Market Conduct
Policy
Version 01 | 23 April 2019
Contents
1/ Key Policy Points ........................................................................................................................ 3
2/ Purpose ........................................................................................................................................ 3
3/ Scope ............................................................................................................................................ 3
4/ Roles and Responsibilities ......................................................................................................... 3
5/ Policy Statements........................................................................................................................ 3
Defining Market Abuse or Manipulation .............................................................................................................................. 3
Defining Prohibited Behaviors and Transactions – Best Practices ..................................................................................... 4
Other Best Practices ........................................................................................................................................................... 6
Policy Questions or Concerns............................................................................................................................................. 7
Surveillance and Training.................................................................................................................................................... 7
6/ Relevant definitions .................................................................................................................... 7
Company, CIL ..................................................................................................................................................................... 7
Employee(s) ........................................................................................................................................................................ 7
Financial Instruments .......................................................................................................................................................... 7
Inside Information................................................................................................................................................................ 7
7/ Non-compliance .......................................................................................................................... 7
8/ Document Information .............................................................................................................. 8
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1/ Key Policy Points
• CILand its employees must conduct trading activities in an ethical manner as an orderly market participant.
• CIL complies with the market abuse and manipulation rules and regulations of the financial markets, countries and
territories in which it operates.
• Any suspicious behaviour should be reported immediately to the Global Head of Compliance, senior management,
or the CIL Integrity Hotline here.
2/ Purpose
CIL firmly commits to maintaining a high ethical standard across all its business activities. The Code of Conduct incorporates
our values and serves as a guide to understanding the expectations of our business conduct, complying with legal
requirements, and exercising sound judgment in reaching ethical business decisions. In support of the Code of Conduct, this
Policy provides further guidance to help our employees understand their responsibilities relative to the trading of financial
instruments and the prevention of unlawful disclosure of inside information or inside dealing.
CIL establishes this policy to entrench systems and controls that meet our duty to educate, detect, prevent and report market
abuse provided for under various laws such as Market Abuse Regulation (EU) No 596/2014 (“MAR”) and the US Commodity
Exchange Act 4c(a)(5) (“CEA”) among others.
3/ Scope
This Policy governs all CIL’s trading activities and it applies to all Company Employees, Officers, Board of Directors,
consultants and contractors. Regulations are not limited by the geographical location of employees or type of trading
activities.
4/ Roles and Responsibilities
Senior management, functions, traders in the first instance and regional business units are ultimately responsible for ensuring
compliance with this Policy.
Employees involved in any trading or regulatory reporting functionalities are responsible for complying with this Policy.
Businesses, functions and countries must maintain contact with the Global Head of Compliance on matters likely to be
important to CIL stakeholders and likely to come to public notice, including but not limited to:
• Suspicions of market abuse
• Investigations or inquiries initiated by a regulatory authority
• Allegations of market abuse against CIL and its employees
• Improper or false regulatory reporting
5/ Policy Statements
COFCO International Limited (“CIL”) and its employees are highly engaged in world-wide financial markets and believe in the
safeguarding of market integrity and trading. As global market players, we are subject to the rules and regulations of multiple
jurisdictions but the general principles stated below are key and should be used as guidelines against all forms of market
abuse and manipulation regardless of physical location or activity.
Violations of this policy harm the reputation of CIL and will carry internal disciplinary actions as well as possible external
consequences for an offending employee. Allegations or findings of market abuse and/or manipulation by a regulatory body
can result in formal charges and significant personal liability in the form of civil or criminal proceedings. Regional regulators
have extraterritorial reach to enforce and prosecute such market abuse.
Defining Market Abuse or Manipulation
In summary, market abuse is illegal behaviour, usually deliberately undertaken to directly or indirectly interfere with
the market for personal gain. Market abuse undermines public confidence in the financial markets and the fair
pricing of traded commodities. It can come in multiple forms as detailed below.
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Defining Prohibited Behaviours and Transactions – Best Practices
Defined here is a non-exhaustive list of common terms that describe manipulative or abusive market behaviour. The
practices are prohibited and should not be strategies employed by CIL personnel. Any questions or concerns about these
types of trades should be raised to the Global Head of Compliance.
“Spoofing”
A form of trading that involves the placement of non-bona fide, large volume orders and near immediate cancellation of such
orders, the goal of which is to manipulate market conditions and mislead other traders.
In spoofing strategies, a trader enters a single or a series of visible orders that either creates a new best bid or offer or adds
significant displayed liquidity at the existing best bid or offer. During the lifespan of that first order(s), or within a short time
after it is cancelled, the same trader executes a trade on the opposite side of the market. The strategy is manipulative
because the placement of the first order(s) was to give the trader a more favourable price execution than he/she was likely to
obtain without the cancelled order.
Example A trader has a significant short position in the May Corn Futures contract that needs to be closed, and the price is
rising. The trader enters a large Sell order close to, but not at “touch.” The order conveys, falsely, a signal of selling interest
to algorithms and other physical traders. While the sell order rests, the trader will be active on the buy side, often in small
clips to close her short. The trader may “toggle” the sell order to ensure it is always at the back of the que in a “first in, first out”
order stack.
Traders should only introduce bona-fide offers or bids into the market and not for the purpose of price improvement. A bona-
fide intent to trade is defined as the intention to execute an order, even if later cancelled. High rates of cancellation should be
avoided when possible because it may spark regulatory interest.
“Layering”
A variant of spoofing, described as entering multiple non-bona fide orders at multiple price tiers.
Similar to spoofing, the trader does not intend to execute all entered orders. Multiple visible orders are usually entered on one
side of the market at multiple price tiers to effect price movement for a favourable execution on the opposite side of the
market. This trading pattern is manipulative because the execution occurs at a more favourable price than the trader was
likely to obtain in the absence of the multiple orders entered and later cancelled.
Again, it is important to have the express intention of executing any and all orders introduced into the market. Note that it has
been proven that even being “hit” on a bid or offer is not evidence of intent. Order to cancellation ratios will be investigated
and well documented strategy can help to evidence a legitimate purpose behind trades. Complex strategies that involve
multiple price layers and resting order types are not necessarily prohibited but should not be used for the express purpose of
price movement and manipulated favourable execution.
“Wash Trading”
This term within financial markets (not within physical trading) refers to prearranged trading resulting in the purchase or sale
of the same instrument at the same price, or with a similar price for accounts with the same or common beneficial ownership.
This is prohibited as it carries no economic risk to the executing traders and puts false information into the market concerning
price and volume.
Regulators routinely monitor order audit trails to review whether trading counterparties are under common beneficial
ownership. Even inadvertent wash trading will draw regulatory ire if the traders should have reasonably known that a pattern
of trades were entered or executed in a manner that might produce a wash result. All CIL entities are considered to be held
under common beneficial ownership, so trades between CIL accounts would be viewed as wash.
Example: A CIL trader in the South Cone wishes to transfer hedges to a colleague at a separate CIL entity in Europe to move
a hedge tied to a physical cargo between legal entities along with the cargo. The traders speak and agree a price at which
they will trade. One CIL trader places the sell order and the other immediately buys the futures.
CIL employees must never intentionally execute trades amongst themselves or between CIL accounts. A positions transfer
executed for the express purpose of balancing CIL accounts or to correct an error will still appear to regulators as a wash
trade and must be avoided. If futures or options transfers are required between CIL entities, Office Transfers (“OTs”) can be
used as an alternative to transferring P&L in the open market, or where permitted under exchange rules, as an EFRP (see
section below for details). Contact compliance if you are unsure of the best way to achieve this.
“Squeezing”
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A squeeze of the market involves deliberately amassing a long futures position to move prices sharply higher, forcing short
participants to close out their positions, usually at a loss.
There are legitimate circumstances that would require CIL to amass a large futures position in the market. However, traders
should be prepared to show that there is legitimate business rationale behind such positions, such as a hedge for existing
physical contracts or inventory. Large futures or options positions in a particular contract may invite regulatory scrutiny if
based on purely speculative activity.
“Cornering the market”
Cornering involves the accumulation of a long or short cash position to manipulate the physical market or deliverable supply
to the futures market. This creates a false advantage for the large physical trader as it implies there is less room for the
market to move. When the market is cornered, competitive price discovery falters and usually requires regulatory
intervention.
CIL’s business interests require the purchase and sale of substantially large physical commodities positions that may affect
market prices, but physical trading activities should not be deliberately used as a means to affect prices in financial markets.
Regulators routinely look at market patterns and unusual trading patterns if a trader is suspected of cornering activity. CIL
traders should be prepared to have legitimate economic rationale and interests behind unusual purchase or sale decisions
that may draw scrutiny.
“Marking the Close”
This is a form of market manipulation that involves the use of purchases or sales at the very end or close to the close of
trading to influence the closing price of the commodity. A rush of activity at the end of the trading day can artificially inflate or
depress the closing price and impacts orders that will be executed at that closing price. A false or misleading appearance of
activity in the contract is given to other market participants, which can improperly influence market prices.
Trades conducted at or near the close are not illegal, but traders should not be entering such trades for the purpose of
affecting prices.
“False Reporting”
False reporting involves knowingly delivering or causing to deliver false, misleading or inaccurate reports or information to
market regulators or price reporting agencies. It is prohibited to be intentionally involved in the delivery of false or inaccurate
reports concerning crop or market information or conditions that affect or tend to affect the price of any commodity.
Concealing relevant facts may also constitute market manipulation as it can qualify as a transaction intended to mislead or
deceive.
For example, it would be prohibited to selectively report only highest price to a Price Reporting Agency achieved in order to
skew the published price to the trader’s advantage.
CIL pledges to be responsive and truthful to regulatory requests for information. Regularly submitted reports such as the
CFTC Form 204 and 304 are reviewed with careful due diligence on the part of CIL and its employees to ensure that all
reported positions are accurate and reflective of our records. CIL traders should also be prepared to answer any and all
inquiries, interviews or questions in an honest manner.
“Insider Trading”
This term can carry many connotations but generally involves the improper use or abuse of non-public, proprietary and
confidential information for an advantage or monetary gain.
Such information would include unpublished, price sensitive data such as USDA crop reports (if somehow obtained prior to
their release). Generally, information about COFCO production assets (for example an elevator outage) would not be
considered inside information as it does not meet the tests for significance or publication. However in the case of specific
examples, please contact Compliance for further guidance.
Note this is also relevant in a prohibition of CIL employees from using what would be considered insider information from their
employment duties to enrich themselves for personal gain. It is a conflict of interest to the CIL organization and a breach of
employee obligations. Any confusion about whether information would be considered to be non-public, proprietary or
confidential should be addressed with the Compliance department before that information is shared.
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Other Best Practices
When a claim of market abuse or manipulation exists, a regulator will attempt to prove that there has been some sort of intent
or reckless behaviour on the part of the trader. In practice, it can be difficult to prove or disprove the intent behind a
transaction or manipulative behaviour. Even legitimate transactions can be viewed with suspicion as unlawful manipulation.
Thus, it is important for CIL and traders to abide by best practices to avoid even a hint of improper market behaviour and
regulatory censure.
Careful Communications
CIL is required to maintain records to evidence (for example correct execution of EFPs), and upon regulatory request or legal
notice it must provide such records during investigation or suit. Therefore, it is important for all CIL employees to remember
that business communications should be exchanged in a careful and thoughtful manner. There are numerous examples of
lawsuits and regulatory actions solely supported by unfortunate written records. Professional judgement should be used at all
times.
The use of certain terms in a trading context, such as the terms defined above, are considered to be “buzz” words by
regulators and can be used as proof of unlawful manipulation and behaviour. They should not be taken lightly and employees
should avoid joking about manipulative behaviours or trends in the market. Communications taken out of context are unlikely
to be viewed in a favourable light.
For further guidance, please review the CIL External Communications Policy.
Algorithmic Trading
Regulations in the US and EU require that any Algorithmic Trading techniques are approved and in some cases reported.
The definition is quite wide and can encompass any system that can generate a trade without direct human intervention. This
can include auto-spreaders and the like. High Frequency Algorithmic Trading (defined as a algorithmic trading with a
frequency rate greater than 2 messages per second) requires further approval and controls . Please consult with Compliance
prior to deploying any such techniques.
EFRPs
An Exchange for Related Position (“EFRP”) transaction involves a privately negotiated off-exchange execution of an
Exchange futures or options contract and the simultaneous execution of an equivalent quantity of the cash product, by-
product, related product, or OTC derivative instrument corresponding to the asset underlying the Exchange contract. EFRPs
are used between independently controlled counterparties to transfer corresponding positions without entering the market.
The most common type of EFRP used by CIL is an Exchange for Physical (EFP). An EFP is a transaction between two
parties in which a futures contract on a commodity is exchanged for the actual physical good.
Within the CIL organization, Office Transfers should be used whenever possible as a default mechanism for transferring
futures or options between companies. As stated above, all CIL entities are under common beneficial ownership which
allows for easy movement of financial instruments. If an Office Transfer is not available and an EFRP is required, that
transaction must document (1) the required “independent control of accounts” for the physical transaction as required by
exchange rules and (2) have a bona fide physical component.
It is a breach of exchange and CFTC rules to execute an EFP without being able to demonstrate the physical underlying to
which it relates.
Pre-hedging of Block Trades
A block trade is a privately negotiated futures or options transaction that meets exchange quantity thresholds and may be
executed away from the public order book. Principal counterparties to a potential block trade may engage in pre-hedging, or
anticipatory hedging, of the position that they believe will result from the consummation of the block trade.
However, note this does not apply to an intermediary between the two parties. An intermediary may only enter transactions
to offset the position after the block has been executed. The intermediary cannot offset the position established by the block
trade in any account which is owned or controlled, or in which an ownership interest is held, or for the proprietary account of
the employer of such intermediary.
Prohibited Use of Non-Public Information
It is important to note that pre-hedging is different than front running. It is a violation of exchange rules to engage in front
running of a block trade if the trader is acting on material non-public information on an impending transaction of another
market participant or in breach of a pre-existing duty.
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Parties who hold non-public information regarding a consummated block trade may not disclose such information to any other
party prior to the public report of the block trade by the exchange. CIL employees should not act on non-public information
that is obtained improperly.
Recordkeeping
From time to time regulators will ask for further information or detail on legitimate transactions. In the interest of avoiding
unnecessary scrutiny, CIL personnel should have careful records of such transactions whenever possible. This includes
necessary documentation required for the execution of EFRPs, office transfers, etc. These will be kept for a minimum of five
years.
Regulatory inquiries are common and not always indicative of an identified issue. Routine audits or questions about market
activity frequently arise. As good practice, CIL personnel should generally be prepared to explain trading rationales and the
economics of certain transactions or decisions, especially those that relate to physical delivery of market contracts.
Policy Questions or Concerns
This policy will be reviewed periodically and if at any time changes are made to this policy statement, a new copy will be
made available. Please contact Compliance at complianceteam@cofcointernational.com if you ever have any further
questions or concerns related to behaviour that may be considered to be manipulative or market-abuse.
Any concerns about market abuse or manipulation may also be reported anonymously through the CIL concerns reporting
hotline.
Surveillance and Training
The Compliance Department will proactively monitor for suspicious or manipulative trading activity on a regular basis by
reviewing trades, transactional records and various reports.
Compliance will also provide training and general awareness of best trading practices on an as-needed basis.
6/ Relevant definitions
In the context of this document:
Company, CIL
COFCO International Limited and its affiliated companies
Employee(s)
Person(s) hired by CIL to conduct business on behalf of CIL and includes person(s) contracted through a third party to work
with COFCO International
Financial Instruments
All types of securities, including but not limited to: shares, notes, bonds or other publicly issued debt instruments, options,
futures and other derivative instruments
Inside Information and Material Non Public Information
Information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to
one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the price of
those financial instruments or on the price of related derivative financial instruments
7/ Non-compliance
Non-compliance with this Policy may constitute misconduct and/or a breach of the Employee’s contract of employment. In line
with HR policy, consequences up to and including termination of employment may be possible. Additionally, individuals may
be subject to disciplinary measures by exchanges and regulatory authorities which include personal fines. In some
jurisdictions Market Abuse is a criminal offence.
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8/ Document Information
Accountabilities
Responsible Officer CIL Chief Legal Counsel
Contact Officer CIL Global Head of Compliance
Supporting Information
Legislative Compliance MAR Regulations, US Commodity Exchange Act
Supporting Documents Code of Conduct
Related Documents CIL External Communications Policy
Superseded Documents Nil
File Number
Revision History
Version Approved by Approval date Effective date Sections modified
CIL Chief Legal
1.0 27 Nov 2019 27 Nov 2019 New document
Counsel
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