Exchange Traded Options Product Disclosure Statement

Transcription

1 Exchange Traded Options Product Disclosure Statement June 2009 Issuer: Westpac Securities Limited ABN Australian Financial Services Licence No Your future is our future

2 feel free to make some notes wherever you see a grid

3 3 what would you like to know? 4 Important Notices 6 1. Introduction to Exchange Traded Options 1.1 What is an ETO? Key features of ETOs How are ETOs valued? Other types of ETOs Frequently asked questions Sources of educational information Benefits and Risks of Investing in ETOs 2.1 What are the benefits of investing in ETOs? What are the risks of investing in ETOs? Managing risks of ETOs Trading ETOs with Westpac Broking 3.1 Opening and closing ETO positions Margins Exercise Settlement ETO trading strategies Tax Considerations 5.1 Income tax Additional Information 6.1 National Guarantee Fund Dispute resolution system Substantial holders, takeovers and associations Potential conflicts of interest involving Westpac Broking Privacy Anti-money laundering and counter terrorism financing Are you having any difficulty with your account? Exchange Traded Options Client Agreement (Terms and Conditions) Exchange Traded Options Application Form Registered Holder Collateral Cover Authorisation Costs, Fees and Financial obligations 4.1 Acquisition cost for Takers Acquisition and ongoing costs for Writers of ETOs 26

4 4 Important Notices Product Disclosure Statement The Product Disclosure Statement (PDS) relates to the issue of Exchange Traded Options (ETOs) by Westpac Securities Limited (ABN ) (Westpac Broking). Westpac Broking holds an Australian Financial Services Licence, number This PDS is dated 8 December 2007 and has not been lodged with the Australian Securities and Investments Commission (ASIC). ASIC and the Australian Securities Exchange (ASX) take no responsibility for the contents of this PDS. ETOs are not investments in Westpac Broking ETOs are not an investment in or deposit with Westpac Broking or any member of the Westpac group. Neither Westpac Broking nor any associate of Westpac Broking in any way guarantees the capital value and/or performance of ETOs. Updating of information in this PDS Information that is in this PDS may change from time to time. Where that information is not materially adverse, Westpac Broking may provide that information on its website at westpac.com.au/broking, where it can be found at any time. A paper copy of that updated information will be given to a person without charge on request by contacting Westpac Broking on Where there is any material change to, or if any significant event affects, any of the required information in this PDS, Westpac Broking will provide that information on its website and, if necessary, will issue a supplementary PDS. This is not investment advice You should seek your own financial advice. The information provided in this PDS has been prepared without taking into account your investment objectives or specific personal circumstances, financial situation or needs. You should read the whole of this PDS and consider all the risk factors and other information concerning ETOs in light of your own particular investment objectives and circumstances before deciding to use ETOs. If you have any questions, you should contact your accountant or other professional adviser for financial advice before buying or selling ETOs. No cooling off rights apply No cooling off rights apply to your trading in ETOs. This means that you cannot withdraw an instruction to trade ETOs, except as permitted by the Corporations Act or the terms and conditions set out in section 7 of this PDS (ETO Terms and Conditions).

5 5 Important Notices How to obtain a PDS and application form (a) Printed PDS Westpac Broking will provide a copy of this PDS (which may be updated by a Supplementary PDS) on request to any person resident in Australia. Alternatively, the PDS and any Supplementary PDS(s) can be viewed and printed or downloaded from the Westpac Broking website at westpac.com.au/broking (b) Electronic PDS If this PDS is accessed electronically, it must be downloaded in its entirety from Westpac Broking s website. By completing the application form set out in section 8 of this PDS (Application Form) and accompanying this electronic document, you declare that you were given access to this electronic PDS together with the Application Form. The offer for ETOs constituted by this PDS is only available by this method to persons accessing and downloading or printing the electronic version of the PDS in Australia. Copies of the PDS are available from the Westpac Broking website at westpac.com.au/broking Offering restrictions None of the ETOs, or this PDS, have been or will be lodged or registered under the securities laws of any other jurisdiction outside Australia. Further, the distribution of this PDS in jurisdictions outside Australia may be restricted by law and therefore persons into whose possession this PDS comes should seek advice on and observe any such restrictions. Failure to comply with relevant legislation may violate those laws. This PDS is not an offer or invitation in relation to ETOs in any place in which, or to any person to whom, it would not be lawful to make such an offer or invitation. This is a brief description only. Your rights and obligations are governed by the ETO Terms and Conditions and the general law. The ETO Terms and Conditions are set out in section 7 of this PDS, or are available by contacting Westpac Broking on or downloading them from Westpac Broking s website at westpac.com.au/broking Definitions Some words used in this PDS have defined meanings as set out in this PDS (see section 1). Information about Westpac Broking Westpac Broking is a wholly owned subsidiary of Westpac Banking Corporation (Westpac). Westpac Broking provides financial services to its customers to trade ASX listed financial products and ETOs and general financial advice as set out in the financial services guide provided to investors. Westpac Broking s registered office is located at Level 20, Westpac Place, 275 Kent Street, Sydney, New South Wales, 2000, Australia.

6 6 1. Introduction to Exchange Traded Options Exchange Traded Options (ETOs) are an alternative way of trading on the Australian Securities Exchange (ASX). They are derivative products that are traded on the ASX Options Market and are registered and cleared by the Australian Clearing House Pty Ltd (ABN ) (ACH). They allow investors to enter into a contract for the right to either acquire or dispose of a parcel of shares at a predetermined price. ETOs have features that may appeal to a wide range of investors looking to broaden their opportunities to profit from changes in the price of traded securities or changes in an ASX index. However, due to their nature, ETOs carry a number of risks that you should carefully consider. Some frequently asked questions about ETOs are set out in section 1.5, while the key benefits and risks of ETOs are discussed in section 2.1 and 2.2 of this PDS. Before you can trade ETOs with Westpac Broking, you must: Read and understand this PDS and the attached ETO Terms and Conditions (set out in section 7); Have received a Westpac Broking Financial Services Guide; Complete the Application Form, the Registered Holder Collateral Cover Authorisation and any additional forms which are required (set out in sections 8 and 9 of this document); Read and understand the ASX educational booklet Understanding Options Trading which we will give you when you complete the Application Form; and If required, complete any additional assessment we may require before trading certain types of ETOs. Certain terms used in this PDS are defined in this section 1. These terms include Writer; Taker; Call; Put; Premium; Expiry Date; Exercise Price; Underlying Security and Margin.

7 7 1. Introduction to Exchange Traded Options 1.1 What is an ETO? An ETO is a standardised contract which gives an investor the right, but not the obligation, to acquire or dispose of a parcel of shares at a predetermined price on or before a predetermined date. To acquire this right, the purchaser of the ETO must pay an amount to the seller of the ETO. The following information will help you understand ETOs. (a) Writers and Takers Every ETO has both a writer and a taker. A Writer of an ETO sells the right to acquire or dispose of a standard parcel of shares at a predetermined price on or before a predetermined date. They are known as writers because they underwrite the obligation to deliver or accept the shares covered by the ETO. A Taker of an ETO buys the right to acquire or dispose of a parcel of shares at a predetermined price on or before a predetermined date. They are known as takers as they can take up the right to purchase or sell the shares covered by the ETO. (b) Calls and Puts ETO can be described as either calls or puts. A Call ETO gives the Taker the right, but not the obligation, to buy a standard parcel of shares at a predetermined price on or before a predetermined date. If the Taker of the Call ETO exercises their right to buy, the Writer must sell that standard parcel of shares at the predetermined price to the Taker. A Put ETO gives the Taker the right, but not the obligation to sell a standard parcel of shares at a predetermined price on or before a predetermined date. If the Taker of the Put ETO exercises their right to sell, the Writer must buy that standard parcel of shares at the predetermined price from the Taker. (c) Settlement method Upon expiry, most ETOs are deliverable, which means that one party to the ETO must physically deliver the standard parcel of shares to the other party. Another type of ETOs known as Index ETOs are cash settled, which means that on expiry, one party to the ETO must pay a cash amount to the other party that is determined by reference to changes in the relevant ASX index. For more information about Index ETOs, refer to section 1.4(a) of this PDS. (d) Exercise style ETOs may have either an American or European exercise style. European-style ETOs may only be exercised on a predetermined date whereas American-style ETOs may be exercised on any day up to and including the predetermined date. Most ETOs are American-style, although Index ETOs are European-style. For more information about Index ETOs, refer to section 1.4(a) of this PDS.

8 8 1.2 Key features of ETOs (a) The Underlying Security ETOs are only available to be traded on certain Underlying Securities selected by ACH according to specified guidelines. A list setting out these Underlying Securities can be found on the ASX website asx.com.au/investor/options/trading_information/index.htm (b) The contract size The standard parcel of Underlying Securities for an ETO is currently 1000 shares, although this may be adjusted following certain events. For more information about these ASX adjustments, refer to section 1.2(f) of this PDS. (c) The Expiry Date ETOs have a limited life span and expire on standardised days set by ACH (Expiry Dates). The Expiry Date is the last day of trading for all unexercised ETOs, and is generally the Thursday before the last Friday in the month (so long as both the Thursday and Friday are business days). Expiry Date information is available on the ASX website at: asx.com.au/about/operational/index.htm (d) The Exercise Price The Exercise Price is the price at which the Taker of an ETO can acquire or dispose of the Underlying Securities. Usually there are a range of Exercise Prices for ETOs in a series which have with the same Underlying Security and the same Expiry Date. (e) The Premium The Premium is the price of the ETO agreed upon by the Taker and the Writer. It is not a standardised feature of an ETO, but is negotiated between parties trading on ASX Options Market. (f) ASX adjustments Apart from the Premium, most of the features of an ETO are standardised by the ASX. However, the ASX may make adjustments to these features in response to certain corporate events that affect the value of the Underlying Security, such as a bonus issue, share split or rights issue. In these situations, the ASX will endeavour to preserve the open positions of Takers and Writers at the time of the adjustment. Information about ASX adjustments is in the ASX booklet Explanatory Guide for Option Adjustments, which can be downloaded at asx.com.au/investor/options/booklets.htm (g) Margins If you Write ETOs, you will be required to deposit a Margin (made up of either cash or securities) with ACH to cover the risk of financial loss due to an adverse market movement. For more information about Margins, refer to section 3.2 of this PDS. (h) No dividends, entitlements or voting rights Holders of ETOs are not entitled to dividends or other entitlements paid to the holder of the Underlying Securities, or to the voting rights attaching to the Underlying Securities. To be entitled to receive a dividend, you must exercise the ETO in sufficient time to become the registered holder.

9 9 1. Introduction to Exchange Traded Options 1.3 How are ETOs valued? The value of an ETO, known as the Premium, is specific to each ETO and determined by market forces. The Taker pays a Premium to the Writer to purchase the ETO and the Writer keeps this Premium whether the ETO is exercised or not. The Premium for an ETO is quoted on a cents per share basis. To calculate the dollar amount to be paid for an ETO, you multiply the value of the Premium by 1,000 (the standard number of Underlying Securities). For example, a Call ETO with a Premium quoted at 25c per share can be purchased for $250. The Premium of an ETO is influenced by both the intrinsic value and the time value of the ETO. The intrinsic value is the difference between the exercise price of the ETO and the market price of the Underlying Security at any given time. An ETO with positive intrinsic value is referred to as being in the money. The terminology used to describe the intrinsic value of an ETO is summarised below: Exercise price > share price Exercise price < share price Exercise price = share price Call ETO Out of the money In the money At the money Put ETO In the money Out of the money At the money Time value represents the amount an investor is prepared to pay for the possibility that the intrinsic value of an ETO might move in the investor s favour during the life of the ETO, allowing the investor to profit. Time value is influenced by the following factors: Time to expiry Market volatility Interest rates Dividend payments Market expectations Most ETO pricing uses a mathematical formula which includes calculating the intrinsic and time value of the particular ETO. The section titled Option pricing fundamentals in the ASX Booklet Understanding Options Trading has more information regarding the fundamentals of pricing ETOs and can be downloaded from asx.com.au/investor/options/booklets.htm ASX also provides a pricing calculator on the ASX website asx.com.au/options The Premium will fluctuate during the life of an ETO depending on a range of factors including the price and volatility of the Underlying Securities or the level and volatility of the relevant index, the time remaining to the Expiry Date, interest rates, dividends and general risks of particular markets. ETO investors will be able to obtain current price information from the Westpac Broking website or by calling the Westpac Broking Trading Room on

10 Other types of ETOs (a) Index ETOs An Index ETO operates in a similar manner to a normal ETO, except that the investor is given exposure to movements in an approved stockmarket index for example, the S&P/ ASX 200 Index or the S&P/ASX 200 Property Trust Index rather than an Underlying Security. This allows investors to trade a view on the market as a whole, or on a sector of the market that is covered by a particular index. Some of the features of Index ETOs include: They are cash settled, since it is not practical to deliver all the securities that make up the index; They are usually European in exercise style, meaning they can only be exercised on the Expiry Date; They have an exercise level, rather than an Exercise Price; and The Premium and the exercise level are both expressed in points. To calculate the dollar amount to be paid for an Index ETO, you multiply the value of the Premium by an index multiplier. For example, an Index ETO with a Premium of 30 points and an index multiplier of $10 can be purchased for $300. If an Index ETO is settled, the cash settlement amount is calculated having regard to the opening price index calculation on the Expiry Date, and is paid to exercising Takers on the day following the Expiry Date. For further information about Index ETOs, refer to the ASX booklet Index Options which can be downloaded from asx.com.au/investor/options/booklets.htm (b) Low Exercise Price Options Low Exercise Price Options (LEPOs) are a more sophisticated style of ETO that involves Writing and Taking Call ETOs with an Exercise Price of one cent. For further information about LEPOs trading, refer to the ASX website asx.com.au/investor/options/trading_information/lepos.htm Westpac Broking does not currently offer LEPOs trading, but may do so in the future.

11 11 1. Introduction to Exchange Traded Options 1.5 Frequently asked questions For more information What is an ETO? What are the Underlying Securities over which I can trade ETOs? Do I have any voting rights, or will I receive any dividends, in relation to the Underlying Securities? How are ETO Premiums determined? What are the major benefits of ETOs? What are the risks associated with trading ETOs? ETOs are financial derivatives that trade on the ASX Options Market and are registered and cleared by ACH. A list of companies over which ETOs are traded can be found on the ASX website at asx.com.au/investor/options/trading_ information/index.htm No. ETOs do not carry any voting rights nor any rights to dividends in respect of the Underlying Securities. The Premium is negotiated between the Writer and the Taker via the ASX Options Market and is determined by a combination of the time value and the intrinsic value of the ETO. The major benefits include being able to: hedge against adverse Underlying Security price movements; generate income from Premiums if you Write ETOs; lock in the future sale or purchase price of an Underlying Security, giving you more time to consider your investment options; profit from rising, falling or flat markets, depending on the trading strategy you have employed; and leverage and diversify a portfolio without paying the entire price for the Underlying Security. The major risks include: financial risks, including unlimited losses for you as a Writer unless you own the Underlying Securities or have an offsetting position; market risks such as suspension of ETO trading, or failure of the ASX or ACH trading platforms; Margin risks including being required to deposit additional Margin deposits settlement risks, including fail fees if you do not have sufficient securities or cash available after exercise of an ETO; and risks arising from default under the ETOs Terms and Conditions. Section 1.1 Section 1.2(a) Section 1.2(h) Section 1.3 Section 2.1 Section 2.2

12 Frequently asked questions continued What are the costs associated with ETOs? The cost of acquiring an ETO includes Premiums (for Takers), brokerage, taxes and ACH fees. For more information Section 4 Whilst holding ETOs, Margins may be payable. Interest may also be payable on late settlement and Margin payments. Are there any tax considerations I should consider before investing in ETOs? The taxation of ETOs is complex and may give rise to either revenue or capital gains and losses depending on your individual circumstances. There are specific rules on when Premiums and other gains and losses on ETOs are assessable and deductible. Section 5 Is there a dispute resolution process in place to deal with complaints? Yes, Westpac Broking has an internal dispute resolution system and is a member of external dispute resolution systems. Section 6.2 Does Westpac Broking take into account labour standards, or environmental, social or ethical considerations in relation to the ETOs offered under this PDS? No. ETOs are generally used for capital protection, income generation or speculative purposes. Labour standards, environmental, social or ethical considerations therefore have not been taken into account in relation to the ETOs that are offered under this PDS.

13 13 1. Introduction to Exchange Traded Options 1.6 Sources of educational information ETOs have been traded in Australia on the ASX Options Market since Over this time, ASX has prepared a number of educational booklets relating to ETOs which are available to you via the ASX website: asx.com.au/investor/options/booklets.htm You can visit this page to access more information, including different types of options, margins and trading strategies. In accordance with the ASX operating rules, we will give you a copy of the ASX booklet entitled Understanding Options Trading when you sign the application form to trade ETOs attached to this PDS. Full details of all ETOs listed on the ASX and Expiry Date information can be found on the ASX website at asx.com.au/options or alternatively through information vendors or newspapers. A list of current ETO codes and delayed price information is available on the ASX website at asx.com.au/options. Details of the previous day s trading are generally published in summary form in the financial pages of the major Australian daily papers. If you have any questions on any aspect of the booklets you should consult Westpac Broking or your financial adviser before making any investment decisions.

14 14 2. Benefits and Risks of Investing in ETOs The versatile nature of ETOs gives investors great flexibility to take advantage of rising, falling and stable markets. The flexibility of ETOs stems from the ability to both buy and sell different ETOs and undertake multiple positions targeting specific movements in the overall market and individual Underlying Securities. Nonetheless, ETOs also involve many potential risks that you should be aware of. Specific concepts which you should practically understand before trading ETOs include: the effect of time on your ETO position/strategy; how changes in volatility may affect your potential return on an ETO position; how to calculate Margins and worst-case scenarios for your ETO position; the likelihood of early exercise and its most probable timing; the effect of dividends and capital reconstructions on your ETO position; and the liquidity of an ETO series and its effect on your ability to exit a position. Whilst this PDS provides information about the benefits, risks and characteristics of ETOs, you should inform yourself and obtain advice about trading ETOs with respect to your personal circumstances. See section 2.2 for a more detailed explanation of the risks associated with trading ETOs. For a further explanation of the strategies that you can undertake with ETOs, see the ASX booklet Options Strategies, available for download from the ASX website, asx.com.au/investor/options/booklets.htm Because the risks of different ETO positions vary markedly depending on the strategy you enter and that you must make Margin arrangements for some strategies, we may require you and any joint account owner to complete an online test prior to entering into the more complex ETO strategies.

15 15 2. Benefits and Risks of Investing in ETOs 2.1 What are the benefits of investing in ETOs? (a) Risk management ETO trading allows you to protect (hedge) your share portfolio from a drop in value. For example, a Put ETO provides a Taker who is holding the Underlying Securities protection against a fall in the price of those Underlying Securities. (b) Income generation You can earn income from Premiums by Writing ETOs for example, writing a Call ETO over Underlying Securities that you may already hold. These Premiums are kept by you whether or not the ETOs are exercised. (c) Increased decision-making time For a Taker, ETOs can lock in a future purchase price (if a Call ETO is used) or a future sale price (if a Put ETO is used) for an Underlying Security. This can give you increased time to consider your investment options. (d) Reduced counterparty risk ETOs benefit from reduced counterparty default risk as a result of standardisation and registration with ACH. Since an ETO position can be closed out without reference to the original counterparty, the risk of counterparty default is transferred to ACH. (e) Investment flexibility ETOs do not require a rising market to make money depending on the strategy you have employed, you may be able to profit from rising, falling or flat markets. (f) Leveraging your portfolio Since the Premium paid by a Taker for an ETO is much less than the purchase price of the Underlying Securities, ETOs provide exposure to changes in an Underlying Security s price without having to pay the full price of that Underlying Security. This is referred to as leverage. (g) Portfolio diversification ETOs allow you to diversify your portfolio and gain a broad market exposure over a range of Underlying Securities or an ASX index (for Index ETOs) with a considerably lower initial outlay than is required if purchasing the Underlying Securities.

16 What are the risks of investing in ETOs? Trading in ETOs can cause substantial financial loss. It is important that you carefully consider whether ETOs are appropriate for you in light of your investment objectives and financial circumstances. You should only trade ETOs if you understand the nature of the products and the extent of your exposure to risks and have the financial resources to manage those risks. You should not trade ETOs if you have a low risk tolerance. Before investing in ETOs, you should obtain independent financial advice and make sure that you understand the legal, tax and accounting implications of your investment. This PDS does not cover every aspect of risk associated with ETOs. For further information concerning risks associated with ETO trading you are referred to the ASX booklet Understanding Options Trading and in particular the section entitled Risks of option trading. This booklet can be found on the ASX website at: asx.com.au/investor/options/booklets.htm (a) Financial risks If you are a Taker, your potential losses are fixed if your ETO expires out of the money, you will only lose the amount you paid for the ETO (ie, the Premium) plus any transaction costs. If you are a Writer, on the other hand, you face potentially unlimited losses if you do not own the Underlying Securities or do not have an offsetting position, since you can be called upon to buy or sell an Underlying Security at a price vastly different to the market price. Additionally, a Writer can be exercised against at any time, since ACH randomly assigns a Writer to an ETO that is exercised. The time when you are randomly selected by ACH may not be convenient and may prevent you from closing out your ETO position. It may even be impossible to close out or cover a position under certain conditions. For example, during a period of low market liquidity, or when there is a significant change in price over a short time period, it may not always be possible to manage a Writer s risk, as market conditions might make it impossible to execute that order. This risk will increase if you use complex trading strategies. You should also be aware that the leverage gained when Writing or Taking an ETO can work against you as well as for you. A relatively small movement in the price of the Underlying Securities may have a proportionately larger impact on the value of the ETO and can lead to losses greater than the Premium received or cause an ETO to expire without value. (b) Market risks You should be aware of the risks that arise as a result of the way ETOs are traded on the ASX Options Market. These risks include: the discretionary power of ASX and ACH to ensure fair and orderly markets are maintained. This power includes the ability to suspend the ASX Options Market s operation, to restrict the exercise of ETOs, to terminate an ETO position or to substitute Underlying Securities; the power of Westpac Broking to, at any time, refuse to deal in, or limit dealings in, ETOs for you, as stated in the ETO Terms and Conditions and in accordance with ASX operating rules;

17 17 2. Benefits and Risks of Investing in ETOs the potential for failure or temporary disruption of the electronic trading platforms used by ASX and ACH. If this occurs, Westpac Broking will have difficulties in executing all or part of your order and you may not be able to instruct us at all. You do not have a right to recover losses arising from these circumstances; that bid and offer prices in the market may not reflect fair value of the ETOs (although you can always contact the Westpac Broking Trading Room on and ask for updated ETO bid and offer prices); and the effect of corporate actions and ASX adjustments on the value of your ETOs. (c) Margin risks If you Write ETOs, you will be required to deposit substantial securities or funds (Collateral) to meet any Margin required by both ACH and Westpac Broking. Depending on movements in the value of your ETOs, or movements in the value of your Collateral, additional deposits may be required. For example, if the securities you have lodged as Collateral are not the Underlying Securities for a Written ETO position, and the value of those securities falls, additional Collateral may be required even though the price of the ETO s Underlying Security has not changed. If you cannot provide additional Collateral deposits within the time prescribed, your ETO position may be liquidated and you will be liable for any loss that results. Additionally, securities or cash lodged as Collateral cannot be traded until the ETO position is closed or other Collateral is provided. You should be aware that there may be a delay between making a request and the securities or cash being available for trading and that if there is an adverse movement in the market, you may sustain a partial or total loss of those Collateral deposits. (d) Settlement Risks If you have Written a Put ETO and it is exercised, settlement of the cash to buy the Underlying Security will be debited from your settlement bank account on T+3 from the exercise day. If you have Written a Call ETO and it is exercised, you must have the Underlying Securities available for delivery on T+3 from the exercise day. This will require you to have bought the Underlying Securities on or before the exercise date. If the Underlying Securities are bought after the exercise date, they will not be available for settlement on T+3 from the exercise day, and you will fail your exercise obligations and be liable for fail fees. You may also have to pay more than the Exercise Price to obtain the stock. If Westpac Broking automatically exercises an in the money Call ETO on your behalf, we will debit cash from your settlement bank account on T+3. If the required funds are not available, you may be liable for fail fees and bank charges. Alternatively, if we automatically exercise an in the money Put ETO on your behalf, and you do not hold the Underlying Securities, we will buy the Underlying Securities for delivery on your behalf. You will be liable for the costs of that purchase, which may include fail fees, brokerage and bank charges.

18 What are the risks of investing in ETOs? continued (e) Default under the ETO Terms and Conditions In accordance with the ETO Terms and Conditions and the ACH operating rules, you have agreed with us that if: (i) (ii) (iii) you fail to pay or provide security for amounts payable to Westpac Broking, or fail to perform any obligation arising pursuant to the exercise or settlement of an ETO; a guarantee or other security provided by you to Westpac Broking is withdrawn or becomes ineffective and other replacement security acceptable to us is not provided; or any other event occurs which, as set out in the ETO Terms and Conditions, entitles Westpac Broking to take action, then Westpac Broking may, in addition to any other rights which they may have against you, and without giving you any prior notice, take any action, or refrain from taking any action, which it considers reasonable in the circumstances in connection with your ETOs. Without limitation, Westpac Broking may: (i) (ii) (iii) enter into transactions to close out one or more of your ETO positions in accordance with the ASX Rules; exercise one or more ETOs in accordance with the ASX Rules; or exercise any other rights conferred by, or perform any other obligation arising under, the ASX Rules or the ETO Terms and Conditions in respect of your ETOs, and you must account to Westpac Broking as if those actions were taken on your instructions. Without limitation, you will be liable for any deficiency or entitled to any surplus which may result from the actions taken by Westpac Broking. 2.3 Managing Risks of ETOs It is your responsibility to monitor your account s open positions, Collateral obligations and general market conditions and to manage the associated risks. Westpac Broking provides you a number of online reports and information sources to assist you to manage your ETO risks. Westpac Broking neither monitors your ETO accounts nor takes action in relation to that monitoring and your risks.

19 19 3. Trading ETOs with Westpac Broking ETOs are traded on the ASX trading platform and cleared through ACH. Westpac Broking has been admitted as a market participant by ASX to trade ETOs and must comply with the operating rules of the ASX. Westpac Broking has also been admitted as a participant by ACH to clear ETOs and must also comply with the operating rules of ACH. Before Westpac Broking executes an instruction from you in relation to ETOs, you must enter into an ETO client agreement with us by signing the Application Form, indicating that you agree to the ETO Terms and Conditions. Once this completed agreement is accepted, Westpac Broking will activate your trading account, which will enable you to trade ETOs in accordance with the ETO Terms and Conditions and the relevant operating rules of ASX and ACH. Any ETOs that you purchase will be registered in the name of your trading account, and your trading account will be the primary source of securities that are required to meet your Margin obligations. Margin obligations may be met by using other accounts only after making arrangements with Westpac Broking s Trading Room on and completing the appropriate documentation. For more information about Margins, refer to section 3.2 of this PDS. You should also be aware that the ASX and ACH operating rules prescribe a number of matters relating to the trading of ETOs, including the standardisation of certain ETO terms, adjustments and termination provisions, the provision of Margins, and settlement. Details of ETO specifications are published by the ASX on their website at asx.com.au/options

20 Opening and closing ETO positions Trading ETOs is very different to trading securities. When trading securities, ownership of the securities is transferred from one party to the other. With ETOs on the other hand, traders open and close positions and there is no transfer of ETOs between different parties. Establishing an ETO is referred to as opening a position. Once you have opened an ETO position by Taking an ETO, you can take one of three courses of action: exercise the ETO; hold the ETO to expiry and allow it to lapse; or close out the ETO by Writing an ETO in the same series. If you are the Writer of an ETO, you only have two alternatives: allow the ETO to expire and accept the risk of it being exercised; or close out the ETO by taking an ETO in the same series (known as buying back the position ). An ETO position may be closed out by placing an order equal and opposite in effect to the original order, effectively cancelling your open position. An investor would generally close out an ETO: if there is a risk of unwanted early exercise (unless the ETO is European-style, as they can only be exercised on the Expiry Date); to take a profit; or to limit a loss. In all ETOs, ACH stands between all buying and selling brokers (such as Westpac Broking) and guarantees performance to each of them. ACH does not have an obligation to you, but to Westpac Broking, even though we may have registered the ETO on your instructions. Each ETO registered with ACH comprises two contracts, and ACH is a party to both: one with Westpac Broking, acting on your instructions; and one with the broker for the other party to the ETO. When placing an order that is opposite to an open position you have, we will effectively close your open position. Closing out is achieved without reference to the original party to the trade because ACH can substitute a new buyer as the contract party when you close their position (this is referred to as novation ).

21 21 3. Trading ETOs with Westpac Broking 3.2 Margins (a) What is a Margin? A Margin is the amount calculated by ACH to cover the risk of financial loss on an ETO due to an adverse market movement. Margins are a feature of all exchange traded derivative products and are designed to protect the market s financial security. If you Write an ETO, Westpac Broking is required to lodge Collateral with ACH on your behalf to cover your Margin obligations. This Collateral is deposited with ACH to ensure that Westpac Broking can meet your obligations to ACH in respect of any ETOs you Write. In addition to this requirement, Westpac Broking requires you to pay a broker margin. Margin requirements are marked to market each day. If the price of the Underlying Security of your Written ETO moves against you, or the value of your Collateral falls, you will be asked to lodge additional Collateral to account for that adverse movement. (b) Meeting margins Collateral to meet Margin obligations can be in the form of eligible securities or cash. Your trading account will be the first source of eligible securities and if you do not have sufficient eligible securities available (or we are unable to lodge with the ACH that day), we will debit cash from your settlement bank account in accordance with your direct debit authorisation. As a risk management tool, ACH will apply a haircut to the value of eligible securities provided as Collateral securities are generally valued at 70% of their full value and instalment warrants are generally valued at 60% of their full value. As a result, if you have a Margin obligation to ACH of $10,000, securities that have a market value of $10,000 will only count as $7,000. Accordingly, you must post the remaining $3,000 in other eligible securities or cash. For the broker margin, securities provided as Collateral are held by ACH, while cash provided as Collateral is held in the Westpac Broking trust account. No haircut is applied to securities provided for broker margin and no interest is paid on any cash held by Westpac Broking. Both your initial and additional Margin obligations must be met on the day that the Margin obligation arises. This will be processed overnight from your trading account and/or settlement bank account. Westpac Broking will automatically debit securities from your trading account or, if you do not have sufficient securities, cash from your settlement bank account. Any interest levied on the late settlement of Margin obligations is due and receivable at the time the amount is levied and, in any event, within 1 business day of the demand being made by Westpac Broking. Where the additional Margin required is greater than the broker margin held, we will both debit the excess amount from your settlement bank account and seek eligible securities to cover the new Margin. If eligible securities are provided as Margin, any excess cash will be credited back to your settlement bank account the next business day unless required for further Margins, or until previous cash payments are confirmed.

22 Margins continued (c) Liability for Margins You should be aware that if you are a joint holder of ETOs with another investor, you are individually liable for the full amount of any Margin. This means that even if, between yourselves, you have an agreement that you are each only responsible for part of the Margin, you will still be liable to pay the full amount of the Margin if the other investor does not make any payments. (d) Lodging Collateral To allow Westpac Broking to lodge Collateral with ACH on your behalf, you must first sign a Registered Holder Collateral Cover Authorisation attached to this PDS (see section 9). Collateral which you lodge can only be used in relation to your ETOs trading (unless you have authorised its use as third party Collateral). If a third party will be meeting your Margin obligations, the third party must sign a Registered Holder Collateral Cover Authorisation in favour of your ETO facility and they must instruct us by telephone to lodge their securities. Securities in a client s superannuation fund cannot be used as third party Collateral. (e) Further information The margining process used by ACH is explained in detail in the ASX Margins booklet or in the section entitled Margins in the Understanding Options Trading booklet. Both booklets are available on the ASX website at asx.com.au/investor/options/booklets.htm 3.3 Exercise Westpac Broking will automatically exercise any Taken ETO that is at least one cent in the money or at least one point in the money for Index ETOs. If you do not want automatic exercise you must call us in accordance with the ETO Terms and Conditions and instruct us not to exercise. Alternatively, if you want us to exercise a Taken ETO that will not be automatically exercised, you must contact us in accordance with the ETO Terms and Conditions and instruct us accordingly. You must have the Underlying Securities in your trading account to exercise a Put ETO. If you do not hold the Underlying Securities, we will exercise your ETO and buy the Underlying Securities on market. This may incur additional fees and brokerage for which you will be liable. We will debit cash from your settlement bank account to exercise Call ETOs. If you do not have sufficient cash, fail fees may apply. You should note that it is not mandatory to allow an out of the money ETO to lapse. For example, Takers may exercise out of the money ETOs to acquire securities that are thinly traded.

23 23 3. Trading ETOs with Westpac Broking 3.4 Settlement of ETO trades and on exercise of ETOs Westpac Broking requires that you settle all ETO trades on T+1 (on the business day after the trade occurs), and this includes Premiums, interest and other costs. Margin transactions are automatically settled on the night that the initial or additional Margin obligation arises. Once an ETO has been exercised, payment for, and delivery of, the Underlying Securities occurs via CHESS on T+3. Westpac Broking is required to make the payment for, or deliver, the Underlying Securities to the ASX within this timeframe. You should be aware that if you need to buy the Underlying Security for delivery after being advised of exercise, due to the time it takes to complete the purchase of securities on-market, your securities may not be available when required and fail fees may apply. Also, if the stock you deliver does not carry the entitlement carried by that stock at exercise you may need to pay an additional amount to represent the value of that entitlement. Alternatively, if you are raising cash by selling securities, that cash may not be available when required and fail fees may apply. 3.5 ETO trading strategies An ETO trading position consists of one or more of the following: a Taken Call ETO, a Written Call ETO, a Taken Put ETO, or a Written Put ETO. A Taken ETO (Call or Put) is often called a long position. A Written ETO (Call or Put) is often called a short position. By combining two or more of these basic positions, you can create a trading strategy that meets a range of investment objectives. Please note that depending on your experience and understanding of ETOs trading, Westpac Broking may not allow you to undertake all of the following trading strategies. You will be advised of any limits on your ability to trade at the time you open your ETO account. Some example ETO trading strategies include: Writing a Put ETO when the Writer accepts the risk of buying a share at a particular price regardless of the market price at the time of exercise; Writing an uncovered Call ETO where the Writer accepts the risk of having to acquire shares on market upon the Taker exercising the ETO, and facing potentially unlimited losses; Simultaneously buying the Underlying Security and Writing a Call ETO for that Underlying Security (a buy/write strategy); Writing a high Premium ETO and Taking a low Premium ETO on the same Underlying Security (a credit spread strategy); and Writing a low Premium ETO and Taking a high Premium ETO on the same Underlying Security (a debit spread strategy). Investors should be aware that using any strategy that involves Writing ETOs will require you to provide Collateral to meet your Margin obligations at the time the ETO is Written and potentially while the position remains open. For more information on possible trading strategies we refer you to the ASX Booklet entitled Options Strategies available on the ASX website at asx.com.au/investor/options/booklets.htm

24 24 4. Costs, Fees and Financial Obligations The costs associated with ETOs trading will vary depending on whether you are a Taker or a Writer. Other than any Margin obligations you may have, the exact cost of your transaction will be disclosed on the confirmation notice provided to you by Westpac Broking following each transaction. Your Margin obligations are presented online and updated overnight for any change. The acquisition costs for a Taker of ETOs includes: a Premium; a brokerage amount; taxes; and ACH fees. The acquisition and ongoing costs for a Writer of ETOs includes: costs associated with providing Margins; a brokerage amount; taxes; and ACH fees. Some fees that are charged may be tax deductible. You should confirm this in relation to your specific situation with your tax adviser or accountant.

25 25 4. Costs, Fees and Financial Obligations 4.1 Acquisition and ongoing costs for Takers (a) Premiums To acquire an ETO, a Taker must pay a Premium the amount agreed by the Taker and the Writer through the ASX Options Market. Factors which affect the size of the Premium include the intrinsic value (the difference between the exercise price of the ETO and the market price of the Underlying Security at any given time) and the time value of the ETO. The time value is influenced by: (i) the time to expiry (ii) market volatility (iii) interest rates (iv) dividend payments (v) market expectations Current ETO price information is available from the Westpac Broking website or by calling the Westpac Broking Trading Room on The Premium you have paid will be disclosed on the confirmation notice provided to you by Westpac Broking following each transaction. For further information on calculating the Premium and factors which affect the amount payable as Premium, please see Section 1.2(e) and 1.3. (b) Brokerage Takers are required to pay a brokerage fee on acquiring an ETO and on exercise or closing out of an ETO position. Brokerage is payable to Westpac Broking in connection with ETO transactions at the rates determined by Westpac Broking from time to time and notified to you in writing. Brokerage and other fees are disclosed on the Westpac Broking website and include a percentage of the dollar value of the Premium subject to a minimum per trade. The percentage fee and the minimum brokerage is determined by us in our discretion taking into account the size and value of the transaction and may change. A schedule of current brokerage will be given to you at the time you sign the Application form. Our current scale of brokerage fees for ETOs is also disclosed in our Financial Services Guide. The applicable percentage fee and minimum brokerage will be disclosed before your first order is placed. In the case of a purchase transaction, the brokerage fee (plus GST) is added to the amount you pay us. In the case of sell transactions, the brokerage fee (plus GST) is subtracted from the amount we will pay you. All brokerage charges will be disclosed on the confirmation notice provided to you by Westpac Broking following each transaction. (c) Government taxes Unless otherwise stated, all fees are expressed exclusive of GST. If GST is payable in respect of a fee or charge, it is added to that fee at the current rate. (d) ACH fees ACH fees are also payable as follows: a transaction fee of $1.12 per ETO, including GST; and an exercise fee of $0.55 per ETO, including GST. The transaction and exercise fees in respect of Index ETOs is $0.39 per ETO, including GST.

26 Acquisition and ongoing costs for Writers of ETOs (a) Margins As a Writer of ETOs, you will generally be required to pay an amount that ACH calculates to cover the risk of financial loss on an ETO from adverse market movement plus a broker margin. This is collectively known as a Margin. Additional Margins may also be called as a result of adverse movements in respect of the ETO. Both your initial and additional Margin obligations must be met the day that the Margin obligation arises. This will be processed overnight from your trading account and/or settlement bank account. Failure to meet your Margin obligations may result in your position being closed. Any interest levied on late settlement and margin payments is due and receivable at the time the amount is levied and, in any event, within 1 Business Day of a demand being made by Westpac Broking. For further information on Margins, see Section 3.2 of this PDS. (b) Brokerage, government taxes and ACH fees Writers pay the same brokerage to Westpac Broking, and are subject to the same government tax and ACH fee obligations, as Takers see section 4.1(b) 4.1(d) above.