It is thrifty to prepare today
for the wants of tomorrow.Aesop, VI century BC

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General risks inherent in securities and investment services

In FB Asset Management, we focus on risks that customers may face when dealing in securities via brokers or asset managers.

 

In a broad sense, a risk is a potential failure to achieve the anticipated return on investment and/or a potential full or partial loss of invested capital (occasionally, losses may exceed the value of invested capital or require further investment).

 

Risks may be caused by a number of triggers and are driven by the type and structure of the underlying financial instruments. Given the host of potential scenarios in the securities market, many risks are hard to predict, so the list below cannot be viewed as exhaustive and definitive. In any event, investors should read the information below and pay close attention to the risks related to investment in financial instruments.

 

Currency risk - Potential financial losses from foreign currency denominated investments caused by fluctuations in exchange rates that may occur within the period between the contract signing and actual settlement.

 

Political risk - The risk of hostilities, nationalisation, seizure, restrictions or embargo, or civil unrest, i.e. unforeseeable implications of the political course pursued by national governments and, accordingly, the risk of losses or lost profit ensuing from the national policy of the home country of your target securities or funds.

 

Price risk - The risk of losses (direct losses or lost profit) from changes in the market value of your investment.

 

Liquidity risk - Inability to quickly sell your assets (securities) when you want to sell them and secure the price you want to get for them. I.e. this is a loss of value you incur when selling assets at a certain point in time (e. g. the difference between the position’s current value and the proceeds that can be generated by fully closing the position within one day).

 

Market risk - The risk of the asset value falling as a result of adverse changes in the market value of financial instruments and derivatives in your trading book or poor performance of foreign currencies and/or precious metals. The market risk is of macroeconomic nature, i.e. is driven by macroeconomic factors of the financial system such as market indices, interest rate curves, and so on.

 

Credit risk (issuer risk) - You may incur losses caused by the declining value or total loss of a financial instrument as a result of the issuer’s defaults on its commitments, its poor financial performance, etc.

 

Systemic risk - This risk comes from technical failures of securities systems or registers, e-trading platforms, clearing houses, or other institutions or from connection errors that may trigger trade cancellations, delays in post trade settlements, and incorrect records or events. All of this may result in customer losses.

 

Counterparty risk - In any transaction, the counterparty risk is the risk that other parties to an agreement or arrangement default on their obligations. Although today’s stock exchanges typically make use of various safeguards to eliminate this risk, there still remains a danger that the person entering into a deal via a management company fails to honour his or her obligations arising from the deal.

 

Legal risk - The legal risk is the risk of losses due to gaps in applicable laws or violation of legal requirements typically in the country where the investment is made. You may lack knowledge of regulations applicable in the home country of your target issuers. For securities that are subject to regulations of a third-party country, your rights may differ from those granted by laws of Estonia or the European Union. For this reason, you may be unaware of your obligations and, accordingly, incur losses or become subject to penalties arising from the laws of such third-party country.

 

Information risk - Inaccessibility, or misstatement, of reliable and complete information about exchange rates, quotations and market trends that may lead to a poor judgment by the investor.

 

Interest rate risk - Risk of financial losses due to adverse changes in interest rates applicable to the investor’s assets.

 

Tax risk - The risk of new types of taxes and charges being introduced; a hike in the rates of existing taxes and charges; changes in timelines and terms for specific taxes; and cancelation of applicable tax credits, typically in the country of investment. In some cases, you may lose the benefits arising from a double tax treaty between your home and host countries.

 

Custody risk - Customer securities held in an account with a third party in another country are exposed to the risk that creditors of, say, the account’s owner, i.e. the management company (fund) might view securities held in this account as property of the account’s owner. This may force the investor to join bankruptcy proceedings against the account’s owner so as to reclaim the title to securities. There is also a risk that the right to dispose of the securities or exercise the rights granted by such securities might be suspended.

 

Derivative risk - Derivative deals are extremely risky and may prove unsuitable for some customers. Derivatives are usually traded with a leverage, which might eventually lead to heavy losses or high gains on the initial investment. This implies that comparatively slight changes in the market performance may trigger disproportionally big changes in the value of investment. Some derivatives are prone to considerable market price fluctuations. Accordingly, this increases the risks of even heavier losses. Each structured product has its own unique risk profile. We cannot describe the risks inherent in every structured product, there being an abundance of potential risk combinations. A margin is required to be provided to trade in financial instruments. Note that if the asset value falls below a certain level, the losses will be debited to the margin account while the investor will be issued a margin call, i.e. required to bring the margin account up to a minimum maintenance level (credit additional money). If the investor fails to top up the margin account, the management company may close the investor’s position at the current market price and use the margin to recover its losses.