MAR 1 Annex 2 Accepted Market Practices

Table: Part 1 - General

1.

G

An accepted market practice features in section 118 in the following ways:

(1)

it is an element in deciding what is inside information in the commodity markets (and see MAR 1.2.17 G to MAR 1.2.19 UK);

(2)

it provides a defence for market abuse (manipulating transactions).

2.

G

The FSA will take the following non-exhaustive factors into account when assessing whether to accept a particular market practice:

(1)

the level of transparency of the relevant market practice to the whole market;

(2)

the need to safeguard the operation of market forces and the proper interplay of the forces of supply and demand (taking into account the impact of the relevant market practice against the main market parameters, such as the specific market conditions before carrying out the relevant market practice, the weighted average price of a single session or the daily closing price);

(3)

the degree to which the relevant market practice has an impact on market liquidity and efficiency;

(4)

the degree to which the relevant practice takes into account the trading mechanism of the relevant market and enables market participants to react properly and in a timely manner to the new market situation created by that practice;

(5)

the risk inherent in the relevant practice for the integrity of, directly or indirectly, related markets, whether regulated or not, in the relevant financial instrument within the whole Community;

(6)

the outcome of any investigation of the relevant market practice by any competent authority or other authority mentioned in Article 12(1) of the Market Abuse Directive, in particular whether the relevant market practice breached rules or regulations designed to prevent market abuse, or codes of conduct, be it on the market in question or on directly or indirectly related markets within the Community; and

(7)

the structural characteristics of the relevant market including whether it is regulated or not, the types of financial instruments traded and the type of market participants, including the extent of retail investors participation in the relevant market.

Table: Part 2 - Accepted Market Practices: Market aberrations on the London Metal Exchange

Description of the AMP:

Behaviour conforming with the metal market aberrations regime 1 .

Rationale for why the practice would constitute manipulation

Behaviour which gives rise to the application of the metal market aberrations regime 1 may involve transactions or orders to trade which:

(i)

give or are likely to give, false or misleading signals as to the supply of or demand for or price of financial instruments;1

(ii)

secure, by a person or persons acting in collaboration, the price of one or several financial instruments at an abnormal or artificial level.

List of Factors

The following factors were taken into account by the FSA when assessing behaviour conforming with the metal market aberrations regime 1 as an accepted market practice:

The level of transparency (to the rest of the market) of the practice in question

The metal market aberrations regime 1 has been published to the market by the Exchange on which it applies. The transparency criterion is therefore met. Those who have long positions at or above the thresholds specified in the metal market aberrations regime 1 are required to advertise to the market that they will be prepared to lend stock.

The need to safeguard the operation of market forces and the proper interplay of the forces of supply and demand

The metal market aberrations regime 1 is designed to facilitate the operation of supply and demand on the market by avoiding abusive squeezes or other circumstances which could result in or involve distortion of the market for the investment in question.

The impact on market liquidity and efficiency

The practice has a positive effect on market liquidity and efficiency as it facilitates the orderly operation of a market in which a participant has a dominant long position.

The degree to which the practice takes into account the trading mechanism of the relevant market and enables market participants to react properly and in a timely manner to the new market situation created by the practice

The metal market aberrations regime 1 was developed taking into account the trading mechanism of the LME. The behaviour required of long position holders under the metal market aberrations regime 1 is monitored by the LME compliance department on a daily basis using public and confidential regulatory information available to it. The LME compliance department takes into account the trading mechanism of the LME when performing this task. Procedures exist for escalating any concerns about market circumstances to a Special Committee that is able to intervene in order to enable market participants to react properly and in a timely manner to any new market situations created by the practices.

The risk inherent in the practice for the integrity of directly or indirectly related markets in the financial instrument, including any market in the financial instrument which exists on an exchange (or other trading venue) and related markets in directly related financial instruments

The metal market aberrations regime was1 developed to maintain the integrity of the markets in financial instruments traded in the LME. The regime has1 been shown to be an aid in maintaining the integrity of those markets.

The outcome of any investigation of the practice by any regulatory body, including the extent to which a practice breaches existing rules or regulations designed to prevent market manipulation on the market in question or on directly or indirectly related markets in the EU

The FSA 1 supports the metal market aberrations regime 1 and, under the previous Code of Market Conduct applying to trading on the LME, provided a safe harbour for behaviour in conformity with the metal market aberrations regime 1 .

The structure characteristics of the market in question including whether it is a regulated or OTC market, the type(s) of financial instrument traded on the market and the type of market participants, including the extent of retail participation in the market;

The London Metal Exchange is a commodity derivatives market which has Recognised Investment Exchange status in the UK. It is a professional market with minimal retail involvement.

Overriding Principles

The FSA 1 had regard to the following overriding principles to ensure that the metal market aberrations regime does1 not undermine market integrity, while fostering innovation and the continued dynamic development of financial markets:

?

new or emerging market practices were not be assumed to be unacceptable simply because they had not been previously described as acceptable by the FSA;

?

the need to safeguard the operation of market forces and the interplay of proper supply and demand;

?

the need for market participants to operate fairly and efficiently without interfering in normal market activity.

Conditions relating to legitimate reasons and proper execution

The metal market aberrations regime 1 specifies the behaviour required in the circumstances where it is triggered and conduct in conformity with the metal market aberrations regime 1 is for legitimate reasons.