Disclosure to wholesale metals clients
We ask that you read this notice as it sets forth our relevant business practices and approach to dealing, including how we communicate and transact with our Clients in principal-to-principal Metals transactions (in addition to when you may act as agent for another principal).
This notice may be updated from time to time in order to address changing regulatory, industry and other circumstances or requirements, with the most up to date notice available at www.macquarie.com/about/disclosures/regulatory-disclosures. If you have questions after reading this notice, please contact your senior Macquarie representative.
The purpose of this notice is to clarify the nature of the Base and Precious Metals (together “Metals”) trading relationship between you and Macquarie Bank Limited, including any of its affiliates (collectively “Macquarie”) and to provide transparency around how Macquarie prices, handles and executes Metals transactions. This notice is not, however, intended to be an exhaustive statement of Macquarie’s pricing or order management practices or policies, nor does it replace any agreements you have entered into with Macquarie relevant to Metals activities or as required by applicable regulations.
Macquarie is a dealer and market maker in the Metals market. As such, Macquarie engages in price quoting, order taking, trade execution and other related activities. Unless otherwise agreed with you, Macquarie engages in these activities as principal for the benefit of Macquarie. In that principal capacity, Macquarie will not act as agent, fiduciary, financial advisor or in any similar capacity on your behalf and therefore does not take on any of the duties that a party acting in that capacity would ordinarily owe to you.
Macquarie is dedicated to upholding a high level of integrity in our Metals dealings with clients and other market participants. This includes following our “What We Stand For” principles (which can be found at www.macquarie.com/about/company/what-we-stand-for), and adhering to applicable rules, regulations and requirements published by regulatory bodies and relevant international groups in our dealings with you. Nonetheless, it is in the nature of this relationship that from time to time Macquarie and its clients will have divergent or conflicting interests. In these situations Macquarie will manage its activities through the relevant policies, procedures and other controls it has in place to mitigate these conflicts. Macquarie may also decline to act when such circumstances occur.
You will execute Metals transactions with Macquarie by either:
- calling Macquarie Metals sales and trading staff (‘Voice Trading”); or
- placing your order through various proprietary, interdealer or other electronic platforms (“Electronic Trading”).
To the extent that you continue to discuss and/or enter into Metals transactions with Macquarie, and unless expressly agreed between Macquarie and yourself or as required by applicable regulation, it will be based on the disclosures in the most recent version of this notice. For the avoidance of doubt, however, this notice is not intended to exclude any mandatory obligations that we are required to undertake under any applicable law or regulation.
Our policies and procedures
Macquarie has specific policies and procedures in place which detail inter-alia how we will communicate, manage orders and transact. Certain of these policies and procedures have been implemented with the intention of identifying and addressing the conflicts of interest inherent in principal trading relationships and managing our business towards an acceptable return. These policies broadly focus on the following:
- conflicts of interest in order handling;
- appropriate management and execution of counterparty orders;
- handling of orders and order fills in a fair, timely and complete manner;
- appropriate communication and communication channels; and
- specific guidelines on appropriate content of market commentary.
Macquarie is a dealer, counterparty and market maker in the Metals market. As such, Macquarie engages in price discovery, price quoting, order taking, transaction execution and other related activities.
Unless we otherwise expressly agree and document clearly that an order is to be managed and executed on an agency basis, Macquarie engages in activities as principal for the benefit of Macquarie and will enter into transactions with you on a principal basis as an arm’s length party.
In that capacity, Macquarie does not act as agent, fiduciary, financial advisor or in any similar capacity on a counterparty’s behalf and therefore does not undertake any of the duties that a party acting in that capacity would ordinarily owe in those circumstances, nor do Macquarie’s sales and trading personnel serve as brokers or agents to a counterparty with whom we deal in a principal capacity.
Due to the nature of Macquarie’s role in its dealings with you, Macquarie may at times have divergent or competing interests from those of our Clients.
Macquarie will be truthful in its statements about any facts discussed with you, but our statements should not be construed as advice regarding investment, tax, accounting, legal or other matters. You are expected to have evaluated the appropriateness of any transaction for you based on your own position and circumstances, including your own assessment of the associated risks and merits of that transaction.
Where Macquarie acts as principal, it does so for its own account and any indicative or firm price provided will be an “all-in” price unless otherwise specified. This means that the price may include a mark-up which will be fair and reasonable and may take into account, among other things, the size of the order, market conditions (such as liquidity and price volatility), as well as relevant business costs,(such as credit costs, costs of capital, execution venue and settlement costs), which may differ between Clients. Apart from these elements, Macquarie may also modify its prices for risk management purposes in order to encourage trades that result in a reduction of Macquarie’s risk.
Macquarie and a counterparty may also, from time to time, discuss prices in relation to a bid, offer or order that is constructed of the market price at the time of execution plus a set fee, which may be inclusive of the cost of credit, margin and costs related to the execution of the transaction (referred to here as “market price plus agreed margin”). Macquarie’s acceptance of and effort to fulfil such bids, offers or orders does not constitute an agreement that Macquarie is acting as the counterparty’s agent. Consequently Macquarie, as principal, may transact with another counterparty at a price different than the bid, offer or order and may also earn compensation (such as mark-up or an on-top amount from such other counterparty) in connection with fulfilling any such counterparty transaction or order in addition to any designated on-top amount and need not disclose that compensation to the counterparty.
Macquarie has discretion to provide different prices or services to different Clients for the same or substantially similar transactions. Macquarie’s sales and trading personnel are not obligated to disclose the amount of revenue Macquarie expects to earn from a transaction, nor are they required to disclose the components of Macquarie’s all-in price. While we do not have any duties to disclose to a counterparty any mark-up included in the transaction price we will be truthful if we do make a disclosure about whether and how much mark-up is applied.
When Macquarie agrees to accept an order from you at a particular price (such as a limit or stop loss order), Macquarie is indicating its willingness to act as a principal counterparty to you and will attempt to complete the trade at the price you have requested. In so doing, Macquarie accepts market risk on the transaction at the point at which it is executed. Unless otherwise specifically agreed, Macquarie will handle the order fairly and with transparency, and will exercise reasonable discretion in deciding which orders to execute, when to execute them, and how to execute them, including whether to execute all or part of the order unless we have otherwise expressly agreed to different terms of execution (e.g. a “fill or kill” order).
In relation to orders that you place with Macquarie, including where you confer Macquarie with a degree of discretion in execution (including but not limited to limit orders, stop loss orders, ‘at best’ or ‘at worst’ orders, or orders worked over a period of time), you should be aware of the following:
- Order parameters: To effectively manage your orders, we require you to inform us of the parameters of each order that you place with us, including but not limited to, the price, order amount, time period and, for stop loss orders, the stop level.
- Pre-hedging: Macquarie may pre-hedge orders when acting in a principal capacity in order to effectively manage market risk. Macquarie will not pre-hedge your order when acting as agent. Prehedging involves Macquarie managing the risks associated with one or more client orders through the establishment of a risk position (“inventory”). Our intention in pre-hedging is to facilitate order execution and reduce the potential market impact of filling your order, with the goal of achieving a better price outcome for you. However, there is no guarantee that the pre-hedging will have the desired outcome. Prevailing market conditions, as well as the size and nature of any anticipated transactions, will be among the relevant considerations in the manner in which Macquarie conducts its pre-hedging. In relation to stop loss orders that you have placed with us, Macquarie may execute transactions that are close to the stop level of any stop loss order that you have placed as part of our pre-hedging approach. These transactions may impact market prices which may result in the stop loss order being triggered, however Macquarie will not transact with the intention of triggering any stop loss orders nor disrupting the market and is committed to handling all orders fairly and in accordance with industry best practice standards. Macquarie may continue to conduct on-going business, including risk management, market making and execution of other client orders, while undertaking pre-hedging.
- Management of potentially-competing counterparty orders: Macquarie may accept orders from multiple Clients at similar price levels in the same or related product, the effect of which has the potential for an order from one counterparty to conflict or compete with the interests of another counterparty. Macquarie is committed to handling all orders fairly and in accordance with industry best practice standards.
- Order fills: Macquarie will endeavour, but is not obliged, to take reasonable steps to keep you updated as to liquidity and market conditions at the beginning of and throughout the execution of your order (as appropriate). Macquarie will endeavour to wholly fill orders which Macquarie is capable of filling within the parameters of the order, subject to the prevailing market conditions and other relevant business considerations including, but not limited to, counterparty instructions, credit lines, costs of execution and the need to prioritise certain counterparty orders. When Macquarie makes a decision on whether and how to fill your order, including partial fills, Macquarie will communicate that decision to you as soon as practicable. If you chose to place a limit order then depending on market liquidity, Macquarie may not be able to fill your order, even where other transactions have been executed in the market at the limit price or better.
If and when an order can be executed at the order price, it does not mean that Macquarie held, acquired, or would acquire inventory to complete the transaction at the order price level, or that there exists a tradable market at that level. Macquarie reserves the right to execute a transaction with a counterparty using Macquarie’s inventory or through acquisition or other hedging activities without disclosing to the counterparty the source and Macquarie’s cost of the liquidity. As principal, Macquarie will generally attempt to execute an order to make an appropriate and reasonable return on the transaction, taking into account Macquarie’s position, including its inventory strategy and overall risk management strategies, its costs, risks and other business factors and objectives, at Macquarie’s discretion.
As a market maker that manages a portfolio of orders for multiple Clients competing interests, as well as its own interests Macquarie acts as principal and may trade prior to or alongside a counterparty’s transaction to execute transactions for Macquarie or to facilitate executions with other Clients in order to manage risk, to source liquidity or for other reasons. These activities may have an impact on the prices we offer you on a transaction and the availability of liquidity at levels necessary to execute orders. There is also a risk that these transactions may trigger stop loss orders, barriers, knock-outs, knock-ins and similar conditions. In conducting these activities, Macquarie endeavours to employ reasonably designed means to avoid undue market impact and will act fairly and with transparency and will not use information received from you to inappropriately derive a benefit for Macquarie.
In addition, as a market maker, Macquarie may receive requests for quotations and multiple orders for the same or related products. Macquarie acts as principal and may seek to satisfy the requests of all of our Clients as well as managing our independent risk management objectives. We retain discretion with respect to how we deal with our Clients, including with respect to order execution, aggregation, priority and pricing. In particular, an order at a certain price level may not be executed, in part or full, even if the market publishes a price at that level, due to various factors which may include that the market did not trade at that level sufficiently (or at all) for Macquarie to execute a transaction, or that the execution of the order is dependent on the incorporation of a mark-up in the final price. Macquarie is unable to disclose at the time you wish to leave an order that Macquarie may be handling other Clients’ orders or Macquarie’s own Metal risk management needs at the same time as, ahead of, or on an aggregated basis with, your order.
Macquarie is under no obligation to disclose to a counterparty why Macquarie is unable to execute the counterparty’s order in whole or in part, provided that Macquarie will be truthful if we agree to disclose such information.
Macquarie’s sales, trading and other personnel will consult, including with respect to a counterparty’s interests, trading behavior and expectations, mark-up, spread, and any other relevant factors, on a need-to-know basis in order to handle Macquarie’s market-making positions, and for the benefit of Macquarie’s trading positions and the handling of counterparty transactions and orders.
Macquarie has policies and procedures in place to address issues arising from these activities, including any conflicts of interest.
A benchmark order is an order to buy or sell a specified amount at the benchmark requested.
Orders for transactions whose pricing is set by reference to certain benchmarks can create additional concerns for transaction execution and management of related risks.
Macquarie has policies and procedures in place that seek to prevent, mitigate and manage conflicts of interest that may arise during the execution of benchmark orders. Macquarie executes benchmark orders according to the following principles:
- Macquarie will not disclose information relating to benchmark orders other than on a need-toknow basis to Macquarie staff or third parties; and
- acceptance and execution of benchmark orders will be undertaken in good faith and in a commercially reasonable manner
In the event that a benchmark that is intended to be used in relation to a client order is not published on the required pricing date, then, subject to the terms of any agreement between the parties, Macquarie will work with the client to determine an alternative pricing mechanism.
Binary and Barrier Options
Binary and Barrier options are a class of option that are either activated or cancelled when a predetermined level of a reference price is reached at a specified date or time (or during a specified date or time range).
As an example, Commodity digital options can be standalone options contracts or can be embedded in other options or structured products. Commodity digital options can have two potential values - a fixed pay-out if in the money or no pay-out if out of the money. Commodity digital options can also be continuous, triggering (i.e. knocking-in or knocking-out) at any point over the term of the option, either into a fixed payoff (positive or negative) or into another market risk instrument (i.e. another option or product).
Commodity digital options are typically used to express a view about future price movements or to hedge bespoke financial risks. They are often seen as lower cost alternatives to “plain vanilla” options since they generally provide limited or contingent protection and can therefore be an efficient way to hedge identified risk or express specific views on a market. Unlike many vanilla options, digital options have the potential for a discontinuous pay-off profile (or a discontinuous change in present value). This means that their value increases or decreases as a step function when the reference price breaches a specified (“strike”) level. Many barrier events exhibit no step change in value. Discontinuities tend only to occur at or near option expiry (or at the end of a barrier window). Trading in digital options is speculative and involves a high degree of risk that can result in the loss of your entire investment.
Protecting the confidentiality and security of your information is an important part of how we do business. Macquarie has policies and controls in place that are designed to protect your confidential information. If it is necessary to disclose your information internally or externally in order to execute transactions or manage risk, Macquarie will only do so in accordance with these policies or procedures which includes such disclosure being on a need to know basis.
Macquarie will protect confidential information through clear and accurate communications that support and promote a robust, fair, open, liquid and appropriately transparent market. This may include analysing, commenting on and disclosing information regarding executed transactions, as appropriate and on an anonymised basis (except where information regarding executed transactions has previously been publicly disclosed), together with other relevant market information, internally and to third parties, as market colour. With regard to executed transactions, Macquarie analyses this information internally on an individual and aggregate basis and may use the information for a variety of purposes, including business strategy, sales coverage, and counterparty risk and relationship management.
Macquarie is also subject to regulatory obligations that require the disclosure of your information, such as regulatory reporting obligations. Macquarie may also disclose your information, in accordance with applicable law, in the course of regulatory investigations or legal proceedings.