Securities and Futures Commission (SFC) issued a letter requiring commodity features brokers to take precautionary actions to manage the risks of trading crude oil futures contracts. The letter reminded brokers to not open new positions for clients who lack complete understanding of these contracts or do not have the financial capabilities to take the potential loses.
Brokers were also advised to collect sufficient margin from clients in considering the forthcoming public holidays in Hong Kong.
Ashley Alder, the SFC’s Chief Executive Officer said:
Ashley Alder
The crude oil market has recently experienced unprecedented volatility, which significantly increases the risks of trading crude oil-related financial products. Firms should prudently manage these risks to protect investors.
In a separate letter, the SFC cautioned managers of SFC-authorised futures-based ETFs to remain careful and ensure that in extreme market conditions the funds are managed in the best interests of investors. The firms were also reminded to remain compliant with the conduct requirements when providing trading services for futures-based ETFs.
Crude oil ETFs and other commodity futures ETFs are derivatives products aimed at investors who know the risks. Commodity futures market suffer from extreme volatility and can cause substantial or complete loss in a short period of time and investors should be careful and cautions in trading of these products.
The Commission advises investors to be guarded in in leveraged or margin trading and to expect that they may have large margin calls on their positions on short notice. Their positions may end up closed out as the markets move against them and they could be liable for losses exceeding their margin deposits.
Alder added:
Investors should only trade financial products they fully understand, and not simply because the prices of the underlying assets have fallen to very low levels.
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