Risk Disclosure Statement for Futures and Options
Protecting Your Confidential Information
in accordance with Commodity Futures Trading Commission Rule 1.55
This brief statement does not disclose all of the risks and other significant
aspects of trading in futures and options. In light of the risks, you should
undertake such transactions only if you understand the nature of the contracts
(and contractual relationships) into which you are entering and the extent of
your exposure to risk. Trading in futures and options is not suitable for many
members of the public. You should carefully consider whether trading is appropriate
for you in light of your experience, objectives, financial resources and other
relevant circumstances.
FUTURES
1. Effect of "Leverage" or "Gearing"
Transactions in futures carry a high degree of risk. The amount of initial margin
is small relative to the value of the futures contract so that transactions
are “leveraged” or “geared.” A relatively small market
movement will have a proportionately larger impact on the funds you have deposited
or will have to deposit: this may work against you as well as for you. You may
sustain a total loss of initial margin funds and any additional funds deposited
with the firm to maintain your position. If the market moves against your position
or margin levels are increased, you may be called upon to pay substantial additional
funds on short notice to maintain your position. If you fail to comply with
a request for additional funds within the time prescribed, your position may
be liquidated at a loss and you will be liable for any resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g., "stop-loss" orders, where permitted
under local law, or "stop-limit" orders) which are intended to limit
losses to certain amounts may not be effective because market conditions may
make it impossible to execute such orders. Strategies using combinations of
positions, such as "spread" and "straddle" positions, may
be as risky as taking simple "long" or "short" positions.
OPTIONS
3. Variable degree of risk Transactions in options carry a high degree of risk.
Purchasers and sellers of options should familiarize themselves with the type
of option (i.e., put or call) which they contemplate trading and the associated
risks. You should calculate the extent to which the value of the options must
increase for your position to become profitable, taking into account the premium
and all transaction costs. The purchaser of options may offset or exercise the
options or allow the options to expire. The exercise of an option results either
in a cash settlement or in the purchaser acquiring or delivering the underlying
interest. If the option is on a future, the purchaser will acquire a futures
position with associated liabilities for margin (see the section on Futures
above). If the purchased options expire worthless, you will suffer a total loss
of your investment which will consist of the option premium plus transaction
costs. If you are contemplating purchasing deep-out-of-the-money options, you
should be aware that the chance of such options becoming profitable ordinarily
is remote. Selling ("writing" or "granting") an option generally
entails considerably greater risk than purchasing options. Although the premium
received by the seller is fixed, the seller may sustain a loss well in excess
of that amount. The seller will be liable for additional margin to maintain
the position if the market moves unfavorably. The seller will also be exposed
to the risk of the purchaser exercising the option and the seller will be obligated
to either settle the option in cash or to acquire or deliver the underlying
interest. If the option is on a future, the seller will acquire a position in
a future with associated liabilities for margin (see the section on Futures
above). If the option is "covered" by the seller holding a corresponding
position in the underlying interest or a future or another option, the risk
may be reduced. If the option is not covered, the risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option
premium, exposing the purchaser to liability for margin payments not exceeding
the amount of the premium. The purchaser is still subject to the risk of losing
the premium and transaction costs. When the option is exercised or expires,
the purchaser is responsible for any unpaid premium outstanding at that time.
ADDITIONAL RISKS COMMON TO FUTURES AND OPTIONS
4. Terms and conditions of contracts
You should ask the firm with which you deal about the terms and conditions of
the specific futures or options which you are trading and associated obligations
(e.g., the circumstances under which you may become obligated to make or take
delivery of the underlying interest of a futures contract and, in respect of
options, expiration dates and restrictions on the time for exercise). Under
certain circumstances the specifications of outstanding contracts (including
the exercise price of an option) may be modified by the exchange or clearing
house to reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g., illiquidity) and/or the operation of the rules of certain
markets (e.g., the suspension of trading in any contract or contract month because
of price limits or "circuit breakers") may increase the risk of loss
by making it difficult or impossible to effect transactions or liquidate/offset
positions. If you have sold options, this may increase the risk of loss. Further,
normal pricing relationships between the underlying interest and the future,
and the underlying interest and the option may not exist. This can occur when,
for example, the futures contract underlying the option is subject to price
limits while the option is not. The absence of an underlying reference price
may make it difficult to judge "fair" value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money or other
property you deposit for domestic and foreign transactions, particularly in
the event of a firm insolvency or bankruptcy. The extent to which you may recover
your money or property may be governed by specific legislation or local rules.
In some jurisdictions, property which has been specifically identifiable as
your own will be pro-rated in the same manner as cash for purposes of distribution
in the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all commission,
fees and other charges for which you will be liable. These charges will affect
your net profit (if any) or increase your loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally linked
to a domestic market, may expose you to additional risk. Such markets may be
subject to regulation which may offer different or diminished investor protection.
Before you trade you should enquire about any rules relevant to your particular
transactions. Your local regulatory authority will be unable to compel the enforcement
of the rules of regulatory authorities or markets in other jurisdictions where
your transactions have been effected. You should ask the firm with which you
deal for details about the types of redress available in both your home jurisdiction
and other relevant jurisdictions before you start to trade.
9. Currency risks
The profit or loss in transactions in foreign currency-denominated contracts
(whether they are traded in your own or another jurisdiction) will be affected
by fluctuations in currency rates where there is a need to convert from the
currency denomination of the contract to another currency.
10. Trading facilities
Most open-outcry and electronic trading facilities are supported by computer-based
component systems for the order-routing, execution, matching, registration or
clearing of trades. As with all facilities and systems, they are vulnerable
to temporary disruption or failure. Your ability to recover certain losses may
be subject to limits on liability imposed by the system provider, the market,
the clearing house and/or member firms. Such limits may vary; you should ask
the firm with which you deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from trading in
an open-outcry market but also from trading on other electronic trading systems.
If you undertake transactions on an electronic trading system, you will be exposed
to risks associated with the system including the failure of hardware and software.
The result of any system failure may be that your order is either not executed
according to your instructions or is not executed at all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are
permitted to effect off-exchange transactions. The firm with which you deal
may be acting as your counterparty to the transaction. It may be difficult or
impossible to liquidate an existing position, to assess the value, to determine
a fair price or to assess the exposure to risk. For these reasons, these transactions
may involve increased risks. Off-exchange transactions may be less regulated
or subject to a separate regulatory regime. Before you undertake such transactions,
you should familiarize yourself with applicable rules and attendant risks.
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