This notice is provided to you in compliance with the rules of the
Securities and Futures Authority (SFA). If you are a private customer, you are afforded
greater protections under these rules than other customers, and you should ensure that
your dealer tells you what these are. This notice does not disclose all of the risks and
other significant aspects of dealing in foreign exchange. You should not deal in foreign
exchange derivatives unless you understand the nature of the contract you are entering
into and the extent of your exposure to risk. You should also be satisfied that the
contract is suitable for you in the light of your circumstances and financial position.
Certain strategies, such as a "spread" position or a "straddle", may
be as risky as a simple "long" or "short" position.In considering
whether to deal in foreign exchange derivatives, you should be aware of the following
points.
Futures
1. Transactions in futures involve the obligation to make, or to take, delivery of the
underlying asset of the contract at a future date, or in some cases to settle your
position with cash. They carry a high degree of risk. The "gearing" or
"leverage" often obtainable in futures trading means that a small deposit or
down payment can lead to large losses as well as gains. It also means that a relatively
small market movement can lead to a proportionately much larger movement in the value of
your investment, and this can work against you as well as for you. Futures transactions
may have to be margined, and you should be aware of the implications of this, which are
set out in paragraph (3) below.
Options
2. There are many different types of options with different characteristics subject to
different conditions
Buying options:
Buying options involves less risk than selling options because, if the price of the
underlying asset moves against you, you can simply allow the option to lapse. The maximum
loss is limited to the premium plus any commission or other transaction charges. However,
if you buy a call option on a futures contract and you later exercise the option, you will
acquire the future. This will expose you to the risks described under "futures"
and "margined transactions".
Writing options:
If you write an option, the risk involved is considerably greater than buying options.
You may be liable for margin to maintain your position and a loss may be sustained well in
excess of any premium received. By writing an option, you accept a legal obligation to
purchase or sell the underlying asset if the option is exercised against you, however far
the market price has moved away from the exercise price. If you already own the underlying
asset which you have contracted to sell (known as "covered call options") the
risk is reduced. If you do not own the underlying asset (known as "uncovered call
options") the risk can be unlimited. Only experienced persons should contemplate
writing uncovered options, and then only after securing full details of the applicable
conditions and potential risk exposure.
OTC Derivative transactions
3. It may not always be apparent whether or not a particular derivative is effected on
exchange or is an off exchange derivative transaction. Your dealer must make it clear to
you if you are entering into an off exchange derivative transaction.
While some off-exchange markets are highly liquid, transaction in off-exchange or
"non transferable" derivatives may involve greater risk than investing in
on-exchange derivatives because there is no exchange market on which to close out an open
position. It may be possible to liquidate an existing position, to assess the value of the
position arising from an off-exchange transaction or to assess the exposure to risk. Bid
and offer prices need not be quoted, and, even where they are, they will be established by
dealers in these instruments and consequently it may be difficult to establish what is a
fair price.
With regard to foreign currency OTC derivative transactions in particular, any profit
or loss 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.
Margined transactions
4. Transactions that are margined require you to make a series of payments against the
purchase price, instead of paying the whole purchase price immediately.
You may sustain a total loss of the margin you deposit with your dealer to establish or
maintain a position. If the market moves against you, you may be called upon to pay
substantial additional margin at short notice to maintain the position. If you fail to do
so within the time required, your position may be liquidated at a loss and you will be
liable for any resulting deficit.
Even if a transaction is not margined, it may still carry an obligation to make further
payments in certain circumstances over and above any amount paid when you entered the
contract.
Collateral
5. If you deposit collateral as security with your dealer, you should ascertain from
your dealer how your collateral will be dealt with. Deposited collateral may lose its
identity as your property once dealings on your behalf are undertaken. Even if your
dealings should ultimately prove unprofitable, you may not get back the same assets which
you deposited and may have to accept payment in cash.
Commissions
6. Before you begin to trade, you should obtain details of all commissions and other
charges for which you will be liable. If any charges are not expressed in money terms
(but, for example, as a dealing spread), you should obtain a clear written explanation,
including appropriate examples, to establish what such charges are likely to mean in
specific money terms.
Suspensions of trading
7. Under certain trading conditions it may be difficult or impossible to liquidate a
position. This may occur, for example, at times of rapid price movement. Placing a
stop-loss order will not necessarily limit your losses to the intended amounts, because
market conditions may make it impossible to execute such an order at the stipulated price.
Insolvency
8. Your dealer's insolvency or default may lead to positions being liquidated or closed
out without your consent. In certain circumstances, you may not get back the actual assets
which you lodged as collateral and you may have to accept any available payment in cash.
I.G. INDEX PLC
