Client information about the securities business. Corporate Banking. Achieving more together

Transcription

1 Client information about the securities business Corporate Banking Achieving more together

2 Contents What you should know about MiFID Commerzbank and its securities services Transaction Execution Guidelines Information on handling conflicts of interest Strategy and risk in securities investment Information on costs and associated charges for securities services for corporate clients Special Conditions for Dealings in Securities

3 What you should know about MiFID 3 What you should know about MiFID THE MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE Dear Client On November 1, 2007, new rules came into effect in the EU for securities transactions. The Markets in Financial Instruments Directive (MiFID) was implemented into Czech law with an amendment of the Business Activities on the Capital Market Act, which came into force on July 1, The aim of the directive was to create a competitive market for securities transactions in the EU. To this end, it improves investor protection in order to bolster investor confidence in the financial markets, increases market transparency and strengthens competition among market participants throughout Europe. Commerzbank welcomed and supported this initiative, as it made many of the standards for advisory services, sales, marketing and order execution which had already been practised at Commerzbank binding for all market participants. The new regime applies to all European banks and firms that offer investment services. We have summarized the key elements of our securities services for you in this brochure. It will inform you about the strategies and risks of investing in securities as well as the way we deal with possible conflicts of interest. It also contains our fees for investment services, information about our execution policy for financial instruments and Special Conditions for Securities. We are aware that this information cannot replace a personal consultation with your Relationship Manager, and we invite you to make an appointment. Sincerely Commerzbank

4 Commerzbank and its securities services 4 Commerzbank and its securities services General information Commerzbank offers its clients numerous investment services, particularly in connection with purchasing, selling and holding in safe custody securities and other financial instruments. Some of these services and their features are described below. In addition, the Bank deals for its own accounts, receives and transmits orders, underwrites and/ or places securities on or without a firm commitment basis and offers all ancillary investment services. Please note that the prospectus of publicly offered securities can be obtained from the issuer and is also usually available on the issuer s website. Investment advisory business Commerzbank offers its clients individual investment recommendations for various financial instruments. The recommendations offered as part of the Bank s investment advisory services are tailored to the client s personal objectives and needs. The Bank is obliged to consider which recommendations are suitable for the client. For this purpose, it must endeavour to obtain sufficient information about the client s individual situation and investment objectives. When providing investment advice on investment funds and certificates, the Bank chooses from a broad range of Bank and Group products. By offering new issues regularly, it can continually provide its clients with innovative products. This balanced range of products is supplemented by the offerings of external cooperation partners for only a few specialized investment areas. an individual recommendation immediately prior to issuing the order. In this case, the Bank is obliged to ensure that the client (in certain client categories) has sufficient knowledge and experience to adequately evaluate the risks associated with the transaction. This can lead to the fact that the client can be informed that a particular transaction is not appropriate. Order processing Orders to buy or sell financial instruments are transacted either as commission or fixed-price transactions. If the Bank processes a commission transaction, it conducts the purchase or sale as the commission agent in its own name and for the client s account at a trading venue or engages an intermediate commission agent. The Bank receives a commission for its service. If the Bank conducts a fixed-price transaction, the client concludes a contract of sale with the Bank and either purchases the financial instrument from the Bank or sells it to the Bank at a fixed or determinable price. Securities orders can be placed at one of our branches, by mail or by telephone. Securities orders are processed in line with the Bank s execution policy. However, the client can issue specific instructions regarding the order limit or the execution venue. In this case, the Bank shall not execute the order in line with its standard execution policy. The client shall receive a contract note for each transaction that is executed. Non-advisory business Of course, securities orders can also be issued by clients who neither use the Bank s advisory services nor receive Asset management Commerzbank offers its clients professional asset management services for a fee.

5 Commerzbank and its securities services 5 Asset management requires a separate agreement with the Bank in which the client specifies the investment strategy and any other investment guidelines. Commerzbank helps its clients to select an investment strategy by providing recommendations that take into account the client s individual circumstances. In managing the client s assets, the asset manager takes investment decisions in line with the client s instructions and within its own power of discretion. The Bank regularly advises the client about transactions and the performance of the portfolio. Custody business The Bank offers safe custody services for securities. Securities are held in safe custody in accordance with the Agreement on Investment Instruments Safekeeping. The Bank sends clients a statement of assets at least once annually. The actual safekeeping of the investment instruments may be carried out inland or abroad. The bank may accept investment instruments in certificated form at its own discretion for global safekeeping, for separate safekeeping, or submit them for secondary safekeeping to other safekeeping providers. Certificated investment instruments shall be administered by the bank for the client with the registration place concerned in the bank s account administered for the clients and shall make sure that the client s investment instruments are internally administered separately from the bank s own investment instruments and third parties interment instruments. Securities credit facilities Under certain circumstances, Commerzbank grants loans to finance transactions with securities and other financial instruments. Reception and transmission of orders Commerzbank receives and transmits orders in relation to the purchase or sale of financial instruments. the Czech Republic. Besides taxation in the Czech Republic, dividend income may also be taxable abroad. Income from the disposal of investment instruments is subject to income tax (or similar tax) in the country where the instrument holder is resident and, in cases laid down by law, also in the Czech Republic. The income of a foreign tax resident generated from holding or selling an investment instrument and subject to taxation in the Czech Republic may be fully or partially exempt from income tax if so provided in the relevant double taxation agreement or other international treaty binding upon the Czech Republic General information about Commerzbank AG Your contractual partner for securities transactions is COMMERZBANK Aktiengesellschaft, pobočka Praha, with its seat at Praha 2, Jugoslávská 1, Postcode , Ident. No.: , entered in the Commercial Register at the Municipal Court Prague, under Entry 7341, Part A, organisational component of COMMERZBANK Aktiengesellschaft, with its seat at Kaiserstraße 16, Frankfurt am Main, Federal Republic Germany, entered in the Commercial Register at the District Court Frankfurt am Main under Entry HR B You can reach us at your branch, on the Internet at or by telephone on The governing language for the contractual relationship is Czech. Clients and the Bank may agree that the Bank will also supply documents in other languages (German, English). Commerzbank AG is regulated by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, Graurheindorfer Strasse 108, Bonn, and Lurgiallee 12, Frankfurt am Main, Germany) and Czech National Bank ( Na Příkopě 28, Praha 1, CZ). Taxation Income generated by ownership of investment instruments, in particular dividends, is subject to income tax in both the Czech Republic and abroad. Depending on who owns an investment instrument and other factors, dividends may be fully or partially exempt from income tax in Commerzbank AG is a member of the deposit insurance fund of the German Banking Association (Bundesverband deutscher Banken e.v.). The extent of the coverage provided by the deposit insurance fund is described in Commerzbank s General Business Conditions.

6 Transaction Execution Guidelines 6 Transaction Execution Guidelines INFORMATION ABOUT THE EXECUTION POLICY FOR FINANCIAL INSTRUMENTS A. Preliminary Remarks COMMERZBANK Aktiengesellschaft, pobočka Praha, as an organizational component of Commerzbank AG, Kaiserstraße 16, Frankfurt am Main, Germany, executes almost all transactions with investment instruments via Commerzbank AG, Kaiserstraße 16, Frankfurt am Main. Accordingly, these Rules on the execution of instructions are based on the rules for the execution of instructions applied by Commerzbank AG, Kaiserstraße 16, Frankfurt am Main, Germany. Area of application 1. These guidelines apply to the execution of orders, which a Client of the Bank places for the purpose of buying or selling securities or other financial instruments (e.g. contracts on futures exchanges). Execution in this context means that the Bank executes a corresponding transaction with a third party in accordance with the Client s order, in an appropriate market (commission transaction). If the Bank and the Client conclude a direct purchase contract for financial instruments (fixed-price transaction), then paragraph 8 hereof will apply. execute Client orders and which are expected to generally result in the best execution in the interest of the Client. 3. In determining actual trading venues, the Bank assumes that the Client wishes primarily to obtain the best possible price, taking all costs associated with the execution of the transaction into account. Since securities are generally subject to price fluctuations, a negative price impact on the Client cannot be ruled out in the period after the order has been placed but before it has been executed. Therefore, the primary focus will be on those trading venues where full execution is likely to be prompt. In the context of the above-mentioned standards, the Bank will also factor in other relevant criteria (e.g. market situation, reliability of settlement). Priority of instructions 4. The Client can issue instructions to the Bank as to where its order is to be executed. Such instructions shall take precedence over these guidelines. N.B.: In such a case, the Bank will not execute the order in accordance with these guidelines on best execution. Objective of order execution 2. Client orders can be routinely executed at various trading venues, e.g. at exchanges or multilateral trading facilities, inland or internationally, and in floor or electronic trading. For the most important types of financial instruments, these guidelines set out the methods of execution and trading venues that the Bank uses to 5. The Bank will deem any discretionary order by the Client to be an instruction. A discretionary order is an order to be executed on a case-by-case basis, where the Client determines the key points of the parameters of execution, which is then executed by the Bank, taking the prevailing market conditions into account. In the absence of the Client specifying anything to the con-

7 Transaction Execution Guidelines 7 trary in such key points, a discretionary limit order will be deemed to include the instruction to refrain from generating pre-trade transparency. B. Transaction execution guidelines for various types of financial instruments Transmitting of orders 6. If the Bank has no direct access to a particular trading venue, the Bank will not execute the Client s order itself, but will transmit the order to be executed by another investment firm, subject to adherence to these guidelines. Client s orders in domestic securities transmit the Bank always to another investment firm to be executed. Non-standard execution 7. Insofar as extraordinary market conditions or market disruption require non-standard execution, the Bank will still endeavour to execute each order in the interest of the Client. In individual cases the Bank may refuse to accept an order, if the Bank envisages that prompt transaction processing may not be possible. Fixed-price transactions 8. If the Bank and the Client conclude a contract to purchase financial instruments at a fixed or determinable price (fixed-price transaction), then these guidelines will only have a limited application. In the case of fixed-price transactions, the Bank s costs, fees and trading margins will already be included in the price. The order is not executed in the manner described in the preceding paragraphs of these guidelines. Instead, both the Bank and the Client will be directly obliged under their contractual agreement to deliver the financial instruments and to pay the purchase price. This will apply analogously when the Bank either offers securities for subscription or concludes contracts with the Client in respect of financial instruments which cannot be traded on any exchange (e.g. OTC financial derivatives). The types of financial instruments for which the Bank regularly offers to conclude fixed price transactions are identified in Part B of these guidelines. 1. Interest-bearing securities The Bank offers Clients the opportunity to directly purchase from it, or sell to it, interest-bearing securities (including zero coupon bonds). Information about which securities are currently available, including details of prices, can always be obtained from the Bank. Each purchase and sale transaction will be executed at a price agreed with the Bank (fixed-price transaction). If no fixed-price transaction is concluded, the Bank would expect to receive instructions from the Client as to the relevant trading venue. If no such instruction is received, the order will be forwarded to a domestic stock exchange chosen by the Bank. Should execution not be feasible on such an exchange, the Bank will forward the order to an appropriate exchange abroad. Client s orders in domestic interest-bearing securities are executed over-the-counter by another domestic investment firm. 2. Equities The Bank executes orders in the market segments stated below at the following trading venues: Domestic shares DAX shares, MDAX shares, TecDAX shares and SDAX shares PSE in SPAD* Xetra** The Bank isn t a member of Prague Stock Exchange. Client s orders in domestic equities will be transmit to be executed by third party***. The execution follows transaction execution guidelines of third party. By way of derogation from this rule, instructions in these segments are restricted to the current business day, if the instruction is delivered after 5:30 p.m. and the Xetra transaction is to be completed, they are forwarded to the traditional German stock exchanges in order to execute them on the same day. German shares Foreign shares listed in Germany (except EuroStoxx50 values) Conventional German stock exchanges Conventional German stock exchanges * Prague Stock Exchange ** The Bank reserves the right to execute via Xetra BEST without the client being disadvantaged. *** Member of Prague Stock Exchange

8 Transaction Execution Guidelines 8 For instructions relating to foreign shares, in cases equivalent to EUR 10,000 the Bank expects the client to provide instructions on the transfer point because, depending on the market situation, the best possible implementation at specified foreign transfer points need not be guaranteed for such large volumes. EuroStoxx50 shares(foreign shares) Foreign shares not listed in Germany. Conventional German stock exchanges Appropriate foreign trading point (as a rule the domestic stock exchange) at a fixed price (fixed-price transaction). If no fixed-price transaction is concluded, the Bank would expect to receive instructions from the Client as to the relevant trading venue. If no such instruction is received, the order will be forwarded to a German floor exchange selected by the Bank. 5. Financial derivatives The Bank executes orders for financial derivatives, which are traded on a futures exchange on standardised terms, at the following trading venues: Transactions on futures exchanges Relevant futures exchange, depending on contract availability The Bank may also offer fixed-price transactions for selected equities. This service may be limited to individual distribution channels. 3. Units in investment funds N.B: The issue of units in investment funds at the issue price and their return at the redemption price, as described in the applicable laws and regulations, are not subject to the regulatory requirements on best execution. The Bank generally executes orders relating to the purchase and sale of units in investment funds either directly or indirectly via relevant investment management companies. Notwithstanding the above, the Bank executes orders in the market segment stated below at the following trading venue: Exchange Traded Funds Xetra** Please note that orders in the above market segment, whose order validity is limited to the current business day and which are received after 5.30 pm (the close of Xetra trading), will be forwarded to German floor exchanges in order to achieve same-day execution. If a contract is traded on more than one futures exchange, the Bank would always expect to receive instructions from the Client as to the relevant trading venue. OTC financial derivatives, e.g. currency forwards and interest rate swaps, are concluded by the Bank individually with the Client (fixed-price transaction). The content and terms of the transaction are agreed upon with the client for the respective transaction at its conclusion. It may be necessary to put in place special conditions or contracts for certain financial derivatives, depending on the type of financial instrument involved (e.g. Special Conditions for Financial Forward Transactions or an OTC derivative master agreement). 6. Depositories abroad As an exception to the above paragraphs relating to the selection of trading venues, sales of financial instruments are only possible in the relevant country where the securities are being held in custody. 7. German trading venues Xetra is the electronic trading system for the spot market of Deutsche Börse AG. If investment funds are traded at a trading venue to which the Bank has access, it will also accept orders with instructions attached to be executed at this trading venue. 4. Certificates warrants The Bank offers certificates and warrants for subscription or for purchase (and, in certain circumstances, repurchase) German floor exchanges are the stock exchanges in Berlin, Hamburg, Hanover, Düsseldorf, Frankfurt, Stuttgart and Munich, including their respective open market segments. The selection of a particular German floor exchange will depend on various parameters, including existing listing of the respective securities on the individual exchanges, type of listing etc.

9 Information on handling conflicts of interest 9 Information on handling conflicts of interest Commerzbank is an internationally active universal bank and offers its Clients a full range of services for investing in securities. It also makes loans to companies and other institutions and advises them on all financing questions. Commerzbank aims to avoid conflicts of interest that may arise in this connection. To this end, the bank has instituted a number of precautionary measures. However, the possibility that such conflicts of interest may arise in individual cases cannot be ruled out. In such cases, Commerzbank always acts professionally and in strict consideration of its Client s interests. Conflicts of interest can arise between Commerzbank, other companies in the Commerzbank Group, the Executive Board, the employees of Commerzbank or other individuals affiliated with the Bank, on the one hand, and the Clients of Commerzbank, on the other hand, or between Clients of Commerzbank. Conflicts of interest can arise in particular in investment advisory services and asset management due to the Bank s own interest in selling financial instruments; when receiving or issuing payments (such as placement commissions, regular sales commissions, non-cash benefits etc.) from or to third parties in connection with securities services; as the result of performance-related compensation of employees and intermediaries; when issuing payments to the Bank s employees and intermediaries; from other Bank business activities, in particular, the Bank s interest in making profits when trading for its own account or in selling the securities it issues; from relationships between Commerzbank and the issuers of financial instruments, such as credit relationships, involvement in the issuance of securities or cooperative arrangements; when preparing investment research on securities that will be offered for sale to Clients; from access to information that is not public knowledge; from the personal relationships of staff or management, or their friends, family or associates; or if such individuals are members of supervisory or advisory boards. Conflicts of interest can arise whenever there are opposing commercial or business interests. Commerzbank makes every effort to prevent such conflicts from arising. However, this is not always possible. Commerzbank therefore expects its employees to exercise care and honesty at all times, to act professionally and in accordance with the law, to observe market standards and, in particular, to observe the Client s best interest at all times. Employees of Commerzbank are obliged to observe specific standards and rules of conduct. Commerzbank s integrity and quality is manifested by its professional handling of conflicts of interest. That is why there is an independent compliance office ( Group Compliance ) at Commerzbank that reports directly to the Executive Board, which is charged with monitoring, identifying, preventing and managing conflicts of interest among business lines.

10 10 Information on handling conflicts of interest Some of the specific measures Commerzbank has taken include: Creating organizational procedures to protect the Client s interest in investment advising and asset management; Regulating the acceptance and granting of inducements, as well as their disclosure; Creating confidential areas by erecting information barriers, separating responsibilities and/or physical separation; Maintaining an insider or observation list that is used to monitor the emergence of sensitive information and prevent the misuse of insider information; Maintaining resticted list that helps deal with potential conflicts of interest by prohibiting transactions, advisory services or publication of investment research; Disclosing to Group Compliance the securities transactions of employees that could result in conflicts of interest; Employee training; The Bank shall disclose conflicts of interest that cannot be avoided to the affected Clients before conducting a transaction or offering advice. The following points, in particular, must be observed: When the Bank sells securities, it routinely receives payments from investment fund companies and issuers of securities. Such payments include regular sales commissions based on sales volume that are paid to the Bank by investment fund companies from the management fees that they collect, as well as sales commissions paid by the issuers of securities, mainly in the form of placement commissions or discounts on the issuing price. The Bank also receives and keeps front-end load fees, if they are charged on the sale of investment units or other securities. The Bank discloses such payments to its Clients. The receipt of these payments and other incentives helps the Bank to provide efficient and high-quality infrastructures for buying and selling financial instruments. They also cover the cost of advisory services that Commerzbank Clients use or can use at any time. When clients engaged the Bank to provide these advisory services, they always receive recommendations for financial instruments that are suitable for them, in compliance with legal regulations. This does not exclude the possibility that certain products, particularly Commerzbank Group products, will be recommended over other products as a result of internal sales-driven measures, taking into account the suitability of the product for the Client at all times. So when recommending investment funds and certificates to its Clients, the Bank chooses from a broad range of Bank and Group products. It also recommends the products of selected and qualified external providers, particularly for investment funds (excluding money market and real estate funds). When managing assets, the asset manager s discretion in decisions on buying and selling securities is based on the investment guidelines stipulated in the agreement with the Client in advance. Investment decisions are primarily based on an investment selection process that focuses on the Client s best interest. In any event, Commerzbank discloses to its Clients inducements it receives or grants in connection with its asset management activities. Another typical conflict of interest in connection with asset management can arise when agreeing on performance related compensation. Here the possibility cannot be ruled out that the manager will incur excessive risk in order to achieve the highest possible performance and, thus, higher compensation. This risk can be reduced by, among other things, agreeing on investment guidelines. An internal monitoring system determines whether the investment decisions made are within the scope of these investment guidelines. In addition, the asset manager s compensation is also based on other components, including fixed remuneration components. Finally, the Bank receives non-cash benefits from other service providers in connection with its securities services, such as financial analyses or other informational material, training and technical support and equipment for accessing data information and distribution systems. The acceptance of such benefits is not directly related to client services. The bank uses these benefits to provide and continually improve the high-quality services demanded by its Clients. Some performance-based commissions and fixed fees are paid to referrees and intermediaries who refer Clients or certain transactions to the Bank. Furthermore, intermediaries may also receive payments directly from third par-

11 Information on handling conflicts of interest 11 ties, such as investment fund companies and issuers of securities, in addition to the agent s commissions paid by the Bank. The Bank also provides information about relevant potential conflicts of interest in respect of the issuers it analyses and/or their financial instruments as part of the financial analyses it prepares and publishes. Commerzbank would be happy to provide its Clients with details about this policy upon request.

12 Strategy and risk in securities investment 12 Strategy and risk in securities investment Overview of investment strategies and financial instruments Commerzbank offers its Clients option to select from among six different investment strategies. The investment strategy serves the Relationship Manager as a guideline for recommending individual securities and financial instruments to structure the Client s custody account. The six investment strategies reflect every risk appetite. For example, investors who want to forego higher returns in favour of higher security can choose the securityoriented investment strategy that does not include equities. The conservative investment strategy, on the other hand, is designed for investors who want good performance, for example, by including equities, and who are willing to accept moderate losses in value. The range is rounded out by an opportunity-oriented investment strategy that has a clear focus on equities, which is suitable for investors who are prepared to accept a high risk of loss in return for the prospect of a larger increase in value. Investment strategies Fixed income component Security The custody account structure of the securityoriented investment strategy focuses on continuous capital growth. The main objective is to preserve capital. Losses in value on an annual basis are unlikely. Diversification is achieved by allocating assets to fixed income, real estate and liquid investments. The emphasis of the security-oriented investment strategy is on bonds and real estate funds. Fixed-income The focus of the fixed-income oriented investment strategy is primarily on continuous capital growth. The main objective is to generate steady income. Small losses in value on an annual basis are possible. Diversification is achieved by allocating assets to fixed-income, real estate and liquid investments. The emphasis of the fixed-income oriented investment strategy is primarily on bonds and real estate funds. Certificates and foreign currency bonds can also be added. Conservative The focus of the fixed-income oriented investment strategy is primarily on continuous capital growth. The main objective is to generate steady income. Small losses in value on an annual basis are possible. Diversification is achieved by allocating assets to fixed-income, real estate and liquid investments. The emphasis of the fixed-income oriented investment strategy is primarily on bonds and real estate funds. Certificates and foreign currency bonds can also be added. Balanced The balanced investment strategy focuses more on opportunities for profit than preserving capital. The emphasis is on generating good performance. Losses in value are possible at any time. Diversification is achieved by allocating assets to fixed-income, equity, real estate and liquid investments. The emphasis of the balanced investment strategy is on fixed-income bonds, European and international equities, certificates and real estate funds. Foreign currency bonds can also be added. Growth The focus of the custody account structure of the growth investment strategy is on good opportunities for profit. Generating above average growth in value is the primary focus. High losses in value are possible at any time. Diversification is achieved by allocating assets to fixed-income, equity, real estate and liquid investments. The focus of the growthoriented investment strategy is on European and international equities, certificates and fixedincome bonds. Foreign currency bonds and real estate funds can also be added. Opportunity Equity component The focus of the custody account structure of the opportunity-oriented investment strategy is on above average opportunities for profit. Generating extraordinarily high growth in value is the primary focus. Very high losses in value are possible at any time. Diversification is achieved by allocating assets to fixed-income, equity, real estate and liquid investments. The focus of the opportunityoriented investment strategy is on European and international equities and certificates. Bonds and debentures, foreign currency bonds and real estate funds can also be added. Note: The shorter your investment horizon, the more you should follow a security-oriented strategy. The longer your investment horizon, the more you can profit from strategies with high risks and rewards.

13 Strategy and risk in securities investment 13 The investment strategy is fulfilled by selecting appropriate securities and financial instruments. At Commerzbank, investors have access to a complete range of securities and other financial instruments. The large number of securities can be divided into product groups. Product groups always contain securities and financial instruments with a similar risk structure. The following is an overview. This brief description cannot replace individual investment advising, which our relationship managers would be happy to provide at any time.

14 Strategy and risk in securities investment 14 Continuous capital appreciation Little risk of loss Stable investments Risk Very high profit opportunities Very high risk of loss Promising investments or hedging transactions A B C D E F G H A Federal treasury bills, federal treasury notes and money market funds Product risk category A includes securities that are associated with very low risk. These include federal treasury bills and money market funds. Federal treasury bills are medium-term bonds issued by the federal government that are available in different forms. At maturity, they are redeemed at nominal value, which is considered guaranteed because of the federal government s credit standing. For this reason, federal government securities are suitable for investment of trust funds. Federal treasury notes are bonds issued by the federal government with maturities of one to two years. Federal treasury notes do not pay interest. They are purchased at a discount and redeemed at nominal value. Money market funds are investment funds that invest solely or primarily in money market securities and liquid fixed income securities with very short (residual) maturities. Due to this orientation, the value of money market fund units is rarely affected by changes in interest rates.

15 Strategy and risk in securities investment 15 Continuous capital appreciation Little risk of loss Stable investments Risk Very high profit opportunities Very high risk of loss Promising investments or hedging transactions A B C D E F G H B Bonds issued by banks and public sector borrowers in Euros, Pfandbriefe (mortgage bonds) and open-ended property funds Product risk category B includes securities that focus on steady capital appreciation and income. Typical securities in this risk category are bonds issued by banks or public-sector entities and open-end property funds. Bonds are also referred to as fixed-income securities or debentures. They are interest-bearing debt securities that pay either fixed or variable interest. The purchaser of a bond has a monetary claim against the issuer. Repayment of this monetary claim depends on the issuer s credit quality. The purchaser of a bond therefore always runs the risk that the issuer will not be able to pay back the claim upon maturity. This risk, which is referred to as issuer risk, decreases as the bond issuer s credit quality increases. Public-sector borrowers, such as the federal government, states and municipalities, generally have good credit quality, and the same is true of many banks. A key indication of credit quality is the issuer s credit rating. Bonds are redeemed at nominal value upon maturity. Bonds and other interest-bearing securities can also be traded during the term of maturity. It is possible, however, that bonds can only be sold at a loss before they reach maturity. This is because the price of a bond depends primarily on interest rates. Long-term bonds react more sharply to interest rate fluctuations than bonds that have a shorter term to maturity. If the bond is to be redeemed in CZK, there is no currency risk. When buying bonds, investors should consider other factors, such as whether the issuer has the right to call in the bond prior to maturity. Pfandbriefe, or mortgage bonds, can only be issued by banks that are authorized and regulated. The investor s redemption claims are secured in full either by (generally first-rank) mortgage liens or by loans to public-sector borrowers. Open-ended property funds are investment funds that invest primarily in real estate, such as commercial properties, shopping centers and participation in domestic and foreign real estate companies. These funds seek to diversify risk through the selection of real estate investments. Changes in value in the real estate market lead to fluctuations in the unit prices of open-ended property funds. When buying investment funds, investors should consider other factors, such as the effect of expenses on returns or the risk that redemption of units may be temporarily suspended by the investment company.

16 Strategy and risk in securities investment 16 Continuous capital appreciation Little risk of loss Stable investments Risk Very high profit opportunities Very high risk of loss Promising investments or hedging transactions A B C D E F G H C Other Euro bonds, bond funds, guarantee funds and capital preservation funds Product risk category C includes bonds, bond funds and capital-preservation investment funds. Bonds are also referred to as fixed-income securities or debentures. They are interest-bearing debt securities that pay either fixed or variable interest. The purchaser of a bond has a monetary claim against the issuer. Repayment of this monetary claim depends on the issuer s credit quality. The purchaser of a bond therefore always runs the risk that the issuer will not be able to pay back the claim upon maturity. This risk, which is referred to as issuer risk, increases as the bond issuer s credit quality decreases. A key indication of credit quality is the issuer s credit rating. This product risk category includes issuers other than public-sector borrowers and banks (see information on product risk category B), and mainly involves corporate bonds. The following rule applies: The higher the bond s yield, the higher the issuer risk. Bonds are redeemed at nominal value upon maturity. Bonds and other interest-bearing securities can also be traded during the term of maturity. Their price depends mainly on the change in interest rates. Bonds have an interest-rate risk. It is possible that bonds can only be sold at a loss before they reach maturity. If the bond is to be redeemed in CZK, there is no currency risk. When buying bonds, investors should consider other factors, such as whether the issuer has the right to call in the bond prior to maturity. Bond funds are investment funds that invest primarily in bonds. The individual investment decisions are taken by the fund management of the investment company in accordance with investment guidelines. The value of a fund unit depends upon the performance of the securities and financial instruments in the fund and may therefore be subject to substantial fluctuations. Dependence on the performance of individual securities is reduced by investing in many different financial instruments. Bond funds can have very different structures. Bond funds that invest in securities in currencies other than the CZK run the risk that currency fluctuation will affect the unit prices. Bond funds that invest in bonds issued by borrowers with low credit quality (government bonds of emerging markets or corporate bonds of lower quality) also have a higher price risk. When buying investment funds, investors should consider other factors, such as the effect of expenses on returns. Investment funds can be structured using options, so that the value of the fund s assets upon maturity is secured. Capital-preservation funds generally repay at least the capital invested (generally minus the costs to buy the fund). In addition, in some cases a third party guarantees repayment of the invested capital. In this case, important information about the guarantee and the guarantor is given in the security s prospectus.

17 Strategy and risk in securities investment 17 Continuous capital appreciation Little risk of loss Stable investments Risk Very high profit opportunities Very high risk of loss Promising investments or hedging transactions A B C D E F G H D Mixed funds, bonds and bond funds in foreign currency, convertible bonds, bonds with warrants and participation certificates Product risk category D includes a number of different types of securities whose structure involves the risk of loss, which is, however, generally lower than investing in equities. of interest. In addition, convertible bond prices not only react to changes in interest rates, but also to falling share prices. Mixed funds are investment funds whose investment policy guidelines allocate assets in a broad range of various investment instruments (primarily equities, bonds and real estate). The focuses of the mixed funds are funds that invest in both bonds and equities, and thus aim for broad diversification of risk. The unit value of these funds is influenced both by bonds subject to changes in interest rates and equities subject to the exchange rate risk. Depending upon the focus of the mixed fund s investment guidelines, both risks can play a role. When buying investment funds, investors should consider other factors, such as the effect of expenses on returns. Currency bonds are bonds that are redeemed in a currency other than the CZK. In addition to the bond risks described above for product risk categories B and C, the purchaser of currency bonds runs the additional risk of fluctuating exchange rates. Even if the issuer has good credit quality and redeems the bond at full nominal value upon maturity, the return after conversion to CZK may be lower than the amount paid to buy the currency bond. The same is true of bond funds that invest in currency bonds. Convertible bonds are bonds that give the investor the right or the obligation depending on how the bond is structured to demand that the bond be redeemed in equities. The bond terms provide for specific preconditions for conversion. If equity prices are rising, convertible bonds offer the opportunity to earn greater growth by converting the bond than with other fixed-interest securities. However, this advantage is generally contrasted by the fact that convertible bonds pay a below-market nominal rate Bonds with warrants are bonds that also certify, in the form of a warrant, the right to buy equities (or other marketable securities). This advantage is generally contrasted by the below-market nominal rate of interest. Because of the warrant component, the price of a bond with a warrant reacts more sharply to falling share prices than other bonds. The warrant is detachable and can be traded on its own. Even after the warrant is detached, the bond remains intact. The bond with warrant allows investors to buy equities at the conditions defined in the bond terms. If share prices fall, the warrant bond may become worthless. However, the interest and redemption claims arising from the bond with warrant are not affected. Investors purchasing bonds of any type need to consider other factors, such as whether the issuer has the right to call in the bond prior to maturity. The structure of participation certificates is not defined by law, so issuers have quite a bit of freedom in structuring them. Depending upon the individual structure, participation certificates may be similar in nature to bonds or to equities. This means it can have either a fixed interest rate or distributions based on the issuer s business results. If the structure is similar to that of equity, the omission of a dividend may mean that the issuer will not pay any distribution on the participation certificate. Another factor to keep in mind is that participation certificates are frequently ranked as subordinate claims in the event of insolvency on the part of the issuer. When buying participation certificates, investors should consider the special features of the security s individual structure.

18 Strategy and risk in securities investment 18 Continuous capital appreciation Little risk of loss Stable investments Risk Very high profit opportunities Very high risk of loss Promising investments or hedging transactions A B C D E F G H E Equities, equity funds, certificates, reverse convertible bonds and partially secured capital preservation funds Product risk category E includes securities that offer attractive earning opportunities, but that also involve a high risk of loss. They include equities and equity funds, certificates, and other structured bonds, as well as partially secured capital preservation funds. Equities securitize the right to shares in a company. The shareholder is not a creditor, but rather an owner in the stock corporation and thus bears entrepreneurial risk. The share price, which represents the value of the shareholder s interest, is subject to unpredictable and frequently sharp fluctuations. Political or general economic developments can also have a significant effect on price trends over the short and medium term. Over the long term, the share price is affected primarily by the company s economic situation. In an extreme case, that is, if the company declares bankruptcy, the shareholder can lose the entire amount invested. Investors can earn profits if the stock markets perform well. Dividends represent another source of income. Dividends represent the stockholder s share of the profits generated by the company in the previous fiscal year. If the company s performance has been unfavorable, there may be no dividend payment. Equity funds are investment funds that invest primarily in equities. The individual investment decisions are taken by the fund management of the investment company in accordance with investment guidelines. The value of a fund unit depends upon the performance of the securities and financial instruments in the fund and may therefore be subject to substantial fluctuations. Dependence on the performance of individual securities is reduced by investing in many different financial instruments. However, this effect is reduced if the investment fund focuses on specific investment areas (such as individual countries or sectors). Investment funds can be structured using options, so that the value of the fund s assets upon maturity is secured. Partially secured capital preservation funds are characterized by the fact that only a portion of the investor s investment is secured, not the entire amount. Certificates and other structured bonds are debt securities that are available in very different forms. Generally they have a defined term and entitle the holder to redemption of a monetary amount upon maturity. The type and amount of redemption can depend on a wide variety of criteria, depending upon the structure of the certificate (e.g. performance of individual equities, change in indices or other underlying instruments). In addition, there are also certificates of unlimited duration. Certificates are traded on exchanges and/or over the counter, which means that certificates can generally be bought or sold even before they reach maturity. The price of the certificate is affected not only by supply and demand but also can be affected significantly, depending upon its structure, by the performance of the underlying instrument and other factors, such as volatility or interest rates. Reverse convertible bonds are a special form of structured bonds. They have a special characteristic in which they can be redeemed upon maturity for a set number of shares (determined when the bond is issued), depending upon the performance of the underlying instrument. While all certificates and structured bonds are subject to the risk of insolvency on the part of the issuer as well as to price risk, other risks depend upon the specific structure of the certificate, which is described in the sale documents.

19 Strategy and risk in securities investment 19 Continuous capital appreciation Little risk of loss Stable investments Risk Very high profit opportunities Very high risk of loss Promising investments or hedging transactions A B C D E F G H F Warrants, leverage certificates and other exchangetraded financial forward transactions (e.g. options and futures) Product risk category F includes exchange-traded financial forward transactions and securities comparable to financial forward transactions. Financial forward transactions involve considerable risk of loss. Investors can lose all of the capital they invest. Some products in this risk category (such as covered options and futures) involve unlimited risk of loss because there may be an obligation to subsequent additional payments, the amount of which cannot be determined. Transactions with securities and financial instruments in product risk category F are only possible on the basis of separate agreements with the Bank and after a detailed explanation of their structure and risks. Warrants give the holder the right to buy (call) or sell (put) an underlying instrument (such as a share) at fixed terms. Price changes and changes in the volatility of the underlying instrument can reduce the value of the warrant until it has no value at all. Because of their leveraging effect, warrants react disproportionately to changes in price. Warrants have a fixed term and lose value through time alone. This decline in value over time accelerates upon maturity. Leverage certificates are debt securities that simulate the price movement of the underlying instrument (such as an index) and increase it disproportionately through their leveraging effect. Depending upon the certificate s structure, the certificate may automatically lose all of its value if certain price thresholds are reached. Exchange-traded financial forward transactions are options and futures contracts. Investors should inform themselves in detail about the opportunities and risks associated with these transactions before buying warrants and leverage certificates or entering into other exchange-traded financial forward transactions.