Risk Warning Notice
OUR DATA PROTECTION POLICY UNDER THE EU GENERAL DATA PROTECTION REGULATION (GDPR)
Part 1 General Risks
Volatility of Returns
The value of investments and the amount of income derived from them may go down as well as up. All investments can be affected by a variety of factors, including macro-economic market conditions such as the interest or exchange rate environment, or other general political factors in addition to more company or investment specific factors.
Liquidity and Non-Readily Realisable Securities
Some investments may be very illiquid, meaning that they are infrequently traded, hence it may be difficult to sell them on, within a reasonable time-frame or at a price which reflects ‘fair’ value. In extreme cases an investment may be non-readily realisable. In this case there may be no secondary market available, and it may be difficult to obtain any reliable independent information regarding the value and risks associated with such an investment.
Investment Leverage or Gearing
Use of borrowing to invest, increases both the volatility and the risk of an investment. This applies if a company has significant borrowings, or if an investment vehicle otherwise allows an investor to gain much greater economic exposure to an asset than is paid for at the point of sale. It also applies if an investor borrows money for the specific purpose of investing. The impact of leverage can be as follows:
movements in the price of an investment leads to much greater volatility in the value of the leveraged position, and this could lead to sudden and large falls in value;
the impact of interest costs could lead to an increase in any rate of return required to break even; or
a client may receive back nothing at all if there are significantly large falls in the value of the investment.
Investments denominated in foreign currencies create additional risks related to the relevant exchange rate. Movements in exchange rates may cause the value of an investment to fluctuate either in a favourable or unfavourable manner.
The tax treatment of an investment for individual clients is relevant only to the specific circumstances of each client. There can be no guarantee that the nature, basis or incidence of taxation may not change during the lifetime of an investment. This may cause potential, current or future tax liabilities, and you should be aware of the tax treatment of any investment product before you decide to invest.
If your circumstances are changing, or if you are uncertain about any aspect of how an investment might relate to your own tax position, please seek professional tax advice.
Part 2 Investment Specific Risks
Ownership of an equity security represents a direct stake in the company concerned. Such an investment will participate fully in the economic risk of the company and its value can therefore fall as well as rise. The price volatility of equity markets can change quickly, and cannot be assumed to follow historic trends. In adverse market conditions irrecoverable capital losses could be incurred. In the worst case, a company could fail and if this happens its equity can become worthless. These securities are commonly used by investors seeking longer term capital growth. Examples of typical company characteristics which could increase equity investment risks are:
(i) a low market capitalization;
(ii) a product set that is undiversified or reliance on single markets as a major source of income;
(iii) a significant reliance on borrowing as a source of finance;
(iv) a significant level of fixed costs to pay, irrespective of output, production or turnover levels;
(v) major income sources which are seasonal or ‘cyclical’ in nature; and
(vi) companies trading primarily in emerging markets particularly during poor market conditions, or in countries where legal property rights may be difficult to enforce.
The equity of some smaller companies may trade in very small sums per share, and an investment into this type of equity will usually involve a proportionately large difference between the market buying and selling price. The effect of this difference means that an immediate sale may realise significant losses.
Other smaller companies may not be subject to the rules of a Listing Authority. Such companies are likely to be high risk ventures and may have an unproven trading history or management team. These equity shares may not be readily disposable, and it could be difficult to realise or to value them independently due to the lack of a secondary trading market.
d. The risks involved in equity investment can often be managed through investment via diversified investment vehicles, or by investing directly in a wide range of different companies, industries, countries and currencies.
The value of debt investments (or ‘bonds’) can generally be expected to be more stable than that of equity investments. However, in some circumstances, particularly when interest rate expectations are changing, the value of most bonds is also volatile. The most common use of a bond is to provide a reliable yield, or a source of income until maturity. For example, the value of a bond can be adversely affected by a number of factors such as:
(i) the issuers credit rating, which reflects their ability to repay the amounts payable when they fall due;
(ii) the market expectations about future interest and inflation rates;
(iii) amount of interest payable (the coupon);
(iv) the length of time until the debt falls due for repayment; or
(v) the seniority of a bond within the capital structure of a company, and the quality of any security available.
b. The factors which are likely to have a major impact on the value of a bond are the perceived financial position of the issuer, and changes to market interest rate expectations. Bonds issued by major governments or supranational bodies tend to be lower risk investments, while the risks of other debt securities (such as those with emerging market or corporate issuers) can vary greatly. For example, if an issuer is in financial difficulty, there is an increased risk that it may default on its repayment obligations. In that event, little or no capital may be recovered and any amounts repaid may take a significant amount of time to obtain.
Derivatives and Warrants
This category of investments covers a very broad range of financial instruments which can be used either for low cost risk management purposes, or for achieving speculative exposure to specific economic risks. Before investing or authorising another to invest in derivatives on your behalf you should take care to ensure you understand the following important aspects of those derivatives:
(i) the characteristics and risks/volatility of the asset(s) to which a contract is linked (the ‘underlying’);
(ii) any relevant market quote conventions, such as the lot size of a contract and the value attributed to movements in the value of the underlying;
(iii) the ‘leveraged’ exposure to price movements in the underlying, which significantly increases volatility;
(iv) the sums you are able to afford to risk before you may wish to close out;
(v) how different investments in derivatives might interact with one another;
(vi) any ongoing responsibilities you may have during the life of the contract such as any requirements to post cash amounts as ‘margin’, and the potential consequences of failure to do so;
(vii) any action you may need to take in order to exercise or opt for settlement at or before expiry; and
(viii) the person that will be responsible for paying any sums owing to you either during the course of the contract or at maturity or expiry, and the likelihood that these sums will be repaid when they fall due.
If you are unsure of any of these or other aspects of a derivatives contract you are considering entering into, please consider your actions carefully and refer to a professional financial adviser as necessary.
c. Derivatives and warrants can involve contingent liabilities. Contingent liability transactions which are margined, may require investors to make a series of payments based upon the market value of the underlying assets from time to time. If you trade in futures, contracts for differences or sell options, you may sustain a total loss of the margin you deposit prior to close out. 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 responsible for the 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 into the contract.
Typical Derivatives Contracts
a. Bought Options or Warrants
(i) These contracts offer a time limited right to subscribe for or to dispose of a defined amount of an asset in the future at a price specified now. An investor will pay an upfront premium to purchase the option to buy or sell the asset at a time (‘expiry’) and price (‘strike’) specified in the contract. An option to buy is referred to as a ‘call’ and an option to sell is referred to as a ‘put’. The maximum potential loss in each case is the amount of the upfront premium paid. This premium is usually small in comparison to the value of the asset to be traded on expiry or exercise of the option. It will be lost in its entirety if the option is exercised or reaches expiry when the price of the underlying is above the strike price of a bought put option or below the strike price of a bought call option. A relatively small movement in the price of the underlying security can therefore result in a disproportionately large movement, unfavourable or favourable, in the price of options or warrants.
(ii) It is essential for anyone who is considering purchasing warrants to understand that the right to subscribe, which a warrant confers, is invariably limited in time with the consequence of; should the investor fail to exercise this right within the predetermined time-scale, the investment becomes worthless.
(iii) In the event that an investor buys an option on a futures contract, and later exercises this option, they will be exposed in the case of a call option to the risks of a long future, and in the case of a put option to the risks of a short future. The risks of futures are set out below.
b. ‘Written’ or Sold Options
(i) Selling options involves significantly greater risk than buying options. This is because the seller of the option usually accepts a relatively small premium in return for the possible legal obligation to either buy or sell a much larger amount of an asset at exercise or expiry at a price determined now if the buyer chooses to exercise. The potential losses involved in writing an option are therefore usually much greater than the initial premium received. This means they are contingent liability investments, which could require an investor to pay additional funds when the contract is exercised. It is very important that you understand the potential amounts you could be liable for and are comfortable that you will be able to afford to pay such amounts should they fall due.
(ii) In the case of written call options, already owning sufficient of the underlying to deliver on exercise may limit the potential risk involved.
(iii) An investor may be liable to post cash margin payments during the life of a written options contract to cover potential losses.
c. Futures and Forwards
(i) Transactions in futures or forwards give rise to a legal obligation to either buy (‘long’) or to sell (‘short’) a specified amount of an asset at expiry at a price determined today. These transactions usually carry a high degree of risk, which arises because an investor is exposed to the movement of a proportionately large amount of the underlying in return for a small upfront payment. This can either work in favour or against an investor, depending upon the difference between the current market price of the underlying and the strike price defined in the contract.
(ii) For bought futures or forwards an investor will profit from rising market prices, and vice versa for sold futures or forwards. Please also note that the current price at which an asset can be traded in the futures market may differ from the price at which it can be bought or sold immediately at the time of dealing. This can work either in favour or against the returns experienced by an investor.
(iii) Futures or forwards are contingent liability investments, meaning that you may be called upon to pay additional sums during the life of the contract and on maturity. It is very important that you understand the potential amounts you could be liable for and are comfortable that you will be able to afford to pay such amounts if they fall due.
d. Contracts for Differences
(i) Contracts for differences are similar to futures or forwards. However, unlike other futures and options, these contracts can only be settled in cash. Investing in a contract for differences carries similar risks as investing in a future and you should be aware and understand the risk warnings set out herein.
(ii) Some contracts for differences are known as swaps. Typical forms of this type of contract can be similar to an agreement to purchase or sell a series of options over an underlying asset or index at an average price specified today. Swaps and other contracts for differences are contingent liability investments, meaning that if the underlying price moves in an unfavourable direction an investor can be called upon to pay additional cash on final settlement.
Other Risk Factors Associated with Derivatives
a. Off-Exchange Derivatives
It may not always be apparent that a derivative is traded on or off-exchange. Some off-exchange products may be highly illiquid. Many such products are not transferable and there is no exchange market on which to close out an existing position. It may not be possible to liquidate a position held in such a contract, or to accurately assess its value or exposure to risk.
b. Suspensions of Trading
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 if the price rises or falls in one trading session to such an extent that under the rules of the relevant exchange, trading is suspended or restricted. 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.
c. Clearing House Protections
On many exchanges, the performance of a transaction is ‘guaranteed’ by the exchange or clearing house. However, this guarantee is unlikely in most circumstances to cover you, the customer, and may not protect you if another party defaults on its obligations to you. On request, Quay Financials (Gibraltar)Limited (‘the Company’) will be pleased to explain any protection provided to you under the clearing guarantee applicable to any on-exchange derivatives in which you are dealing. There is generally no clearing house for off-exchange instruments which are not traded under the rules of an exchange.
If you deposit collateral as security with a firm, the way in which it will be treated will vary according to the type of transaction and where it is traded. There could be significant differences in the treatment of your collateral depending upon whether you are trading on exchange or off-exchange. Deposited collateral may cease to be your property once dealings on your behalf are undertaken. Even if your dealings should ultimately prove profitable, you may not get back the same assets which you deposited and may have to accept payment in cash.
In the event of an insolvency or default of your counterparty to a derivative contract, or that of any other brokers involved with your transaction, positions may be 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 payments in cash.
Commodities Linked Products
Commodity based investments may be impacted by a variety of political, economic, environmental and seasonal factors relating to issues that impact either upon demand or on the available supply of the commodity in question. As with all investments, the value of commodities can fall as well as rise.
Investment in commodities is often achieved either via a structured product over a commodities index or basket of different commodities, or by using a commodity derivative. Such products will be accompanied by specific risk disclosures to which you should refer for further information.