Risk Disclosures Statement
Before making investment decisions, investors should carefully consider whether investment products/ services are suitable in light of their financial position, investment objectives and experiences, risk tolerance and other relevant circumstances. Meanwhile, investors should also understand the risks associated with investment products/ services.
(1) General risks
Risk of Trading
The prices of any asset fluctuate, sometimes dramatically. The price of any asset may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling such assets.
- 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.
- Risk-reducing orders or strategiesThe placing of certain orders (e.g. “stop-loss” orders, 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.
- Trading facilitiesElectronic 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 participant firms. Such limits may vary: you should ask the firm with which you deal for details in this respect.
- Electronic tradingTrading on an electronic trading system may differ 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.
- Off-exchange transactionsIn 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.
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.
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.
(2) Specific Risk of Trading Exchange Traded Funds (“ETFs”)
- Market risk: ETFs are typically designed to track the performance of certain indices, market sectors, or groups of assets such as stocks, bonds, or commodities. ETF managers may use different strategies to achieve this goal, but in general they do not have the discretion to take defensive positions in declining markets. Investors must be prepared to bear the risk of loss and volatility associated with the underlying index/assets.
- Tracking errors: Tracking errors refer to the disparity in performance between an ETF and its underlying index/assets. Tracking errors can arise due to factors such as the impact of transaction fees and expenses incurred to the ETF, changes in composition of the underlying index/assets, and the ETF manager’s replication strategy. (The common replication strategies include full replication/representative sampling and synthetic replication.)
- Trading at discount or premium: An ETF may be traded at a discount or premium to its Net Asset Value (NAV). This price discrepancy is caused by supply and demand factors, and may be particularly likely to emerge during periods of high market volatility and uncertainty. This phenomenon may also be observed for ETFs tracking specific markets or sectors that are subject to direct investment restrictions.
- Foreign exchange risk: Investors trading ETFs with underlying assets not denominated in Hong Kong dollars are also exposed to exchange rate risk. Currency rate fluctuations can adversely affect the underlying asset value, also affecting the ETF price.
- Liquidity risk: Securities Market Makers (SMMs) are Exchange Participants that provide liquidity to facilitate trading in ETFs. Although most ETFs are supported by one or more SMMs, there is no assurance that active trading will be maintained. In the event that the SMMs default or cease to fulfill their role, investors may not be able to buy or sell the product.
(3) Risk of trading in leveraged foreign exchange contracts
The risk of loss in leveraged foreign exchange trading can be substantial. You may sustain losses in excess of your initial margin funds. Placing contingent orders, such as “stop-loss” or “stop-limit” orders, will not necessarily limit losses to the intended amounts.Market conditions may make it impossible to execute such orders. You may be called upon at short notice to deposit additional margin funds. If the required funds are not provided within the prescribed time, your position may be liquidated. You will remain liable for any resulting deficit in your account. You should therefore carefully consider whether such trading is suitable in light of your own financial position and investment objectives.
(4) General Major Risks associated with Exchange-traded Derivative Products (including but not limited to the following)
- Issuer default riskIn the event that an exchange-traded derivative product issuer becomes insolvent and defaults on their issued products, investors will be considered as unsecured creditors and will have no preferential claims to any assets held by the issuer. Investors should therefore pay close attention to the financial strength and credit worthiness of exchange-traded derivative product issuers. Since exchange-traded derivative products are not asset backed, in the event of issuer bankruptcy, investor can lose their entire investment
- Gearing riskExchange-traded derivative products such as derivative warrants and callable bull/bear contracts are leveraged and can change in value rapidly according to the gearing ratio relative to the underlying assets. Investors should be aware that the value of an exchange-traded derivative product may fall to zero resulting in a total loss of the initial investment.
- Limited LifeMost of the exchange-traded derivative product issuer has an expiry date after which the products may become worthless. Investors should be aware of the expiry time horizon and choose a product with an appropriate lifespan for their trading strategy.
- Extraordinary price movementsThe price of an exchange-traded derivative product may not match its theoretical price due to outside influences such as market supply and demand factors. As a result, actual traded prices can be higher or lower than the theoretical price.
(5) General Major Risks associated with Contract for Difference (including but not limited to the following)
- A CFD is a contract for difference derivative transaction providing synthetic exposure to an underlying asset.
- It is important that the Investor fully understand the risks involved before making a decision to purchase or sell a CFD.
- This notice provides information about the risks associated with CFDs, but it cannot explain all of the risks or how such risks relate to the Investor’s personal circumstances.
- The Investor should carefully consider whether such investments are suitable for the Investor in the light of the Investor’s circumstances and financial position. CFDs are not suitable for everyone and, if the Investor is in any doubt, professional advice should be obtained.
- If the Investor chooses to enter into a trading relationship with TRADEX, it is important that the Investor remains aware of the risks involved, that the Investor has adequate financial resources to bear such risks and that the Investor monitors the CFD Orders, CFDs and Margin Account carefully and regularly.
- The Investor could lose more than the Initial Amount The risk of loss arising from trading in CFDs can be substantial and the Investor could lose more than the Initial Amount and any additional amounts, including Margin Adjustment Payments, paid into the Margin Account. CFD trading typically only requires depositing a small percentage of the total trade value (Required Margin Amount), but profits and losses can quickly exceed the Required Margin Amount, requiring Margin Adjustment Payments. If the market moves against a Long CFD Position or a Short CFD Position, the Investor might, in a relatively short time, sustain more than a total loss of Margin in the Margin Account.
- CFDs are over-the-counter (OTC) derivatives
- CFDs are not traded on any exchange at present. Each CFD purchased or sold through the CFD System results in the Investor entering into a contract with TRADEX, as the issuer of the CFD. These contracts can only be closed with TRADEX and are not transferrable to any other person.
- This means that the Investor will be exposed to the risk of TRADEX default and that such trading is not guaranteed by TRADEX.
- Gearing or Leverage 2
- Derivative instruments, such as the CFDs, can be highly volatile. The high degree of “gearing” or “leverage” which is often obtainable in CFDs stems from the payment of what is a comparatively modest Required Margin Amount when compared with the value of the underlying Reference Securities. As a result, a relatively small market movement can, in addition to achieving substantial gains where the market moves in the Investor’s favour, result in substantial losses which may exceed the Margin in your Margin Account where the market moves against the Investor.
- The Investor must ensure that there is sufficient Margin available in the Margin Account at all times when Long CFD Positions and/or Short CFD Positions are outstanding. A decline in the value of the Reference Securities may cause TRADEX to require the Investor to make Margin Adjustment Payments to avoid the forced Close-out of the relevant CFD or the forced Close-out of the Investor’s other existing CFDs. The Investor will be responsible for any losses incurred and any shortfall in the Margin Account after such Close-out.
- Changes in margin requirements
- As may be required by market conditions or otherwise in TRADEX’ discretion, TRADEX can increase the Required Margin Amounts and other rates (as set out in this Agreement )at any time subject to the notice requirements contained in this Agreement.
- These changes may, in certain circumstances, take effect immediately and may result in the Investor being required to make a Margin Adjustment Payment. If the Investor fails to make the Margin Adjustment Payment, TRADEX is entitled to follow the Close-out Procedure detailed in this Agreement.
- Lack of liquidity
- Under certain market conditions, it may be difficult or impossible to Close-out a CFD. This may occur, for example, where trading on the Reference Security Exchange is suspended or restricted at times of rapid price movement.
- If there is no liquidity in the relevant Reference Security, the Investor may be unable to trade CFDs referencing that Reference Security.
- No right to, or in respect of, the Reference Securities No CFD can be settled by either party by delivering any underlying Reference Securities. A CFD shall not confer on either party any right, title or interest in any Reference Securities, entitle either party to any voting rights or other rights of corporate action in respect of the Reference Securities, or entitle or oblige either party to acquire, receive, hold, deliver or dispose of any Reference Securities or other securities.
- This risk warnings statement cannot disclose all risks of purchasing and selling CFDs. The Investor should consult professional advisors regarding any legal, regulatory, credit, tax or accounting aspects that may be applicable to any CFD.