A simplified summary on leveraged products and the risks associated with them
Trading in financial products always involves a risk. As a general rule, you should therefore only trade in financial products if you understand the products and the risks associated with them. We have endeavoured in the following sections to cover the key leveraged products that Saxo Capital Markets offers to its clients as well as the risks associated with these particular products.
Foreign exchange trading (FOREX)
When trading in foreign exchange, the investor takes a view on the development of the price of one currency relative to another, where one is sold and the other is purchased. By way of example, an investor may sell British pounds (GBP) against the US dollar (USD) if he expects that the USD will increase relative to the GBP.
Foreign exchange is traded as a leveraged product, which means that for a small outlay, you can open and trade larger positions in the market. Foreign exchange may be traded as FX Spot, FX Forward or FX Options. FX Spot is the purchase of one currency against the sale of another for immediate delivery. FX Forward and FX Options transactions are settled on an agreed date in the future at prices which are agreed on the date of the transaction. FX Forward trading involves an obligation to enter into the transaction at the agreed price on the settlement date. A purchaser of FX Options has a right to enter into a transaction in the underlying FX Spot currency pair on the expiry date if the price is more favourable than the market price at this time. On the other hand, a seller of options has an obligation to enter into a transaction with the purchaser (Saxo Capital Markets) on the settlement date if requested by the purchaser. Purchased options therefore involve a limited risk in the form of a premium which is payable when the contract is made, while options that have been sold involve unlimited risk in the form of changes to the price of the underlying FX Spot currency pair.
The currency exchange market is the world's largest financial market with 24 hour trading on working days. It is characterised, among other things, by a relatively low profit margin compared to other products. A high profit is therefore subject to a large trading volume, which is achieved for instance by margin trading as described above. When trading in foreign exchange, a gain realised by one market player will always be offset by another player's loss. Foreign exchange transactions are always made with Saxo Capital Markets as counterparty, and Saxo Capital Markets quotes prices on the basis of prices that can be obtained in the market.
Please note that as foreign exchange is margin traded, it allows you to take a larger position than you would otherwise be able to based on your funds with Saxo Capital Markets. As such, a relatively small negative or positive market movement can have a significant effect on your investment. Foreign exchange trading therefore involves a relatively high level of risk. This makes the potential gain quite high, even if the deposit is relatively small. If your total exposure on margin trades exceeds your deposit, you risk losing more than your deposit.
FX Touch Options
An FX Touch Option is a type of binary option in which the payout can take only two possible outcomes: either you are paid the return in a predefined fixed amount upon the occurrence of the event on or before the expiry date, or you lose the amount invested in the option. Simply stated, a Touch Option is generally held until expiry in an “all or nothing” payout structure and based on a simple “yes” or “no” proposition: Will a currency pair* touch a set price on or before a certain date? This is different from a traditional FX option which grants the right, but not the obligation to buy or sell a currency pair at a set price on or before a certain date.
The maximum loss is known when you trade a Touch Option, and depending on whether it is a buy or sell position, the premium or the notional/payout (whichever represents the maximum loss) is reserved from your account in full when the Touch Option is dealt, i.e., the product cannot be traded on margin.
Whether a Touch Option is regulated will depend on its underlying asset. Where the underlying asset of the binary option is traded OTC such as FX spot, it is important to note that the OTC markets are largely unregulated due its decentralised structure where deals take place directly between two counterparties and liquidity is fragmented across different venues. Therefore, the level of regulatory oversight and transparency in an OTC market is very low compared to that of a formal exchange which is required to maintain fair, orderly and transparent markets.
Tradeable tenures for touch options are available from 1 day to 12 months. Touch Options with shorter tenures are riskier as investors may be exposed to short term volatility and further, it is challenging to consistently predict the performance of an underlying asset within a short period of time.
You should not engage in Touch Options trading unless you fully understand the basic aspects of such trading as well as its associated risks. By trading in unregulated financial products, investors will not have the protection afforded under the regulatory framework which are only available in the context of regulated offerings.
*Currency pairs available include: EURUSD, GBPUSD, EURGBP, USDJPY, EURJPY and AUDUSD.
If you buy a touch or no-touch option, then the maximum amount you can lose is the premium paid up-front (you stand to receive the notional/payout amount if the option “touches”). You must be able to pay this premium upfront, which is deducted from your account at the point of trade, and the market value of the touch option position cannot be used as leverage to support any other existing or new open positions from a margin perspective.
If you sell a no-touch or touch option, then you receive the premium up-front (which you keep in entirety but may need to pay the notional/payout amount if the option “touches”). The premium is credited to your account at the point of trade, but the full notional/payout amount is reserved from the account and cannot be used over the touch option’s lifetime to support any other existing or new open positions from a margin perspective.
A CFD - or Contract for Difference - is an agreement between two parties to exchange the difference between the purchase and sale price of a financial instrument or security. The product allows you to take a view on the future increases or decreases in the value of a specific asset, for instance a share. If your view proves to be correct, you will make a profit from the difference in value (less costs). If the view you took turns out to be wrong, you will have to pay the difference in value (plus costs). Being tied to an underlying asset, the value of a CFD depends on that asset. CFDs are always margin traded (see the above paragraph on foreign exchange transactions). CFDs are normally traded with Saxo Capital Markets as the counterparty, but some CFDs may be traded on a regulated market. However, the price always moves with the price of the underlying product, which is in most cases traded on a regulated market. The price and liquidity of CFDs on individual shares mirror the price and liquidity of the share on the market in which the share is admitted for trading, whereas, for instance, index CFDs are over-the counter(OTC) products with a price fixed by Saxo Capital Markets on the basis of the price and liquidity of the underlying shares, the futures market, estimated future dividends, the effects of interest rates, etc.
Please note that as CFDs are margin traded, it allows you to take a larger position than you would otherwise be able to based on your funds with Saxo Capital Markets. As such, a relatively small negative or positive movement in the underlying instrument can have a significant effect on your investment. CFD trading therefore involves a relatively high level of risk. This makes the potential gain quite high, even if the deposit is relatively small. If your total exposure on margin trades exceeds your deposit, you risk losing more than your deposit.
Futures trading involves trading on the price of a specific underlying asset going up or down in the future. A future gives the holder a standardised obligation to either buy or sell the underlying asset at a specified price at a certain date in the future. The underlying asset may, for instance, be raw materials, agricultural produce or financial products. Depending on the nature of the future, the asset either has to be settled for the price difference or by actual delivery at the settlement date. Saxo Capital Markets does not support actual physical delivery. Futures are always traded on margin (see "Foreign exchange trading" above). Futures are always traded in a regulated market, either by direct trading in the stock exchanges' trading systems, or by reporting of transactions.
Please note that as futures are margin traded, it allows you to take a larger position than you would otherwise be able to based on your funds with Saxo Capital Markets. As such, a relatively small negative or positive market movement can have a significant effect on your investment. Futures trading therefore involves a relatively high degree of risk. This makes the potential gain quite high, even if the deposit is relatively small. If your total exposure on margin trades exceeds your deposit, you risk losing more than your deposit.
Option trading is highly speculative and is not suitable for all investors due to the risks involved. Buyers and sellers of Contract Options should familiarize themselves with the type of option (i.e. put or call, bought or sold) they intend to trade and the associated risks. Contract Options are traded with Saxo Capital Markets as counterparty to the trades.
A Contract Option gives you the right or the obligation to either buy or sell a specified amount or value of a particular underlying asset at a fixed exercise price, by the option being exercised either before or on its specified expiration date. A Contract Option which gives you the right to buy or the obligation to sell is a call option and a Contract Option that gives you the right to sell or the obligation to buy is a put option.
A Contract Option that is in the money on expiry will always be exercised.
Trading Contract Options involves a high level of risk. Contract Options that gives you the right to either sell or buy an underlying asset (bought Contract Options) might expire worthless and your initial investment ( i.e. premium and transaction costs) will be lost. Contract Options that give you the obligation to either sell or buy an underlying asset (sold Contract Options) can result in substantial (potentially unlimited) losses. To assure you will be able to cover losses on sold Contract Options Saxo Capital Markets will require margin charges. Nonetheless, potential losses can exceed the margin charged and you will be liable for these losses.
If your total exposure on margin trades exceeds your deposit, you risk losing more than your deposit. If the underlying asset of a Contract Option is a margin traded product (i.e. a derivative), and if the Contract Option is being exercised by the buyer, then the buyer (in case of a call option) or the seller (in case of a put option) of the Contract Option will acquire a position in the underlying margin traded product with associated risks as well as liabilities to provide margin.
Please note that by default, you will be enabled for buy Contract Options (puts and calls) only. Should you wish to be enabled to write / sell Contract Options (puts and calls), please contact your account manager.
- Final Settlement of Stock Options requires physical delivery of the underlying stocks vs. payment of the strike value in cash. In case a client is holding a stock options position, but is short either cash or stocks, he will not be able to settle the options position and the client will fail to deliver on his contractual obligation.
- Final Settlement of a stock option position occurs when the holder of a long option position exercises his right to buy or sell the underlying stocks on and/or, in case of American Style options, prior to expiry. On expiry, all in-the-money long option positions held by clients of Saxo Capital Markets are automatically exercised. Both prior as well as on expiration, clients who hold short option positions will be assigned by means of a random assignment lottery. At expiry, there should be no "assume" procedure for delivering on short option positions. Instead of the assume procedure, the clearing statements from the broker should be used to reflect the true exchange expiry outcome.
- As a general rule, Saxo Capital Markets clients have responsibility to meet the delivery requirements related to their option positions. As such Saxo Capital Markets will not pre-emptively act on client positions to avoid delivery failure. It will be the responsibility of the client to manage his positions especially when approaching expiry to make sure he can meet any delivery obligations. Notwithstanding the above, in case Saxo Capital Markets could be exposed to uncollateralized losses incurred by clients, Saxo Capital Markets reserves the right to act pre-emptively and close-out some or all of the client's positions that could cause potential losses which the client cannot carry on his account balances. Pre-emptive close-out will be conducted under the responsibility of the Saxo Capital Markets' Market Analysis & Control.
- In case a client failed to meet his delivery obligation, Saxo Capital Markets will act on behalf of the client and without the need to notify the client in advance to resolve the delivery failure. Saxo Capital Markets will resolve a short stock position by acquiring the required stocks at market price, Saxo Capital Markets will resolve a short cash position by liquidating any or all positions under delivery and if available any long option position that provided cover for a settling short option position. In the Exchange Traded Options context, this will be referred to as default handling. Transactions executed for the purpose of default handling, will be charged additional (substantial) commissions. Default Handling will be performed by Saxo Capital Markets' Markets Desk.
- Therefore Saxo Capital Markets recommends the Clients to close the position before expiry.
Overseas-Listed Investment Products
An overseas-listed investment product* is subject to the laws and regulations of the jurisdiction it is listed in. Before you trade in an overseas-listed investment product or authorise someone else to trade for you, you should be aware of:
- The level of investor protection and safeguards that you are afforded in the relevant foreign jurisdiction, as the overseas-listed investment product would operate under a different regulatory regime.
- The differences between the legal systems in the foreign jurisdiction and Singapore that may affect your ability to recover your funds.
- The tax implications, currency risks, and additional transaction costs that you may have to incur.
- The counterparty and correspondent broker risks that you are exposed to.
- The political, economic and social developments that influence the overseas markets you are investing in.
These and other risks may affect the value of your investment. You should not invest in the product if you do not understand or are not comfortable with such risks.
* An "overseas-listed investment product" in this statement refers to a capital markets product that is listed for quotation or quoted only on overseas securities exchange(s) or overseas future(s) (collectively referred to as "overseas exchanges").
This statement is provided to you in accordance with paragraph 29D of the Notice on the Sale of Investment Products [SFA04-N12].
This statement does not disclose all the risks and other significant aspects of trading in an overseas-listed investment product. You should undertake such transactions only if youunderstand and are comfortable with the extent of your exposure to the risks.
You should carefully consider whether such trading is suitable for you in light of your experience, objectives, risk appetite, financial resources and other relevant circumstances. In considering whether to trade or to authorise someone else to trade for you, you should be aware of the following:
Differences in Regulatory Regimes
- Overseas markets may be subject to different regulations, and may operate differently from approved exchanges in Singapore. For example, there may be different rules providing for the safekeeping of securities and monies held by custodian banks or depositories. This may affect the level of safeguards in place to ensure proper segregation and safekeeping of your investment products or monies held overseas. There is also the risk of your investment products or monies not being protected if the custodian has credit problems or fails. Overseas markets may also have different periods for clearing and settling transactions. These may affect the information available to you regarding transaction prices and the time you have to settle your trade on such overseas markets.
- Overseas markets may be subject to rules which may offer different investor protection as compared to Singapore. Before you start to trade, you should be fully aware of the types of redress available to you in Singapore and other relevant jurisdictions, if any.
- Overseas-listed investment products may not be subject to the same disclosure standards that apply to investment products listed for quotation or quoted on an approved exchange in Singapore. Where disclosure is made, differences in accounting, auditing and financial reporting standards may also affect the quality and comparability of information provided. It may also be more difficult to locate up-to-date information, and the information published may only be available in a foreign language.
Differences in legal systems
- In some countries, legal concepts which are practiced in mature legal systems may not be in place or may have yet to be tested in courts. This would make it more difficult to predict with a degree of certainty the outcome of judicial proceedings or even the quantum of damages which may be awarded following a successful claim.
- The Monetary Authority of Singapore will be unable to compel the enforcement of the rules of the regulatory authorities or markets in other jurisdictions where your transactions will be effected.
- The laws of some jurisdictions may prohibit or restrict the repatriation of funds from such jurisdictions including capital, divestment proceeds, profits, dividends and interest arising from investment in such countries. Therefore, there is no guarantee that the funds you have invested and the funds arising from your investment will be capable of being remitted.
- Some jurisdictions may also restrict the amount or type of investment products that foreign investors may purchase. This can affect the liquidity and prices of the overseas-listed investment products that you invest in.
Different costs involved
- There may be tax implications of investing in an overseas-listed investment product. For example, sale proceeds or the receipt of any dividends and other income may be subject to tax levies, duties or charges in the foreign country, in Singapore, or in both countries.
- Your investment return on foreign currency-denominated investment products will be affected by exchange rate fluctuations where there is a need to convert from the currency of denomination of the investment products to another currency, or may be affected by exchange controls.
- You may have to pay additional costs such as fees and broker's commissions for transactions in overseas exchanges. In some jurisdictions, you may also have to pay a premium to trade certain listed investment products. Therefore, before you begin to trade, you should obtain a clear explanation of all commissions, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.
Counterparty and correspondent broker risks
- Transactions on overseas exchanges or overseas markets are generally effected by your Singapore broker through the use of foreign brokers who have trading and/or clearing rights on those exchanges. All transactions that are executed upon your instructions with such counterparties and correspondent brokers are dependent on their respective due performance of their obligations. The insolvency or default of such counterparties and correspondent brokers may lead to positions being liquidated or closed out without your consent and/or may result in difficulties in recovering your money and assets held overseas.
Political, Economic and Social Developments
- Overseas markets are influenced by the political, economic and social developments in the foreign jurisdiction, which may be uncertain and may increase the risk of investing in overseas-listed investment products.
No Warranty or Liability
The information presented herein is intended for general circulation and does not constitute investment, legal, accounting, tax or financial advice. It does not take into account the specific investment objectives, financial situation or particular needs of any person, and any information contained herein should be verified independently, taking into account, the specific investment objectives, financial situation or particular needs of the investor, before the investor makes a commitment to transact in any investment.
Although information presented in this document has been obtained or derived from sources believed to be correct and reliable, Saxo Capital Markets makes no warranty or accepts any liability of any kind as to its accuracy, adequacy, reliability, timeliness or reasonableness of such information. You assume all risks for any reliance on the information presented herein.