How are Gold and other precious metals traded?
Precious metals can be traded in 3 main ways:
- Buying physical gold bars
- Entering into futures or other derivatives on a commodities exchange
- Trading interbank derived spot metals as a currency pair (XAU/USD etc.)
What is XAU/USD?
The ISO 4217 standard designates currency codes such as XAU (the currency code for gold), XAG (the currency code for silver), XAG, XTS, XBB, XBC, XPT and XPD etc. These currency codes are used when a gold or silver spot trade has been entered into on an FX market alongside the relevant currency it is being traded against.
The code XAU/USD for example, consists of both the code for gold and the USD currency. XAU can also be traded on the FX marketplace similarly to other currencies such as Euro or Australian dollars (referred to as XAU/EUR and XAU/AUD, respectively).
What should XAU/USD be reported as?
Contracts for Difference (CFDs) on gold or other physical precious metals fall under the definition of a ‘derivative’. A derivative on a precious metal is normally considered as the trading of a commodity (or CMD) for reporting purposes. However, there sometimes may be confusion on how to report FX trades where the underlying is a commodity.
According to ESMA, commodities should not be reflected in currency fields, i.e. they should not be categorised as currency derivatives when reporting. This is also the case where a designated code for the commodity has been provided according to the ISO 4217 standard such as ‘XAU’ or ‘XBA’.
Derivatives based on precious metals are to be categorised and therefore reported as commodity derivatives – even when they are represented like an FX trade.
ASIC also affirms ESMA’s views on this, specifying in their recent technical guidance that the ISO 4217 designated currency codes (as mentioned above) fall outside ASIC’s trade repository minimum validation requirements. ASIC provides that a subsequent MODI (i.e. modification action type for reporting) of precious metals units codes are invalid currency codes for FX trade reports. Accordingly, trades with designated currency codes that are submitted as an FX trade report will be rejected.
How can TRAction assist?
If you have had issues regarding your trade report submissions or need help identifying how your commodity trades should be categorised and reported, please get in touch with us.
