Risk Disclosure Statement

Risk Disclosure Statement

Risks Associated with Futures and Options Trading

The risk of loss in trading futures contracts is substantial. In some circumstances, 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 avoid loss. 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 study and understand futures contracts before you trade and carefully consider whether such trading is suitable in the light of your own financial position and investment objectives.

This brief statement does not disclose all the risks and other significant aspects of trading in futures. 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 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.

Effect of ‘Leverage’ or ‘Gearing’ of Futures

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 Strategies of Futures

The 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.

Risk of Negative Price

Futures and options can be volatile instruments and may fall in value as rapidly as it may rise. Any individual futures or options may experience downward price movement, and may under some circumstances become valueless or negative in value. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling futures and options. Such losses may be substantial. You should understand that you may be liable for unlimited losses based on the rise or fall in the price of the underlying assets.

Variable Degree of Risk in Options Trading

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 futures contract, 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 futures contract, the seller will acquire a position in a futures contract 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 futures contract 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 Risk Common to Futures and Options

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 obliged 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. The Company shall not be liable for any loss suffered by you resulting from your lack of knowledge of some trading rules.

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 futures, 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”.

Trading in futures markets outside Hong Kong

Transactions on markets or exchanges in other jurisdictions, including markets formally linked to the Hong Kong markets, may expose you to additional risk. Such markets may be subject to regulation which may offer different or diminished investor protection compared to that offered in Hong Kong. The Hong Kong SFC will be unable to compel the enforcement of domestic Hong Kong rules in markets in other jurisdictions where your transactions have been effected.

If you wish to transact in markets and exchanges outside of Hong Kong, you acknowledge that BFL arranges for the execution of orders on these exchanges and market centers by participants in the local market or on the relevant exchange and that transaction(s) will be cleared by such entity or their nominated clearing agents. Such entities may or may not be affiliates of BFL.

  • Currency risk: 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.
  • Legal and tax risks: Trading futures in overseas market may subject to different legal systems and tax regulation. Understanding the legal and tax implications, including any reporting requirement is essential to avoid any legal and financial complications.
  • Bankruptcy and insolvency risks: If an overseas entity who provides services to BFL were to default or become insolvent, positions and funds held with such entity would also be subject to the insolvency or bankruptcy laws and rules, including if applicable any investor protection schemes, of that overseas jurisdiction and not those applying in Hong Kong. Bankruptcy and insolvency laws are complex, and the extent of recovery of positions or funds would depend on the facts and circumstances of the default or insolvency. Depending on the value of positions and the sufficiency of assets held by an overseas executing or clearing participant, the entities’ other liabilities, any investor protection regimes that may be applicable, you may only recover less or substantially less than the value of the positions or funds held with such entity, or in a worst-case scenario, you may loss all funds or the value of any positions with such entity.