RISK DISCLOSURE AND WARNING STATEMENT 

Part 1 – RISK OF SECURITIES TRADING

The prices of securities fluctuate, sometimes dramatically.  The price of a security may move up or down, and may become valueless.  It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities.

 

Part 2 – RISK OF MARGIN TRADING

 

The risk of loss in financing a transaction by deposit of collateral is significant.  You may sustain losses in excess of your cash and any other assets deposited as collateral with China Galaxy International Securities (Hong Kong) Co., Limited (‘Galaxy Securities’).  Market conditions may make it impossible to execute contingent orders, such as ‘stop-loss’ or “stop-limit” orders.  You may be called upon at short notice to make additional margin deposits or interest payments.  If the required margin deposits or interest payments are not made within the prescribed time, your Collateral may be liquidated without your consent.  Moreover, you will remain liable for any resulting deficit in your Account and interest charged on your Account.  You should therefore carefully consider whether such a financing arrangement is suitable in light of your own financial position and investment objectives.

 

Part 3 – RISKS OF PROVIDING AN AUTHORITY TO REPLEDGE YOUR SECURITIES COLLATERAL

 

There is risk if you provide Galaxy Securities with an authority that allows Galaxy Securities to apply your Securities or Collateral pursuant to a securities borrowing and lending agreement, repledge your Collateral for financial accommodation or deposit your Collateral as collateral for the discharge or satisfaction of Galaxy Securities’ settlement obligations and liabilities.

 

If your Securities or Collateral are received or held by Galaxy Securities in Hong Kong, the above arrangement is allowed only when you have consented in writing.  Moreover, unless you are a Professional Investor, the authority must specify the period for which it is current and be limited to not more than 12 months.  If you are a Professional Investor, these restrictions do not apply.

 

Additionally your authority may be deemed renewed (i.e. without your written consent) if Galaxy Securities issues to you a reminder at least 14 days prior to the expiry of the authority and you do not object to such deemed renewal before the expiry date of your then existing authority.

 

You are not required by any law to sign these authorities.  But an authority may be required by Galaxy Securities, for example, to facilitate margin lending to you or to allow your Securities or Collateral to be lent to or deposited as collateral with third parties.  Galaxy Securities should explain to you the purposes for which one of these authorities is to be used.

 

If you sign one of these authorities and your Securities or Collateral are lent to or deposited with third parties, those third parties will have a lien or charge on your Securities or Collateral.  Although Galaxy Securities is responsible to you for Securities or Collateral lent or deposited under the authority, a default by it could result in the loss of your Securities or Collateral.

 

A Securities Cash Account not involving securities borrowing and lending is available.  If you do not require margin facilities or do not wish your Securities or Collateral to be lent or pledged, you should not sign the above authorities but should open a Securities Cash Account instead.

 

Part 4 – RISKS OF TRADING GROWTH ENTERPRISE MARKET STOCKS

 

Growth Enterprise Market (the “GEM”) stocks involve a high investment risk.  In particular, companies may list on the GEM with neither a track record of profitability nor any obligation to forecast future profitability.  GEM stocks may be very volatile and illiquid.

 

You should make the decision to invest only after due and careful consideration.  The greater risk profile and other characteristics of the GEM mean that it is a market more suited to professional and other sophisticated investors.

 

Current information on the GEM stocks may only be found on the internet website operated by the Stock Exchange.  Companies listed on the GEM are usually not required to issue paid announcements in gazetted newspapers.

 

You should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of GEM stocks.

 

 

 

Part 5 – RISK OF TRADING NASDAQ-AMEX SECURITIES AT THE STOCK EXCHANGE OF HONG KONG LIMITED

 

The Securities traded under the Nasdaq-Amex Pilot Program (the “PP”) are aimed at sophisticated investors.  You should consult Galaxy Securities and become familiarised with the PP before trading in the PP securities.  You should be aware that the PP securities are not regulated as a primary or secondary listing on the Main Board of the Stock Exchange or the GEM.

 

Part 6 – RISK OF PROVIDING AN AUTHOIRTIY TO HOLD MAIL OR TO DIRECT MAIL TO THIRD PARTIES

 

If you provide Galaxy Securities with an authority to hold mail or to direct mail to third parties, it is important for you to promptly collect in person all contract notes and statements of your account and review them in detail to ensure that any anomalies or mistakes can be detected in a timely fashion.

 

Part 7 – RISK OF CLIENT ASSETS RECEIVED OR HELD OUTSIDE HONG KONG

 

Client assets received or held by Galaxy Securities outside Hong Kong are subject to the applicable laws and regulations of the relevant overseas jurisdiction which may be different from the Securities and Futures Ordinance and the rules made thereunder.  Consequently, such client assets may not enjoy the same protection as that conferred on client assets received or held in Hong Kong.

 

Part 8 – RISK OF TRADING EXCHANGE TRADED DERIVATIVES PRODUCTS

 

DERIVATIVE WARRANTS

 

Derivative warrants are an instrument that gives an investor the right but not the obligation to “buy” or “sell” an underlying asset at a pre-set price prior to a specified expiry date. At expiry, settlement is usually made in cash rather than a purchase or sale of the underlying asset. 

 

Derivative warrants can be issued over a range of assets, including stocks, stock indices, currencies, commodities, or a basket of securities. They are generally divided into two types: calls and puts. Holders of call warrants have the right, but not obligation, to purchase from the issuer a give amount of the underlying asset at a predetermined price (also known as the exercise price) within a certain time period. Conversely, holders of put warrants have the right, but not obligation, to sell to the issuer a given amount of the underlying asset at a predetermined price within a certain time period.

 

Risk of trading derivative warrants

 

1. Issuer risk

Derivative warrant holders are unsecured creditors of the issuer and they have no preferential claim to any assets an issuer may hold. Therefore, investors are exposed to credit risk in respect to the issuer.

 

2. Gearing risk

Although derivative warrants may cost a fraction of the price of the underlying assets, a derivative warrant may change in value more or less rapidly than the underlying assets. In the worst case the value of the derivative warrants falls to zero and holders may lose their entire purchase price.

 

3. Limited life

Unlike stocks, derivative warrants have an expiry date and therefore a limited life. Unless the derivative warrants are in-the-money, they become worthless at expiration.

 

4. Time decay

The value of derivative warrants will decrease over time. Therefore, derivative warrants should never be viewed as products that are bought and held as long term investments.

 

5. Volatility

An increase in the volatility of the underlying asset should lead to a higher warrant price and a decrease in volatility lead to a lower derivative warrant price. Investors should be aware of the underlying assets volatility.

 

6. Market forces

In addition to the basic factors that determine the theoretical price of a derivative warrant, derivative warrant prices are also affected by the demand for and supply of the derivative warrants. Supply and Demand forces maybe greatest when a derivative warrant issue is almost sold out and when there are further issues of an existing derivative warrant.

 

 

 

7. Turnover

High turnover in a derivative warrant should not be regarded as an indication that its price will go up. The price of a derivative warrant is affected by many factors from market forces to technical matters such as the price of the underlying asset, the volatility of the price of the underlying asset, the time remaining to expiry, interest rates and the expected dividend on the underlying asset.

 

CALLABLE BULL/BEAR CONTRACTS

Callable Bull/Bear Contracts (“CBBC”) are a type of structured product that tracks the performance of an underlying asset without requiring investors to pay the full price required to own the actual asset. They are issued either as Bull or Bear contracts with a fixed expiry date, allowing investors to take bullish or bearish positions on the underlying asset. 

 

CBBC are issued with the condition that during their lifespan they will be called by the issuers when the price of the underlying asset reaches a level (known as the “Call Price”) specified in the listing document. If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be terminated immediately. The specified expiry date from the listing document will no longer be valid.

 

There are two categories of CBBC, namely Category N CBBC and Category R CBBC. A Category N CBBC refers to a CBBC where its Call Price is equal to its Strike Price, and the CBBC holder will not receive any cash payment once the price of the underlying asset reaches or goes beyond the Call Price. A Category R CBBC refers to a CBBC where its Call Price is different from its Strike Price, and the CBBC holder may receive a small amount of cash payment (called “Residual Value”) upon the occurrence of a Mandatory Call Event (“MCE”) but in the worst case, no residual value will be paid.

 

RISK OF TRADING CALLABLE BULL/BEAR CONTRACTS

 

1. Mandatory call

A CBBC will be called by the issuer when the price of the underlying asset hits the Call Price and trading in that CBBC will expire early. Payoff for Category N CBBC will be zero when they expire early.  When Category R CBBC expire early the holder may receive a small amount of Residual Value payment, but there may be no Residual Value payment in adverse situations. Once the CBBC is called, even though the underlying asset may bounce back in the right direction, the CBBC which has been called will not be revived and investors will not be able to profit from the bounce-back.

 

2. Gearing effects

Since a CBBC is a leveraged product, the percentage change in the price of a CBBC is greater compared with that of the underlying asset. Investors may suffer higher losses in percentage terms if they expect the price of the underlying asset to move one way but it moves in the opposite direction.

 

3. Limited life

A CBBC has a limited life, as denoted by the fixed expiry date. The life of a CBBC may be shorter if called before the fixed expiry date. The price of a CBBC fluctuates with the changes in the price of the underlying asset from time to time and may become worthless after expiry and in certain cases, even before the normal expiry if the CBBC has been called early.

 

4. Movement with underlying asset

Although the price of a CBBC tends to follow closely the price of its underlying asset, but in some situations it may not. Prices of CBBC are affected by a number of factors, including its own demand and supply, funding costs and time to expiry. Moreover, the delta for a particular CBBC may not always be close to one, in particular when the price of the underlying asset is close to the Call Price.

 

5. Liquidity

Although CBBC have liquidity providers, there is no guarantee that investors will be able to buy/sell CBBC at their target prices any time they wish.

 

6. Funding costs

The issue price of a CBBC includes funding costs and issuers will specify the formula for calculating the funding costs of their CBBC at launch in the listing documents. Since the funding costs for each CBBC issue may be different as it includes the issuer’s financing/stock borrowing costs after adjustment for expected ordinary dividend of the stock plus the issuer’s profit margin, investors are advised to compare the funding costs of different issuers for CBBC with similar underlying assets and terms. Funding costs are gradually reduced over time as the CBBC moves towards expiry.  The longer the duration of the CBBC, the higher the total funding costs. When a CBBC is called, the CBBC holders (investors) will lose the funding cost for the full period since the funding cost is built into the CBBC price upfront at launch even though with the MCE, the actual period of funding for the CBBC turns out to be shorter.

 

7. Trading of CBBC close to Call Price

When the underlying asset is trading close to the Call Price, the price of a CBBC may be more volatile with wider spreads and uncertain liquidity. CBBC may be called at any time and trading will terminate as a result.

 

8. CBBC with overseas underlying assets

Investors trading CBBC with overseas underlying assets are exposed to an exchange rate risk as the price and cash settlement amount of the CBBC are converted from a foreign currency into Hong Kong dollars. Exchange rates between currencies are determined by forces of supply and demand in the foreign exchange markets which are affected by various factors. Besides, CBBC issued on overseas underlying assets may be called outside the Exchange’s trading hours.

 

LISTED EQUITY LINKED INSTRUMENTS

Equity Linked Instruments (“ELI”) are structured products which can be listed on the Stock Exchange under Chapter 15A of the Rules Governing the Listing of Securities on the Stock Exchange. They are marketed to retail and institutional investors who want to earn a higher interest rate than the rate on an ordinary time deposit and accept the risk of repayment in the form of the underlying shares or losing some or all of their investment.

When an investor purchases an ELI, he/ she is indirectly writing an option on the underlying shares. If the market moves as the investor expected, he/ she earns a fixed return from his/ her investment which is derived mainly from the premium received on writing the option. If the market moves against the investor's view, he/she may lose some or all of his/ her investment or receive shares worth less than the initial investment. ELI is traded scripless in Hong Kong dollars and odd lots are settled in cash. Investors should note that short selling of ELI is prohibited. To match their directional view on the underlying securities, investors may choose from three different types of ELI listed on the Stock Exchange: Bull, Bear and Range. Other types of ELI may be traded on the Stock Exchange in future.

 

RISK OF TRADING LISTED EQUITY LINKED INSTRUMENTS

 

1. Exposure to equity market

Investors are exposed to price movements in the underlying security and the stock market, the impact of dividends and corporate actions and counterparty risks. Investors must also be prepared to accept the risk of receiving the underlying shares or a payment less than their original investment.

 

2. Possibilities of losing investment

Investors may lose part or all of their investment if the price of the underlying security moves against their investment view.

 

3. Price adjustment

Investors should note that any dividend payment on the underlying security may affect its price and the payback of the ELI at expiry due to ex-dividend pricing. Investors should also note that issuers may make adjustments to the ELI due to corporate actions on the underlying security.

 

4. Interest rates

While most ELI offers a yield that is potentially higher than the interest on fixed deposits and traditional bonds, the return on investment is limited to the potential yield of the ELI.

 

5. Potential yield

Investors should consult their brokers on fees and charges related to the purchase and sale of ELI and payment/ delivery at expiry. The potential yields disseminated by the Hong Kong Exchanges and Clearing Limited (“HKEx”) have not taken fees and charges into consideration.

 

EXCHANGE TRADED FUNDS WITH DERIVATIVE NATURE

Exchange Traded Funds (“ETFs”) are passively-managed and open-ended funds. All listed ETFs on the HKEx securities market are authorised by the Securities and Futures Commission as collective investment schemes. They are designed to track the performance of their underlying benchmarks (e.g. an index, a commodity such as gold, etc) and offer investors an efficient way to obtain cost-effective exposure to a wide range of underlying market themes.

ETFs can be broadly grouped into two types: Physical ETFs (i.e. traditional or in-specie ETFs) and Synthetic ETFs. Many of physical ETFs directly buy all the assets needed to replicate the composition and weighting of their benchmark (e.g. constituents of a stock index). Some physical ETFs with underlying equity-based indices may also invest partially in futures and options contracts. Synthetic ETFs do not buy the assets in their benchmark. Instead, they typically invest in financial derivative instruments to replicate the benchmark’s performance.

 

RISK OF TRADING EXCHANGE TRADED FUNDS

 

1. Market risk

ETFs are typically designed to track the performance of certain indices, market sectors, or groups of assets such as stocks, bonds, or commodities. ETF managers may use different strategies to achieve this goal, but in general they do not have the discretion to take defensive positions in declining markets.  Investors must be prepared to bear the risk of loss and volatility associated with the underlying index/assets.

 

2. Tracking errors

Tracking errors refer to the disparity in performance between an ETF and its underlying index/ assets.  Tracking errors can arise due to factors such as the impact of transaction fees and expenses incurred to the ETF, changes in composition of the underlying index/ assets, and the ETF manager’s replication strategy.

 

3. Trading at discount or premium

An ETF may be traded at a discount or premium to its Net Asset Value. This price discrepancy is caused by supply and demand factors, and may be particularly likely to emerge during periods of high market volatility and uncertainty. This phenomenon may also be observed for ETFs tracking specific markets or sectors that are subject to direct investment restrictions.

 

4. Foreign exchange risk

Investors trading ETFs with underlying assets not denominated in Hong Kong dollars are also exposed to exchange rate risk. Currency rate fluctuations can adversely affect the underlying asset value, also affecting the ETF price.

 

5. Liquidity risk

Securities Market Makers (“SMMs”) are Stock Exchange Participants that provide liquidity to facilitate trading in ETFs. Although most ETFs are supported by one or more SMMs, there is no assurance that active trading will be maintained. In the event that the SMMs default or cease to fulfill their role, investors may not be able to buy or sell the product.

 

6. Counterparty risk involved in ETFs with different replication strategies

An ETF using a full replication strategy generally aims to invest in all constituent stocks/ assets in the same weightings as its benchmark.  ETFS adopting a representative sampling strategy will invest in some, but not all of the relevant constituent stocks/ assets.  Where ETFs utilising a synthetic replication strategy use swaps or other derivative instruments to gain exposure to a benchmark, they are exposed to counterparty risk of the swap dealers or the derivative instruments’ issuers and may suffer losses if such dealers or issuers default or fail to honor their contractual commitments.

Even where collateral is obtained by an ETF, it is subject to the collateral provider fulfilling its obligations. There is a further risk that when the right against the collateral is exercised, the market value of the collateral could be substantially less than the amount secured resulting in significant loss to the ETF.

 

CONVERTIBLE BONDS

Convertible bonds have investment characteristics of both debt and equity securities. A convertible bond gives its holder the right to convert the bond into shares of the issuing corporation according to predetermined terms during a conversion period or at conversion dates.

Convertible bonds have the characteristics of debt securities, such as interest payments and a definite date upon which the principal must be repaid. They also offer possible capital appreciation through the right to convert the bonds into shares at the holder’s option according to stipulated terms over certain periods. Due to their conversion feature, convertible bonds usually offer a slightly interest payments than corporate bonds.

 

RISK OF TRADING CONVERTIBLE BONDS

 

1. Issuer risk

Issuer may fail to pay interest or principal to bond holders on time.

 

2. Interest rate risk

The price of fixed rate bonds fluctuates according to changes in market interest rates. Prices for fixed rate bonds move inversely with changes in interest rates. In general, market interest rate movements have a larger impact on the price of bonds with a longer remaining period to maturity.

 

3. Liquidity risk

Liquidity of some bonds in the secondary market may be low. Investors may find it hard to buy or sell such bonds and need to hold them to maturity.

 

4. Foreign exchange risk

Exchange rate risk exists if the bond is denominated in foreign currency.

 

5. Equity risk

If the bond is converted into shares of the issuing corporation, equity risk associated with the stock will be existed.

 

OTHER MARKET CONDITIONS AND RISKS

As with all investments, returns on derivatives products are influenced by external factors such as inflation and political changes.

 

Uncollateralised derivative products are not assets backed. In the event of issuer bankruptcy, investors can lose their entire investment, investors should read the listing documents to determine if a product is uncollateralised.

 

 

Part 9 - RISK OF TRADING LISTED RENMINBI-DENOMINATED SECURITIES

 

1.            Currency Risk

In general, a non-Mainland (including Hong Kong) investor who holds a local currency other than renminbi will be exposed to currency risk if he/she invests in a renminbi product. This is because renminbi is a restricted currency and subject to exchange controls, you may have to convert the local currency into renminbi when you invest in a renminbi product. When you redeem / sell your investment, you may also need to convert the renminbi received upon redemption / sale of your investment product into the local currency (even if redemptions / sale proceeds are paid in renminbi). During these processes, you will incur currency conversion costs (e.g. as a result of the fluctuations in the exchange rates between the relevant currencies) and you will also be exposed to currency risk. In other words, even if the price of the renminbi product remains the same when you purchase it and when you redeem / sell it, you will still incur a loss when you convert the redemption / sale proceeds into local currency if renminbi has depreciated.

Like any currency, the exchange rate of renminbi may rise or fall. Further, renminbi is subject to conversion restrictions and foreign exchange control mechanism.

 

2.            Liquidity risk

Renminbi products are also subject to liquidity risk as renminbi products are a new type of product and there may not be regular trading or an active secondary market. Therefore you may not be able to sell your investment in the product on a timely basis, or you may have to sell the product at a deep discount to its value.  In addition, investors shall also find out whether the renminibi product is subject to any lock-up period or heavy penalty or charges for early surrender or termination of the product.

 

3.            Issuer / counterparty risk

Renminbi products are subject to the credit and insolvency risks of their issuers. You should consider carefully the creditworthiness of the issuers before investing. Furthermore, as a renminbi product may invest in derivative instruments, counterparty risk may also arise as the default by the derivative issuers may adversely affect the performance of the renminbi products and result in substantial losses.

 

4. Investment / Market risk

 

Like any investments, renminbi products are subject to investment risk and may not be principal protected i.e. the assets that the products invest in or referenced to may fall as well as rise, resulting in gains or losses to the product.

 

Depending on the nature of the renminbi product and its investment objective, there may be other risk factors specific to the product which you should consider. Before making an investment decision, always read the risk factors as set out in the offering documents and seek professional advice where necessary.

 

Part 10 – INTERNET RISK

 

Since Galaxy Securities does not control signal power, its reception or routing via internet, configuration of your equipment or reliability of its connection, we cannot be responsible for communication failures, distortions or delays when trading online (via internet).  Thus you agree to accept that such prices as Galaxy Securities may offer from time to time are the best prices then available.

 

You acknowledge that 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 of failure. You acknowledge that 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 particular firms, such limits may vary.

 

You understand that trading on an electronic trading system may differ from trading on other trading systems. You acknowledge that if you undertake transactions on an electronic system, you will be exposed to risks 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.

 

Part 11 – OVERSEAS MARKET RISK

 

Transactions on market in other jurisdictions may expose you to additional risk.  Such overseas markets may be subject to regulation which may offer different or diminished investor protection. Before you trade, you should enquire about any rules relevant to your particular transactions. The Client understands that his local regulatory authority will be unable to compel the enforcement of the rules or regulatory authorities or markets in other jurisdictions where the Client’s transaction have been effected.

 

 

 

 

Terms used herein shall have the same meanings as those defined in the Terms & Conditions, unless stated herein to the otherwise.

 

 

Investors should make their own risk assessment and seek independent professional advice where necessary with respect to any exposure to derivative products to ensure that any decision you make is suitable with regards to your circumstances and financial position. In addition, investors should refer to the relevant derivative product's listing documents (including the full text of the risk factors stated therein) in detail before making any investment decision.

 
Warning statement about Complex Product

If you are trading a complex product (Note 1), you must read the following warning statement for complex products before trading:

1.

Investors should exercise caution in relation to the complex products.

2.

Client is required to read and understand the all relevant product offering documents and understand the product features and risks of the complex products before making investment decisions.

3.

Investors of complex products should note that investment involves risks including the possibility of losing all the capital invested or more than the invested amount (if applicable).

4.

Investors are advised to exercise caution in relation to the offer if the offering documents or information provided by the issuer have not been reviewed by the SFC.

5.

For complex products described as having been authorized by the SFC, investors should understand that such authorization is not an official recommendation or that SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product and its performance.

6.

Prices of complex products may fluctuate and past performance is not indicative of future performance. Investors should read the relevant offering documents and risks disclosure statements in detail before making any investment decisions.

7.

For those complex products which are only available to professional investors (PI), please note that the eligible client must be a PI.

Note 1 Complex product including but not limited to derivative warrant, callable bull/bear contract, exchange traded fund, equity linked instrument/equity linked note, leveraged and inverse product, futures, stock option, other derivative products traded on an exchange in Hong Kong or in a specified jurisdiction, etc. For the non-exhaustive list of examples of complex and non-complex products, please refer to SFC website: https://www.sfc.hk/web/EN/rules-and-standards/suitability-requirement/non-complex-and-complex-products/.  For list of specified jurisdictions, please refer to SFC website: https://www.sfc.hk/web/EN/rules-and-standards/suitability-requirement/non-complex-and-complex-products/list-of-specified-jurisdictions.html