1. Forex Risk Disclosure
Forex Trading is Speculative and Involves a High Degree of Risk
Trading in leveraged OTC foreign currency contracts is speculative and involves a high degree of risk. In particular, because of the low margin required for foreign currency trading, price changes in OTC foreign currency contracts may result in significant losses, which may substantially exceed the funds or other assets deposited as margin. Therefore, foreign currency contracts are appropriate only for persons that (a) understand and are willing to assume the economic, legal and other risks involved in such transactions, and (b) are financially able to withstand losses significantly in excess of their initial margin funds and any additional funds deposited to maintain their positions. Before deciding to participate in Foreign Exchange (Forex) Market Transactions, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. The leveraged nature of Forex trading implies that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. It is possible that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses (to manage exposure, employ risk-reducing strategies such as "stop-loss" or " stop limit" orders described above).
Foreign currencies represent the legal tender of one or more foreign nations and normally are not linked to any intrinsically valuable commodity (such as precious metals). Any transaction involving foreign currencies, including OTC foreign currency contracts, involves risks not common to investments denominated entirely in a person’s domestic currency. Such enhanced risks include the risks of political or economic policy changes in a foreign nation, which may substantially and permanently alter the conditions, terms, marketability or price of a foreign currency. The profit or loss in transactions in foreign currency-denominated contracts (whether they are traded in a customer’s own or another jurisdiction) will also be affected by fluctuations in currency rates where there is a need to convert from the currency denomination of the contract to another currency.
Off-Exchange Currency Transactions
There is considerable exposure to risk in any off-exchange foreign currency transaction, including but not limited to leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency pair.
Retail Foreign Exchange Dealers (RFEDs) as Principals
A RFED acts as the counterparty to all foreign currency contracts executed through the RFED via its’ proprietary, leased or any other party’s trading system/platform. A RFED is not required to continue to make markets in any foreign currency and may refuse to accept any order for any or no reason, including but not limited to the failure of a customer to have sufficient funds on deposit with RFED to margin the position, market volatility, and illiquidity in the respective non exchange–traded inter-bank foreign exchange market. In particular, during periods of market volatility, it may be difficult or impossible to liquidate an existing position, to assess the value of open positions, to determine a fair price or to assess the exposure to risk. For these reasons, transactions in foreign currency involve increased risks.
Risk Reducing Orders or Strategies
The placing of certain orders (e.g., ‘stop-loss’ or ‘stop-limit’ orders) that are intended to limit losses to certain amounts may not always be effective because market conditions or technological limitations may make it impossible to execute such orders. Strategies using combinations of positions, such as ‘spread’ and ‘straddle’ positions, may be as risky or even riskier than simple ‘long’ or ‘short’ positions.
Prices May Be Different From Prices Reported Elsewhere
The prices posted by a RFED may not necessarily reflect the broader market for foreign currencies. Additionally, a RFED will select closing prices to be used in determining margin requirements and in periodically marking to market the positions in customer accounts. Prices a RFED uses may vary from those available to banks and other participants in the inter-bank market. Consequently, a RFED may exercise considerable discretion in setting margin requirements and collecting margin funds.
Customers that trade on an electronic trading system are exposed to risks associated with the system including the failure of hardware and software and system downtime, with respect to the trading platform, the individual customer’s system(s), and the communications infrastructure (including, without limitation, the Internet), connecting the trading platform with customers. As a result of any system failure or other interruption, orders either may not be executed according to the customer’s instructions or may not be executed at all, or a customer may not be able to place or change orders. RFED brokers generally disclaim any liability for any such failure of hardware or software, system downtime or communications interruption. Furthermore, IB does not warrant that it, the RFED or any customer will be able to maintain a continuous and uninterrupted link with the Internet at all times and therefore, IB shall have no liability for any such failure at any given time.
Deposited Cash and Other Property; Risk of Default
The transactions you enter into with a RFED are not traded on an exchange. Therefore, your funds may not receive the same protections as funds used to margin or guarantee exchange-traded futures and options contracts, which may receive a priority in bankruptcy. Since that same priority has not been given to funds used for off-exchange foreign exchange trading, if a foreign currency broker becomes insolvent and you have a claim for amounts deposited or profits earned on transactions with the foreign currency broker, your claim may not receive a priority. Without a priority, you are a general creditor and your claim will be paid, along with the claims of other general creditors, from any monies still available after priority claims are paid. Even customer funds that a foreign currency broker keeps separate from its own operating funds may not be safe from the claims of other general and priority creditors. The protections you may or may not receive should your foreign currency broker become insolvent will vary and be dependent on the jurisdiction in which they are based. You should seek to establish what protections, if any, you will be provided with in the event of insolvency and whether any protections are lost as a result of not trading on an exchange.
2. Futures & Options Risk Disclosure
This brief statement does not disclose all of the risks and other significant aspects of trading in Futures, Options and Foreign Exchange (Forex). 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, Options and Forex 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"
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 and Strategies
The placing of certain orders (e.g. "stop-loss" orders, where permitted under local law, 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.
Variable Degree of Risk
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 Options or allow 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.
Selling/Shorting ("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 also will 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.
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 Risks Common to Forex & Futures & Options Trading
Terms and Conditions of Contracts
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 clearinghouse to reflect changes in the underlying interest.
Suspension or Restriction of Trading & 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 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" value.
Deposited Cash and Property
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 had 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
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.
Transactions in Other Jurisdictions
Transactions on markets in other jurisdictions, including markets formally linked to a domestic market, may expose you to additional risk. Such markets may be subject to regulation which may offer different or diminished investor protection. Before you trade you should inquire about any rules relevant to your particular transactions. Your local regulatory authority will be unable to compel the enforcement of the rules of regulatory authorities or markets in other jurisdictions where your transactions have been affected. You should ask the firm with which you deal for details about the types of redress available in both your home jurisdiction and other relevant jurisdictions before you start to trade.
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.
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.
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.
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.
Any opinions expressed on IB’s website as to the future direction of prices of specific Foreign Exchange currency pairs and/or Futures and Options contracts are purely opinions, do not necessarily represent IB’s opinion, and are not guaranteed in any way. In no event will IB have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided verbally or through the Internet, or any delays, inaccuracies, errors in, or omissions of information.