:

  • A clear description of the algorithmic execution strategy or the aggregation strategy and sufficient information to enable the Client to evaluate the performance of the service, in a manner that is consistent with appropriate protection of related Confidential Information;
  • Whether the algorithm provider or the aggregation service provider could execute as Principal;
  • The fees applicable to the provision of the services;
  • In the case of algorithmic trading services, general information regarding how routing preferences are determined; and
  • In the case of aggregation services, information on the liquidity sources to which access may be provided.

5.10.4

Clients of algorithmic trading providers should use such data and disclosed information in order to evaluate, on an ongoing basis, the appropriateness of the trading strategy to their execution strategy. Clients who use an aggregator to access trading venues should understand the parameters that will define the prices displayed by the aggregator.

5.10.5

Market Participants providing algorithmic trading or aggregation services should provide services that perform in the manner disclosed to the Client.

Precious Metals Benchmarks

PTE Principle 11

Market Participants should not engage in practices that disrupt the integrity of Benchmarks

5.11.1

Market Participants should understand the associated risk for executing Precious Metals trades against a Precious Metals Benchmark. All Market Participants should take special care to avoid collusion, improper sharing of information or trading with intent to disrupt or abuse the Benchmark itself or the underlying market.

5.11.2

Market Participants handling orders during the Benchmark Process should:

  • Understand the associated risks and be aware of the appropriate procedures;
  • Not collude or inappropriately share information in order to attempt to influence the Benchmark;
  • Not intentionally influence the Benchmark Price to benefit from the Benchmark Process, whether directly or in respect of any Client related flows during the underlying Benchmark Process;
  • Price transactions in a manner that is transparent and is consistent with the risk borne in accepting such transactions;
  • Establish and enforce internal guidelines and procedures for executing orders during the Benchmark Process;
  • Accurately reflect the full interest of the Participant during the Benchmark Process; and
  • Understand that market-making during the Benchmark Process is permitted.

5.11.3

Indicative examples of acceptable practices:

  • Transacting an order over time before, during or after the Benchmark Process, so long as not to intentionally negatively impact the market price and outcome to the Client.

5.11.4

Indicative examples of unacceptable practices:

  • Buying or selling an amount shortly before the Benchmark Process such that there is an intentionally negative impact on the market;
  • Showing large interest in the market during the Benchmark Process with the intent of manipulating the Benchmark;
  • Informing others of a specific Client dealing at the Benchmark rate; and
  • Acting with other Market Participants to inflate or deflate the Benchmark against the interests of a Client.

5.11.5

Market Participants handling orders that have had potential to have sizable market impact should do so with particular care and attention.