CFTC Rule 1.55(b) Risk Disclosure Statement for Event Contracts and Swaps
This brief statement does not disclose all of the risks and other significant aspects of trading in swaps. 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 swaps is not suitable for many members of the public. The risk of loss in trading swaps can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. You should be aware of the following points:
1. Trading 100% Margined Products
Transactions in swaps that are event contracts are not currently available for trading on a partially margined basis. Instead, you will be required to post margin for 100% of the amount you may possibly be required to pay if you are the losing party on your event contract when you exit the contract or it expires. Therefore, you will not have the use of this money for the duration of your holding period for the contract. You will not receive interest, dividends or other payments on this money. You may have been able to achieve a better return on this money had you put it to another use. You will sustain a total loss of margin funds if you are the losing party when your contract expires and you still hold the contract. You may sustain a partial or total loss of margin funds if the market moves against your position and you decide to exit your position before it expires.
2. Risk-reducing Orders or Strategies
The placing of certain 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.
ADDITIONAL RISKS COMMON TO SWAPS AND OPTIONS
3. Terms and Conditions of Contracts You should review, understand and ask us about the term and conditions of the specific event contract which you are trading and associated obligations (e.g., restrictions on your ability to exit your position only partially, contract expiration dates). Under certain circumstances the specifications of outstanding contracts may be modified by the exchange or clearing house to reflect changes in the underlying commodity.
4. Suspension or Restriction of Trading and 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. Further, normal pricing relationships between the underlying interest and the swap may not exist with respect to event contracts. The absence of an underlying reference price may make it difficult to judge 'fair' value.
5. Deposited Cash and Property You should familiarize yourself with the protections accorded money or other property you deposit for event contract transactions, particularly in the event of an insolvency or bankruptcy of the derivatives clearing organization. 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.
6. 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.
7. Currency Risks 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.
8. Trading Facilities Most 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 clearing house and/or member firms. Such limits may vary; you should ask us for details in this respect.
9. Electronic Trading 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. THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS. PARAGON GLOBAL MARKETS, LLC D/B/A FANATICS MARKETS IB IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS.