Risk Disclosure for Trading Futures and Forex
Important Risk Disclosure
Futures Trading
THE RISK OF LOSS IN TRADING COMMODITY FUTURES CONTRACTS CAN BE SUBSTANTIAL. YOU
SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU
IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD BE AWARE OF
THE FOLLOWING POINTS:
- You may sustain a total loss of the funds that you deposit with your broker to establish or
maintain a position in the commodity futures market, and you may incur losses beyond these amounts. If the
market moves against your position, you may be called upon by your broker to deposit a substantial amount of
additional margin funds, on short notice, in order to maintain your position. If you do not provide the required
funds within the time required by your broker, your position may be liquidated at a loss, and you will be liable
for any resulting deficit in your account.
- Under certain market conditions, you may find it difficult or impossible to liquidate a position.
This can occur, for example, when the market reaches a daily price fluctuation limit (``limit move'').
- Placing contingent orders, such as ``stop-loss'' or ``stop-limit'' orders, will not necessarily limit
your losses to the intended amounts, since market conditions on the exchange where the order is placed may
make it impossible to execute such orders.
- All futures positions involve risk, and a ``spread'' position may not be less risky than an
outright ``long'' or ``short'' position.
- The high degree of leverage (gearing) that is often obtainable in futures trading because of the
small margin requirements can work against you as well as for you. Leverage (gearing) can lead to large losses
as well as gains.
- You should consult your broker concerning the nature of the protections available to safeguard
funds or property deposited for your account.
ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER FOREIGN OR
DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING FOREIGN FUTURES OR OPTIONS
CONTRACTS, YOU SHOULD BE AWARE OF THE FOLLOWING ADDITIONAL RISKS:
- Foreign futures transactions involve executing and clearing trades on a foreign exchange. This
is the case even if the foreign exchange is formally ``linked'' to a domestic exchange, whereby a trade executed
on one exchange liquidates or establishes a position on the other exchange. No domestic organization regulates
the activities of a foreign exchange, including the execution, delivery, and clearing of transactions on such an
exchange, and no domestic regulator has the power to compel enforcement of the rules of the foreign exchange
or the laws of the foreign country. Moreover, such laws or regulations will vary depending on the foreign country
in which the transaction occurs. For these reasons, customers who trade on foreign exchanges may not be
afforded certain of the protections which apply to domestic transactions, including the right to use domestic
alternative dispute resolution procedures. In particular, funds received from customers to margin foreign
futures transactions may not be provided the same protections as funds received to margin futures transactions
on domestic exchanges. Before you trade, you should familiarize yourself with the foreign rules which will apply
to your particular transaction.
- Finally, you should be aware that the price of any foreign futures or option contract and,
therefore, the potential profit and loss resulting therefrom, may be affected by any fluctuation in the foreign
exchange rate between the time the order is placed and the foreign futures contract is liquidated or the foreign
option contract is liquidated or exercised.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF
THE COMMODITY MARKETS
Forex Trading
UNDERSTANDING THE RISKS OF TRADING IN THE
RETAIL OFF-EXCHANGE FOREIGN CURRENCY MARKET Although every investment involves some risk, the risk of loss in trading off-exchange forex contracts can be substantial. Therefore, if you are considering participating in this market, you should understand some of the risks associated with this product so you may make an informed decision before investing.
- Forex dealers are not all regulated the same way. Only regulated entities, such as banks, insurance companies, broker-dealers or futures commission merchants, and affiliates of regulated entities may enter into off-exchange forex trades with retail customers. Therefore, you should make sure the dealer is regulated and check out the dealer's registration status and background with its regulator.
Although forex dealers must be regulated, firms and individuals can solicit retail accounts for forex dealers and manage those accounts without being regulated. Therefore, you should find out if these persons are regulated. If they are not, you may be exposed to additional risks.
- The market could move against you. No one can predict with certainty which way exchange rates will go, and the forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you attempt to liquidate it will affect the price of your forex contract and the potential profit and losses relating to it.
- You could lose more money than you initially invest. You will be required to deposit an amount of money (often referred to as "margin") with your forex dealer in order to buy or sell an off-exchange forex contract. Only a relatively small amount of money can enable you to hold a forex position for much more than the account value. This is referred to leverage or gearing. The smaller the deposit in relation to the underlying value of the contract, the greater the leverage.
If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire initial deposit and the liability for additional losses.
- You are relying on the creditworthiness and reputation of the other party to the transaction. Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. Therefore, you should know who you are dealing with.
- There is no central marketplace. Unlike regulated futures exchanges, in the retail off-exchange forex market, there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price, so you are relying on the dealer's integrity for a fair price.
- The trading system could break down. If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority.
Managed Futures
There are substantial risks and conflicts of interests associated with managed futures and commodities accounts, and you should only invest risk capital. The success of an investment is dependent upon a CTA's ability to identify profitable investment opportunities and to successfully trade. The identification of attractive trading opportunities is difficult, requires skill, and involves a significant degree of uncertainty. CTAs have total trading authority, and the use of a single CTA could mean a lack of diversification and higher risk. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Returns generated from a CTA's trading, if any, may not adequately compensate you for the business and financial risks you assume. You can lose all or a substantial amount of your investment. If you use notional funding, you may lose more than your initial cash investment. Managed futures and commodities accounts may be subject to substantial charges for management and advisory fees. It may be necessary for accounts that are subject to these charges to make substantial trading profits in order to avoid depletion or exhaustion of their assets. The disclosure document contains a complete description of each fee to be charged to your account by a CTA. CTAs may trade highly illiquid markets, or on foreign markets, and may not be able to close or offset positions immediately upon request. You may have market exposure even after the CTA has a request for closure or liquidation. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. |
