Futures & Options Risk

Risk Disclosure Statement for Futures and Options

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:


(1) 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

(2) The funds you deposit with a futures commission merchant for trading futures
positions are not protected by insurance in the event of the bankruptcy or insolvency of the
futures commission merchant, or in the event your funds are misappropriated.

(3) The funds you deposit with a futures commission merchant for trading futures
positions are not protected by the Securities Investor Protection Corporation even if the
futures commission merchant is registered with the Securities and Exchange Commission as a broker or dealer.

(4) The funds you deposit with a futures commission merchant are generally not
guaranteed or insured by a derivative clearing organization in the event of the bankruptcy or
insolvency of the futures commission merchant, or if the futures commission merchant is
otherwise unable to refund your funds. Certain derivatives clearing organizations, however,
may have programs that provide limited insurance to customers. You should inquire of your
futures commission merchant whether your funds will be insured by a derivative clearing
organization and you should understand the benefits and limitations of such insurance

(5) The funds you deposit with a futures commission merchant are not held by the futures
commission merchant in a separate account for your individual benefit. Futures commission
merchants commingle the funds received from customers in one or more accounts and you may
be exposed to losses incurred by other customers if the futures commission merchant does not
have sufficient capital to cover such other customers’ trading losses.

(6) The funds you deposit with a futures commission merchant may be invested by the
futures commission merchant in certain types of financial instruments that have been
approved by the Commission for the purpose of such investments. Permitted investments are
listed in Commission Regulation 1.25 and include: U.S. government securities; municipal
securities; money market mutual funds; and certain corporate notes and bonds. The futures
commission merchant may retain the interest and other earnings realized from its investment of customer funds. You should be familiar with the types of financial instruments that a futures commission merchant may invest customer funds in.

(7) Futures commission merchants are permitted to deposit customer funds with
affiliated entities, such as affiliated banks, securities brokers or dealers, or foreign brokers. You
should inquire as to whether your futures commission merchant deposits funds with affiliates
and assess whether such deposits by the futures commission merchant with its affiliates
increases the risks to your funds.

(8) You should consult your futures commission merchant concerning the nature of the
protections available to safeguard funds or property deposited for your account.

(9) 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”).

(10) All futures positions involve risk, and a “spread” position may not be less risky than an
outright “long” or “short” position.

(11) The high degree of leverage (gearing) that is often obtainable in futures trading
because the small margin requirements can work against you as well as for you. Leverage
(gearing) can lead to large losses as well as gains.

(12) In addition to the risks noted in the paragraphs enumerated above, you should be
familiar with the futures commission merchant you select to entrust your funds for trading
futures positions. The Commodity Futures Trading Commission requires each futures
commission merchant to make publicly available on its Web site firm-specific disclosures and
financial information to assist you with your assessment and selection of a futures commission


Variable degree of risk

13) Transactions in options carry a high degree of risk. Purchasers and seller 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.

(14) 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 is ordinarily remote.

(15) 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 position 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.

(16) 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.


Terms and conditions of contracts

(17) You should ask the firm with which you deal about the term 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.

Suspension or restriction of trading and pricing relationships

(18) 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.

(19) 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’

Deposited cash and property

(20) 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 specified 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.

Commission and other charges

(21) 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.

Currency risks

(22) 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.

Trading facilities

(23) 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 clearinghouse and/or member firms. Such limits may
vary; you should ask the firm with which you deal for details in this respect.

Electronic trading

(24) 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 risk 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 transactions

(25) 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.


(26) 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.

(27) 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


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