4.7. Provision of key features document relating to Derivatives

(1)   An Authorised Firm must not provide a Financial Service relating to Derivatives unless it has provided the Client with a key features document containing the information in (2) and taken reasonable steps to ensure that the Client understands the nature of the risks involved.

(2)   The key features document must contain the applicable information in respect of each Derivative relevant to the Financial Services that the Authorised Firm will provide to the Client:

(a) the description, risk warning on risks associated with and essential characteristics of Derivative instrument;

(b) the risks associated with and essential characteristics of type of transaction, including the need for margin payments, the potential for total loss, and the specific risks of transactions;

(c) the importance of understanding all commissions and charges before engaging in transactions, particularly when these charges are expressed as percentages rather than in monetary terms;

(d) the risks associated with and essential characteristics of trading suspensions, including the difficulty or impossibility of liquidating positions during rapid price movements, and the stop-loss orders will not necessarily limit losses to the intended amounts, because market conditions may make it impossible to execute such an order at the stipulated price.

(3) The key features document must be provided:

(a) in writing and in good time before the relevant Financial Service is provided to the Person, to enable that Person to make an informed decision about whether to use the relevant Financial Service;

(b) in a stand alone document and not be part of the Client Agreement or any other document provided to the Client.

(4) The key features document does not need to be provided to a Person to whom the Authorised Firm has previously provided that information, if there has been no significant change since the information was previously provided.

(5) The AFSA may, by written notice or Guidance, set more detailed requirements to key features document relating to Derivatives.

Guidance: risk warning

An Authorised Firm should provide that Client with a risk warning, which states that:

(a) the types of contracts which the Authorised Firm will be entering into with the person are complex financial instruments where the loss or profit of the person is determined by reference to the movement of the value or price of the underlying reference;

(b) this type of trading in complex financial instruments has a high probability of the person losing money rapidly, particularly due to the gain or loss being leveraged, based on the fluctuation of the price of the underlying reference; and

(c) before deciding to trade in a Derivative, the person needs to understand how the Derivative offered work, and whether the person can afford to take the risk of losing money.