Full Risk Warning
It is Binary Capital’s policy that all clients should be provided with the following two-way risk warning notice. You should also be satisfied that the product is suitable for you in the light of your circumstances and financial position. This disclosure is intended to be a general explanation of the nature and risks of the different types of financial instruments/products you may wish to invest into. It is intended at helping you understand industry terminology and to enable you to make informed decisions about the management of your investments. It cannot, however, explain everything about the nature and risks of investments and, should you have any questions, the Manager will be happy to provide you with additional explanations. However, the Manager does not provide investment advice and any such explanation is not to be considered as such.
It is important that you understand that all investment involves risk. The value of investments, and the income from them, may fall as well as rise and such value and/or income is not guaranteed. Investors may not get back the original amount invested. The past performance of investments is not a reliable indicator of future results.
Although financial instruments can be utilised for the management of investment risk, certain financial instruments can be unsuitable for certain investors. Different financial instruments involve different levels of exposure to risks and in deciding whether to trade in such instruments you should be aware of the following points. Please accordingly read carefully the following description about the nature and risks of certain investments.
1. General risks
1.1 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.
1.2 Liquidity and non-readily realisable securities
Some financial instruments may be very illiquid, meaning that they are infrequently traded, and hence it may be difficult to sell them on within a reasonable timeframe or at a price which reflects “fair” value. In extreme cases, a financial instrument may be non-readily realisable. This means that the financial instrument is neither a government security, nor a listed investment, nor an investment that regularly trades on an exchange. In this case, there may be no secondary market available, and it may be difficult to obtain any reliable independent information about the value and risks associated with such an investment.
1.3 Legal obligations and tax affairs
You have sole responsibility for the management of your legal obligations and tax affairs including making any applicable filings and payments and complying with any applicable laws and regulations. The Manager does not and will not provide you with tax or legal advice and we recommend that you obtain your own independent tax and legal advice tailored to your individual circumstances. The tax treatment of certain financial products can be complex, and the level and basis of taxation may alter during the term of any product.
2. Financial Instruments Asset Classes
An asset class is a group of securities and/or assets that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are cash and equivalents (money market instruments), fixed-income (bonds) and equities (shares). Besides those three traditional categories of assets, physical assets (for example property and commodities) are also widely used for investment purposes even if they are not classified as securities.
2.1 Cash and equivalents
Cash equivalents are investment securities that are short-term, have high credit quality and are highly liquid. These securities have a low-risk, low-return profile. Cash equivalents include government Treasury bills, bank certificates of deposit, bankers’ acceptances, corporate commercial paper and other money market instruments. Cash and cash equivalents are the most secure investment as the capital value does not vary. However, even cash deposited in a Bank may carry a certain degree of risk as it is tied up to the bank and if the Bank fails the deposit will be lost.
2.2 Fixed Income (Bonds)
Those are debt instruments (such as bonds, loans notes or debentures) that are issued by a borrower, where the borrower may be a supranational entity or agency, a sovereign, a governmental entity or agency, a state or municipal or public or other similar entity, or a corporation or other private sector institution. Typically, the borrower enters into a contractual obligation to repay the capital borrowed after a specific period of time and to pay the lender a periodic income, at regular intervals and at reasonably predictable levels. These are not generally designed to provide capital growth but to ensure a regular income. The primary risk associated with fixed-income investments is the borrower defaulting on his payment. Other considerations include exchange rate risk for international bonds and interest rate risk for longer-dated securities.
2.3 Equities (Shares)
Equities, also called stocks or shares represent a portion of ownership in a corporation. The holder of a share is entitled to the company’s earnings and is responsible for its risk for the portion of the company that each share(s) represents. There are two main classes of shares: common shares and preferred shares. Common shares holders have the right to vote on major company decisions, such as whether or not to merge with another corporation, and may receive dividends determined by management. Preferred shares holders do not usually have voting rights, but receive a minimum dividend.
These instruments are much more volatile, i.e. they are subject to higher price variation than Fixed Income instruments or Cash and equivalents. These fluctuations represent the change in opinion as to how well the company is performing, including changes in opinion as to the company’s solvency and general ability to carry-on its business. Additionally, they may be subject to, without limitation, supply and demand factors, liquidity risk, market risk, dividend risk, legal risk and/or global economic risk.
2.4. Physical assets
The two main categories of physical assets are property or real estate and commodities.
2.4.1 Real Estate
Real estate or property is comprised of land and the buildings on it as well as the natural resources of the land including uncultivated flora and fauna, farmed crops and livestock, water and minerals. However, for financial purposes, this class of assets will predominately encompass residential or commercial real estate together with the land on which it is build or be built. These assets are perceived to provide both income and capital growth. They may be illiquid and difficult to dispose of and are subject to various risks such as, without limitation, risks stemming from the global economic environment, interest rate risk, legal and contractual risks.
Commodities markets are organised markets in raw material or primary agricultural product that can be bought and sold, such as copper or coffee. They are traded on regulated markets, i.e. commodities exchanges via standardised contracts. The prices of these instruments may vary a lot and are influenced by the changes in the demand and supply for commodities (which are affected by external factors such as weather and environmental patterns), as well as the usual risks including but not limited to interest rates risk, risks stemming from the global or local economic environment or jurisdictional risk. They are also subject to very specific risks inherent to the nature of the asset which include, without limitation, supply and input risks.
Many financial investments based on Real estate or Commodities are referred to as “Alternative Investments”, which is set out more in details below.
3. Undertakings in collective investment schemes (Funds)
3.1 Collective investment schemes
A collective investment scheme allows investors to “pool” their assets into a fund which will be managed by a professional fund manager. By pooling together those assets, the fund can invest in far broader spread of investments thus reducing risk.
Terminology varies with country but investment funds are often referred to as investment pools, collective investment schemes, managed funds, or simply funds. The regulatory term in UK is Undertaking for Collective Investments. An investment fund may be held by the public, such as a mutual fund, exchanged-traded fund, or close-end fund, or it may be sold only in a private placement, such as a hedge fund or private equity fund. The term also includes specialised vehicles such as collective and common trust funds, which are unique bank managed funds structured primarily to commingle assets from qualifying pension plans or trusts.
Investment funds are promoted with a wide range of investment aims either targeting specific geographic regions (e.g., emerging markets or Europe) or specified industry sectors (e.g. technology). Funds are often selected on the basis of these specified investment aims, their past investment performance, and other factors such as fees.
Funds are exposed to the risks of the underlying assets they invest into, although the degree of such exposure depends on how well diversified they are. Besides those risks they are also exposed to specific risks such as the funds redemption policy, cancellation rights, taxes, liquidity or legal structure of their incorporation.
3.2 Exchange traded funds
Exchange traded funds (known as “ETFs”) are open-ended or closed-ended collective investment schemes or securities, traded as shares on stock exchanges, and typically replicate a stock market index, market sector, commodity or basket of assets. As such, they generally combine the flexibility and trade ability of a share with the diversification of a collective investment scheme. Where you purchase ETFs, you will be exposed to similar risks as detailed in respect of equity securities and collective investment schemes (as above)
3.3 Alternative Investments
Hedge funds and other private investment fund investments (“alternative investments”) may involve complex tax and legal considerations and can give rise to considerable risks. Although often in the form of collective investment schemes, alternative investments are often not subject to the same regulatory requirements or oversight as traditional collective investment schemes. Investors in alternative investments may also have limited rights with respect to their investment interest, including limited voting rights and participation in the management of the alternative investment.
Alternative investments often engage in leverage and other speculative investment practices, which involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the loss of the entire amount that is invested or committed. The illiquid nature of such investments can mean interests can be difficult to value and can render transfer (particularly within a required timeframe) difficult.
Alternative investments may themselves invest in instruments that may be highly illiquid and difficult to value. Alternative investments may also not be required to provide you with periodic pricing or valuation information. Again, this may limit your ability to redeem or transfer your investment or delay receipt of redemption proceeds.
It should be noted that alternative investments may impose significant fees and charges, including management fees that are based upon a percentage of the realised and unrealised gains or management fees that are set at a fixed percentage of assets under management regardless of performance returns.
The Alternative Investment Fund Managers Directive (the “AIFMD”) is a European Union legislative measure which has sought to regulate
3.3.1 managers of alternative investment funds (“AIFs”) and
3.3.2 how AIFs are marketed/distributed to professional investors throughout the European Economic Area (the “EEA”). An AIF includes hedge funds and funds of hedge funds. AIFMD requires managers of alternative investments to, for example and among other things, make appropriate disclosures to investors and regulators
A derivative is a financial instrument with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indices.
Derivatives can either be traded over-the-counter (“OTC”) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardised derivatives.
The most common derivatives are Futures, Options, Warrants and Contracts for differences. While futures and options are commonly standardised, the universe of contracts for differences is much wider and includes Forwards, Swaps and CFDs. These instruments present multiple risks (e.g. credit risk, leverage risk and contingent liability risk) and are often subject to high price variation and may potentially lead to a total loss of the investor’s invested capital.
Furthermore, certain type of transaction, such as the purchase or sale of derivatives instruments enabling the entry into contracts for future purchases, sales or settlement may result in a loss of more than the initial transaction amount. In some cases, the loss may be unlimited.
4.1 Exchanged traded derivatives
There are many different types of options with different characteristics. Buying options involves less risk than selling options because, if the price of the underlying asset moves against you, you can 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.
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 the 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 (when the options will be known as ‘covered call options’) the risk is reduced. If you do not own the underlying asset (‘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.
Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation you may subsequently be called upon to pay margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated in the same way as a futures position.
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 the 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 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 have a contingent liability, and you should be aware of the implications of this, in particular the margining requirements, which are set out above.
4.2 Rolling Spot Forex
This is either a future where the underlying instrument being traded is foreign exchange or sterling or it is a contract for difference where the profit is secured or a loss is avoided through fluctuations in foreign exchange rates and in either case the contract is entered into for speculative purposes. A rolling spot forex contract can be ‘rolled’ indefinitely and no currency is actually delivered until the position is closed. This exposes both parties to fluctuations in the underlying currencies.
5. Structured investment products
Structured products are designed to facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security, such as a conventional investment grade bond, and replacing the usual payment features (e.g. periodic coupons and final principal) with non traditional payoffs which do not resemble the scheduled cash flows paid by the issuer, but are instead derived from the performance of one or more underlying assets.
The payoffs from these performance outcomes are contingent in the sense that if the underlying assets return “x,” then the structured product pays out “y.” This means that structured products may closely relate to traditional models of option pricing, though they may also contain other derivative types such as swaps, forwards and future, as well as embedded features such as leveraged upside participation or downside buffers.
Structured products carry risk, i.e. invested capital and any expected income may be lost in whole or part. In some cases, investments in structured products may lead to losses exceeding that of the originally invested capital. Additionally, given that the structure is designed by, and implementation of the structure is via, a financial intermediary, an important risk when investing in these instruments one important risk is the counterparty risk, i.e. the possibility that the financial institution fails, becomes insolvent, or generally ceases to carry on its business, which may lead to part of, or the full invested amount (or in some cases, an amount exceeding the amount originally invested in the instrument) to being lost, irrespective of the performance of the underlying asset.
Certain structured products provide capital protection (subject to the credit risk of an issuer) such that an investor will not have economic exposure to performance of the underlying assets below a certain level. The range of products may include those where the return is linked to an index or indices, a basket of securities or other specified factors which relate to one or more of the following: equity or debt securities, interest rates, currency exchange rates or commodities.
Some structured products do include an element of principal protection, at a level which is stated at the time of the initial investment, so that on maturity of the investment you are assured of the return, at a minimum, of the stated proportion of your initial capital invested (subject always to the credit of the issuer of the product). In respect of some products which include an element of principal protection, the return of the stated proportion of your initial capital invested may depend on a pre-agreed level of performance being achieved or the product being held to maturity. If the performance is not attained or the product is not held to maturity the element of principal protection will not apply.
Investors in products which have either conditional or no capital protection should only invest in them if they are prepared to sustain a total or substantial loss of the money they have invested, plus any commission or other transaction charges.
It is important to understand that it may be difficult to liquidate or sell an investment of this type, or to identify an independently determined fair valuation for an interest in this kind of vehicle. In addition, you may not be protected by certain regulatory protections or compensation schemes in the event that a scheme operator acts unlawfully and causes a loss to you when managing fund assets. Such risks can be mitigated through the performance of extensive due diligence prior to investment, or through investment via a professionally managed fund.
6. Other factors influencing investment risks
Besides the specific investment risks highlighted above several other risks may influence the expected returns on investments: foreign markets, currency risks or Over-the-Counter transactions. These risks are global and will affect any types of investments undertaken.
6.1 Foreign markets
Investments in foreign markets, in particular in “emerging markets” are consider to be more at risk that investing in domestic instruments given the legal uncertainties, different regulatory, legal and fiscal frameworks (if any) and political or macroeconomic distresses. The investments may also be impacted by adverse currency fluctuations that will affect the value of the investments purely as a result of exchange rates changes.
6.2 Currency risks
Financial instruments denominated in foreign currencies open up 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.
6.3 Over-the-counter transactions
As already indicated above, transactions executed on an OTC basis are usually deemed to be riskier than those executed on regulated markets for two main reasons:
(i) the products traded on an OTC are usually more tailored to investors needs than those traded on regulated exchanges. All OTC trades are transacted on a principal to principal basis. In most circumstances OTC contracts, will not be transferrable to other counterparties and will have be closed with the counterparty with whom investors have originally traded. For contingent liability transactions, such as swaps for examples investors will be more reliant on their counterparty to fulfil their contractual obligations such as current and future payments required by the contracts.; and
(ii) the valuation process and tradability of OTC investments are different to investments executed on regulated markets and it may be more difficult to dispose of OTC investments given a narrower range of purchasers in respect of such OTC investments.
Some securities or assets may be subject to a “stabilisation mechanism”. Where the market price of such securities or assets is being artificially stabilised, and often maintained at a higher level that it would be otherwise. This may happen during an initial public offering (“IPO”) process (involving a new issuance of a security) where the new security is sold to the public.
6.5 Weekend and holiday risk
There will be limitation on when you are able to carry out trading, for example you will not be able to trade over weekends and bank holidays (market opening and closing times can be found on our website) when financial markets will generally be closed for trading. You should be aware that this may cause the markets to open at a significantly different price from where they closed. You will not be able place or change orders over the weekend, on market holidays or and at other times when the relevant markets are generally closed. There is a substantial risk that non-guaranteed stop-loss orders left to protect open positions held during these periods will be executed at levels significantly worse than their specified price and you will be liable for making good any losses, even if they are unforeseen.
6.6 Charges and commissions
Before you begin to trade, you should ensure that you understand all commissions and other charges for which you will be liable. All costs and charges have been disclosed to you separately, to help you to understand how costs and charges can affect a transaction and the expected returns.