242 FSA derivatives and warrants risk warning
The amount you can lose in limited liability transactions will be less than
in other margined transactions, which have no predetermined loss limit.
Nevertheless, even though the extent of loss will be subject to the agreed
limit, you may sustain the loss in a relatively short time. Your loss may
be limited, but the risk of sustaining a total loss to the amount agreed is
substantial.
11. Collateral
If you deposit collateral as security with your 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 on whether you are trading on a recognised or desig-
nated investment exchange, with the rules of that exchange (and the
associated clearing house) applying, or trading off-exchange. Deposited
collateral may lose its identity as 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. You should ascertain from
your firm how your collateral will be dealt with.
12. Commissions
Before you begin to trade, you should obtain details of all commissions
and other charges for which you will be liable. If any charges are not
expressed in money terms (but, for example, as a percentage of con-
tract value), you should obtain a clear and written explanation, includ-
ing appropriate examples, to establish what such charges are likely to
mean in specific money terms. In the case of futures, when commis-
sion is charged as a percentage, it will normally be as a percentage of
the total contract value, and not simply as a percentage of your initial
payment.
13. Suspensions of trading
Under certain trading conditions it may be difficult or impossible to liqui-
date 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.
14. Clearing house protections
On many exchanges, the performance of a transaction by your firm (or
third party with whom he is dealing on your behalf) 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
your firm or another party defaults on its obligations to you. On request,