The new Precious Metals Code

The Global Precious Metals Code (Metals Code) has been published in and is effective as of May 2017. It sets out the standards and best practices expected from participants in the global OTC-wholesale market for precious metals, meaning gold, silver, platinum and palladium (Precious Metals). It has been prepared and is backed by the London Bullion Market Association (LBMA).

Although the Metals Code is not binding law, all organisations actively involved in the global OTC-wholesale trading market for Precious Metals are expected to act according to the broad principles of the Metals Code and have procedures designed to uphold its general terms. The Global Code will need to be applied proportionally, because of the varying degrees of sophistication and the diverse nature of the participants. Non-compliance is likely to have negative consequences on business activities, because certain market participants might no longer be willing to enter into transactions with non-compliant market participants. It is also likely that courts will rely on the Metals Code when interpreting contracts entered into in the Precious Metals wholesale market.

The Metals Code applies to the following market participants (Market Participants):

  • LBMA members
  • Physical market participants (such as refiners and miners)
  • Financial institutions such as banks, asset/fund managers, high frequency trading firms, brokers, investment advisers
  • Trading houses
  • Central banks and sovereign wealth funds
  • Logistics firms and fabricators
  • Jewellery companies
  • Benchmark execution service providers and benchmark process platform operators
  • Affirmation and settlement platforms

The Metals Code does not apply to price-streaming platform providers, private banking clients and the general retail public.

The Metals Code is organised around the following four leading principles:

  • Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the Precious Metals market. This means in particular that Market Participants should:
    • Strive for the highest ethical and professional standards.
    • Identify and address conflicts of interests.
  • Governance, Compliance and Risk Management: Market Participants are expected to have a sound and effective governance framework that provides clear accountability and a compliance and risk framework that provides for robust control and a compliance environment that effectively identifies and manages the risks associated with their engagement with the market. This means that Market Participants have to:
    • Put an adequate business strategy and financial soundness in place as well as effective structures and mechanisms to provide for appropriate oversight, supervision and controls.
    • Have appropriate policies and procedures designed to handle and respond to potentially improper practices and behaviours effectively.
    • Have a framework for compliance and risk management.
    • Familiarize themselves with and abide by all applicable laws, regulatory obligations and relevant industry standards, and should have an appropriate compliance framework in place.
    • Maintain an appropriate risk management framework with systems and controls to identify and manage the Precious Metals market risks they face.
    • Have processes in place to independently review the effectiveness of and adherence to the risk management and compliance framework.
  • Information Sharing: Market Participants are expected to be clear and accurate in their communications. They are also expected to protect confidential information and to promote effective communication that supports a robust, fair, open, liquid and appropriately transparent Precious Metals market. Market Participants have thus to:
    • Clearly and effectively identify and appropriately limit access to confidential information.
    • Not disclose confidential information to external parties, except under specific circumstances.
    • Communicate in a manner that is clear, accurate, professional and not misleading.
    • Communicate market colour appropriately and without compromising confidential information.
    • Have clear guidance on approved modes and channels of communication.
  • Business Conduct: Market Participants are expected to effectively manage each stage of the transaction life cycle, i.e. pre-trade, execution, and post-trade, in order to promote a robust, fair, open and appropriately transparent Precious Metals market. Market Participants must, however:
    • Obtain sufficient information to know each client.
    • Ensure the adoption of proportionate and responsible business practices, appropriate to their business.
    • Be clear about the capacities in which they act.
    • Handle orders fairly and with transparency in line with the capacities in which they act.
    • Handle orders fairly, with transparency and in a manner consistent with the specific considerations relevant to the different order types.
    • Only pre-hedge client orders when acting as a principal and should do so fairly and with transparency.
    • Apply only a mark-up to client transactions if fair and reasonable.
    • Not request transactions, create orders or provide prices with the intent of disrupting market functioning or hinder the price discovery process.
    • Employ a last look which is transparent regarding its use and provide appropriate disclosure to clients.
    • When providing algorithmic trading or aggregation services to clients, provide adequate disclosure regarding their operation.
    • Not engage in practices that disrupt the integrity of benchmarks.
    • Confirm trades as soon as practicable, and in a secure and efficient manner.
    • Identify and resolve confirmation and settlement discrepancies as soon as practicable.
    • Perform timely account reconciliation processes.
    • Identify settlement discrepancies and submit compensation claims in a timely manner.
    • Measure and monitor their settlement risk and seek to mitigate that risk when possible.
    • Utilize standard settlement instructions.
    • Request direct payments.

Please contact our expert on this topic for a free consultation:

Martin Liebi
Director
Tel: +41 58 792 2886
martin.liebi@ch.pwc.com

Published by

Martin Liebi

Dr. iur. Martin Liebi LL.M., attorney-at-law, CAIA, advises on and implements as Head Capital Markets within Pricewaterhouse Coopers Ltd. Legal FS Regulatory & Compliance Services practice, a wide array of regulatory change management programs.

Martin Liebi has more than 14 years experience with leading Swiss and US law firms in the areas of capital market law, banking law (private banking, asset management, and investment banking), financial market regulation, securities law, corporate law, M&A, and general commercial law.

He has been head legal with a Swiss Private Bank and head compliance with a Swiss Fund-of-Hedge Funds. He has studied law at Stanford University (LL.M.), the University of Zurich (Dr.iur.), the University of Fribourg (Lic.iur.), and Leiden University (LLC). He holds also a Management Degree from Harvard University.

He serves as judge at the commercial court of Zurich and is a lecturer at the University of Zurich’s LL.M. program in Banking & Finance (Regulation of European Capital Markets as well as Regulation of Banks and Securities Dealers). Martin Liebi publishes and holds talks regularly about current topics in financial markets law.