EXCHANGE TRADED OPTION CONTRACTS

Transcription

1 CLIENT SERVICE AGREEMENT Halifax New Zealand Limited Client Service Agreement Product Disclosure Statement for EXCHANGE TRADED OPTION CONTRACTS Halifax New Zealand Limited Financial Services Provider No Date 26th May 2015 HALIFAX Client Service Agreement 1

2 This document provides important information about to help you decide whether you want to enter into any of these derivatives. There is other useful information about this offer on the Offer Register at Many derivatives are complex and high-risk financial products that are not suitable for most retail investors. If you do not fully understand a derivative described in this document and the risks associated with it, you should not enter into it. You can also seek advice from a financial adviser to help you make your decision. You should ask if that adviser has experience with these types of derivatives. Halifax New Zealand Limited has prepared this document in accordance with the Financial Markets Conduct Act i HALIFAX NZ

3 1. Key Information Summary 1.1 What is this? This is a product disclosure statement (PDS) for Exchange Traded Option (ETO) Contracts provided by Halifax New Zealand Limited (Halifax). are derivatives, which are contracts between you and Halifax that may require you or Halifax to make payment or deliver on the underlying currency, index, equity, commodity, financial product, or other asset (as the case may be). The value of the contract will depend on the price of the underlying currency, index, equity, commodity, financial product, or other asset. The contract specifies the terms on which those payments or deliveries are to be made. 1.2 Warning Risk that you may owe money under the derivative If the price, value, or level (as the case may be) of the underlying currency, index, equity, commodity, financial product, or other asset changes, you may suffer losses. In particular, unlike most other kinds of financial products, you may end up owing significant amounts of money. You should carefully read section 2.4 of this on how payments are calculated Your liability to make margin payments Halifax may require you to make additional margin payments to contribute towards your future obligations under ETO Contracts. These payments may be required at short notice and can be substantial. You should carefully read section 2.4 about your obligations Risks arising from issuer s creditworthiness When you enter into derivatives with Halifax, you are exposed to a risk that Halifax cannot make payments or deliver a currency, index, equity, commodity, financial product, or other asset (as the case may be) as required. You should carefully read section 3 of this PDS (risks of these derivatives) and consider the creditworthiness of Halifax and the third parties which it transfers. If Halifax or these third parties runs into financial difficulty, the margins you provide may be lost. For more information about risks and liability, see section 3 of this PDS. HALIFAX NZ ii

4 1.3 About Halifax New Zealand Limited Halifax issues derivatives on contracts for difference, exchange traded options, margin foreign exchange and foreign exchange options. It also offers broking services in Futures Contracts and Options Contracts. For more information about Halifax see section 6 of this PDS. 1.4 Derivatives covered by the PDS? The derivatives covered by this PDS are What is an Exchange Traded Option Contract? An Exchange Traded Option Contract gives the buyer the right, but not the obligation, to acquire an Underlying Instrument at the prescribed Exercise Price in return for payment of a Premium (being the price of the Exchange Traded Option Contract). The seller has no right other than the right to the Premium. The Underlying Instrument may be a share, share index or Exchange-Traded Products (ETP), where the seller will be under an obligation to enter into a share or ETP at the Exercise Price if the Exchange Traded Option Contract is validly exercised by the buyer, and cash-settled if it is a share index. If the Exchange Traded Option Contract is exercised, it results in the establishment of a share or ETP What are the key benefits and uses of? are generally used for one of two purposes hedging or speculating: a. Hedging: They can provide investors or traders with a facility for managing risks associated with changing prices in the Underlying Instrument. b. Speculation: They can be traded by speculators, who trade in them hoping to profit from the changing prices in the Underlying Instrument. iii HALIFAX NZ

5 Contents 1 Key Information Summary ii 2 Key features of the derivatives 1 3 Risks of these derivatives 10 4 Fees 11 5 How Halifax treats funds and property received from you 13 6 About Halifax New Zealand Limited 14 7 How to complain 14 8 Where you can find more information 15 9 How to enter into Client Services Agreement 15 Glossary 16 HALIFAX NZ iv

6 2. Key features of the derivatives 2.1 What is an Exchange Traded Option Contract and what are the types of? Options traded over stockshares, stockshare indices and ETPFs are commonly known as Exchange Traded Option Contracts. An Exchange Traded Option Contract that is a Call Option gives the buyer the right, but not the obligation, to buy an Underlying Instrument at the prescribed Exercise Price in return for payment of a Premium. An Exchange Traded Option Contract that is a Put Option gives the buyer the right, but not the obligation, to sell an Underlying Instrument at the prescribed Exercise Price in return for payment of a Premium. The seller will be under an obligation to sell a stockshare, stockshare index or ETPF (in the case of a Call Option) or to buy a stockshare, stockshare index or ETPF (in the case of a Put Option) at the Exercise Price of the Exchange Traded Option Contract if the Exchange Traded Option Contract is validly exercised by the buyer. If an Exchange Traded Option Contract is exercised, it results in the establishment of a stockshare or ETPF, or cash settled if it is a stockshare index Styles of There are two types of option styles; American style options (American Options) and European style options (European Options). European Options can only be exercised on the Expiry Date and not before. American Options can be exercised at any time up until, and including, the Expiry Date. traded on most Futures Exchanges are American Options. The seller of an Exchange Traded Option Contract that is an American Option must be prepared for that Exchange Traded Option Contract to be exercised at any time before the Expiry Date. You should clarify whether the Exchange Traded Option Contract you intend to trade is an American Option or a European Option prior to entering into the Transaction, as the operating rules of the StockOption Exchange may vary depending on the type of Exchange Traded Option Contract you are dealing with. 2.2 Other Features of Exchange Traded Options You can take both long and short positions You can take both long and short positions. If you take a long position (i.e. you purchase an ETO), you may profit from a rise in the price of the Underlying Instrument, and you will make a loss if the price of the Underlying Instrument falls. Conversely, if you take a short position (i.e. you sell an ETO), you may profit from a fall in the price of the Underlying Instrument, and you will make a loss if the Underlying Instrument s price rises Exercising Call Options and Put Options The diagram below sets out the results from the buyer s and seller s viewpoint when the buyer exercises a Call Option or Put Option: Buyer Bought Call Option Bought Underlying Contract (at the Exercise Price of the Exchange Traded Option Contract) Seller Sold Call Option Sold Underlying Contract (at the Exercise Price of the Exchange Traded Option Contract) Bought Put Option Sold Underlying Contract (at the Exercise Price of the Exchange Traded Option Contract) Sold Put Option Bought Underlying Contract (at the Exercise Price of the Exchange Traded Option Contract) 1 HALIFAX NZ

7 2.2.3 In the money, at the money and out of the money A Exchange Traded Option Contract is always either in the money, out of the money or at the money. In the money An in the money Exchange Traded Option Contract is, in relation to a bought Call Option, if the Exercise Price is lower than the current market price of the Underlying Instrument and, in relation to a bought Put Option, if the Exercise Price is above the market price of the Underlying Instrument. An in the money option is, in relation to a sold Call Option, if the Exercise Price is higher than the current market price of the Underlying Instrument and, in relation to a sold Put Option, if the Exercise Price is below the market price of the Underlying Instrument. At the money An at the money option is, in relation to both Put Options and Call Options, if the Exercise Price is equal to the current market price of the Underlying Instrument. For the most part, at expiry all in the money or at the money options are automatically exercised, however not all StockOption Exchanges automatically exercise in the money or at the money options at expiry. Accordingly, you should contact your Halifax representative before the Expiry Date or the option may lapse worthless. Out of the money An out of the money option is, in relation to a bought Call Option is, if the Exercise Price is higher than the current market price of the Underlying Instrument and, in relation to a bought Put Option, if the Exercise Price is below the market price of the Underlying Instrument. An out of the money option is, in relation to a sold Call Option, if the Exercise Price is lower than the current market price of the Underlying Instrument and, in relation to a sold Put Option, if the Exercise Price is above the market price of the Underlying Instrument. If a Exchange Traded Option Contract is out of the money at a particular point in time, it does not mean it does not have value. That is, it may still have time value i.e. time until the Expiry Date in which the price of the Underlying Instrument may move in your favour How is the Premium determined? The price to be paid or received in relation to an Exchange Traded Option Contract is the Premium. It is negotiated between the buyer and seller of the Exchange Traded Option Contract via the market, and is payable by the buyer to the seller at the time the Exchange Traded Option Contract is entered into. The Premium is the compensation for the seller accepting the risk involved in selling the Exchange Traded Option Contract. The full value of the Premium is payable immediately upon executing the Exchange Traded Option Contract. This means that there must be sufficient Net Free Equity in your Trading Account before you can commence trading. Paying the Premium will allow you to keep or hold the Exchange Traded Option Contract until its Expiry Date (when it can either be exercised or it will lapse) or to sell it at any given point of time prior to its Expiry Date i.e. Close Out the open Exchange Traded Option Contract. The value of an Exchange Traded Option Contract will fluctuate during the life of the Exchange Traded Option Contract depending on a number of factors, including: a. the price of the Underlying Instrument; b. the nominated Expiry Date and the time remaining to expiry; c. the nominated Exercise Price; d. the volatility of the Underlying Instrument; and e. interest rates, dividends and other distributions paid or payable in respect of the Underlying Instrument and general risks applicable to markets Calculating profits and/or losses If you Close Out an Exchange Traded Option Transaction (ETO Transaction) before the Expiry Date, the amount of any gross profit or loss made on an ETO Transaction (i.e. before fees, commissions and other costs) will be equal to the difference between the price the ETO Contract was opened and the price the ETO Contract was Closed Out, multiplied by the number of the ETO Contracts held. The indicative price for a ETO Contract at which you can enter into or Close Out is available on your Trading Platform. HALIFAX NZ 2

8 Example 1: Assume you purchase 10 XJOCBA Contract (i.e. you enter into a long ETO Contract) where the Underlying Instrument is the Commonwealth Bank share and the Exercise Price at which you enter into the ETO Contract is $80 and the Option price is $1.00. Your later Closed Out the ETO Contract by selling (or exiting the long ETO Contract) at a higher Option price of $1.50. The resulting gross profit on the transaction would be $500 being sale price ($1.50) less buy price ($1.00) x 10 x 100 (the share amount per ETO Contract). The net profit is determined after deducting Halifax commissions (charged on both opening and Closing Out the transaction) and any other charges as set out in section 4 of this PDS. Example 2: Assume you purchase 10 XJO ETO Contract (i.e. you enter into a long ETO Contract) where the Underlying Instrument is the ASX200 Index and the Exercise Price at which you enter into the ETO Contract is 5450 and the Option price is $10. You later Closed Out the ETO Contract by selling (or exiting the long ETO Contract) at a lower Option price of $9. The resulting gross loss would be $100 being sale price ($9) less buy price ($10) x 10 x 10 (the share index amount per ETO Contract). The net loss is determined after adding commissions and any other charges. The above examples are included for illustrative purposes only. They provide an example of two situations only and do not reflect the specific circumstances or the obligations that may arise under a derivative you enter in to. For additional trade examples please refer to Halifax NZ s Futures Contracts and Options Contracts Trading Examples Booklet found on Halifax NZ s website at Closing Out prior to the Expiry date An ETO Contract can be Closed Out prior to the Expiry Date so as to realise any unrealised gains or losses: a. For a bought Exchange Traded Option Contract: If you have bought an ETO Contract, you can Close Out your position by selling an equivalent ETO Contract to Halifax. Your Trading Account will then be credited with the value of the Premium for the sold ETO Contract at the time of Closing Out. You may make a gross profit on the Transaction if the value of the Premium for the sold ETO Contract is greater than the value of the Premium that you initially paid to buy the ETO Contract (subject to any fees, charges and other amounts payable as outlined in section 4 of this PDS). You will incur a loss on the Transaction if the value of the Premium for the sold ETO Contract is less than the value of the Premium that you initially paid to buy the ETO Contract. b. For a sold Exchange Traded Option Contract: If you have sold an ETO Contract, you can Close Out the position by buying an equivalent ETO Contract from Halifax. Your Trading Account will be debited with the value of the Premium for the bought ETO Contract at the time of Closing Out. You may make a gross profit on the Transaction if the value of the Premium for the bought ETO Contract is less than the value of the Premium that you initially received to sell the ETO Contract (subject to any fees, charges and other amounts payable as outlined in section 4 of this PDS). You will incur a loss on the Transaction if the value of the Premium for the bought ETO Contract is greater than the value of the Premium that you initially received to sell the ETO Contract. Under certain conditions, it may become difficult or impossible for you to Close Out an ETO Contract. For example, this can happen when there is a significant volatility in the level of the Underlying Instrument. The above example is included for illustrative purposes only. It provides one example of a specific situation only and does not reflect the specific circumstances or the obligations that may arise under a derivative you enter in to. For additional trade examples please refer to Halifax NZ s website at 3 HALIFAX NZ

9 2.2.7 Exercise and Settlement of Deliverable ETO and Cash Settled ETO It is your responsibility to monitor your open positions and to Close Out any open position before the Expiry Date if you do not wish to be exercised. Deliverable Exchange Traded Option Contract If you have bought a Deliverable Exchange Traded Option Contract that is still open at the close of trading on the Expiry Date, you will be under an obligation to take delivery of the Underlying Instrument at the Exercise Price. If you have sold a Deliverable Exchange Traded Option Contract that is still open at the close of trading on the Expiry Date, you will be under an obligation to deliver the Underlying Instrument at the Exercise Price. Cash-settled Futures Contract If you have a cash-settled Exchange Traded Option Contract open at the close of trading on the Expiry Date, you will be under an obligation to pay (for a bought position) or have a right to receive (for a sold position) an amount of money depending on the price movement. 2.3 Trading Margin FX and FX Option Contracts When you enter into an Exchange Traded Option Contract with us, you do so through an online interface (referred to as a Trading Platform). The Trading Platforms that can be used to trade ETO Contracts are Halifaxonline and Trader Work Station. Set out below is a summary of the types of orders that you can place with Halifax and on the Trading Platforms (refer to section 2.6 of this PDS for further information about entering into Exchange Traded Option Contracts on the Trading Platform). Order type Market Stop Loss Stop Entry Market If Touched Limit One Cancels The Other If Done Good Til Cancelled Orders Standing Order Description An order filled immediately at the best price available. An order that becomes a market order only when the price offered by Halifax on the relevant Trading Platform trades at a specified price. An order placed to open a new position or increase an existing open position at a price which is inferior to the current price offered by Halifax. A price order that becomes a market order when the price offered by Halifax on the relevant Trading Platform trades at a specified price at least once. An order that can be filled only at a specified price or better. An order that includes two orders, one of which cancels the other when filled. Also referred to as one-cancels-other. An order that includes two orders, where the second of the two orders only becoming active should the first order be executed. An order which remains in the relevant Trading Platform until it is either executed according to the terms of that order or cancelled by you. A standing order means an instruction to execute an order for a specified volume on a recurring basis if triggered, unless otherwise cancelled. HALIFAX NZ 4

10 2.4 Key Benefits of The key benefits of are as follows: a. Hedging: Futures Contracts and Options Contracts can be used to hedge your exposure to the Underlying Instrument. b. Speculating: You may take a view on a particular Underlying Instrument and invest in Futures Contracts and Options Contracts according to this belief. c. Leverage: involve a high degree of leverage. They enable a client to outlay a relatively small amount (in the form of the Initial Margin) to secure an exposure to the movements in the price of the Underlying Instrument without having to pay the full price of actually acquiring the Underlying Instrument. d. Profit potential in both rising and falling markets: do not require a rising market to make money. There is the potential for profit (and loss) in both rising and falling markets depending on the strategy you employ. e. Flexibility: There is also some flexibility in entering and exiting the market prior to the Expiry Date. This enables you to take a view on market movements and trade accordingly. f. Limited risk for bought options: Buying either Call Options or Put Options gives you limited risk as the maximum loss on the Transaction will always be the premium and any costs or fees on the Transaction itself. 2.5 Margin Obligations are subject to margin obligations i.e. clients must have sufficient Net Free Equity in their Trading Account for security and margining purposes. You are responsible for meeting all margin obligations. Margin FX and FX Options are subject to margin obligations i.e. clients must have sufficient Net Free Equity in their Trading Account for security and margining purposes. You are responsible for meeting all margin obligations Types of Margin Margin Requirements have two components; Initial Margin and Variation Margin Initial Margin Exchange Traded OptionExchange Traded OptionThe buyer of a Exchange Traded Option Contract ( long ) is generally not subject to margin obligations as the buyer of an Exchange Traded Option Contract is required to pay the full value of the Premium at the time the Exchange Traded Option Contract is acquired. However in some instances an Initial Margin may be acceptable as opposed to paying the full premium when initiating a long position. The seller of the Exchange Traded Option Contract ( short ) is entitled to receive a portion of the Premium based on the mark to market valuation of the Exchange Traded Option Contract (i.e. the seller of an Exchange Traded Option Contract does not receive the full value of the Premium upfront). A seller would also be required to pay an Initial Margin to open the position. The Initial Margin required depends on the Option Exchange and/or Trading Platform on which the Exchange Traded Option Contract is traded. The Initial Margin will vary from time to time according to the volatility of the market. This means that an Initial Margin may change after a position has been opened, requiring a further payment (or refund, where applicable). 5 HALIFAX NZ

11 2.5.3 Variation Margin As the value of your open positions will constantly change due to changing values of the Underlying Instrument, the Margin Requirement (being the minimum Net Free Equity required in your Trading Account) on the open positions will also constantly change. This is referred to as a Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Trading Platform. Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient Net Free Equity in your Trading Account). We will also credit the Variation Margin to your Trading Account when a position moves in your favour. We determine the Variation Margin for a Transaction by reference to changes in the value of the Underlying Instrument. In other words, each contract is effectively marked to market on at least a daily basis. Marked to market means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day s valuation compared to the previous real time/ day s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Instrument as determined by the relevant Pricing Source. Intraday marked to market revaluations will be based on the last available value of the Underlying Instrument as determined by us in our sole discretion. Margin Calls are made on a net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one Transaction can be used or applied as Initial Margin or Variation Margin for another Transaction. It is your responsibility to monitor your Variation Margin obligations. Any notification of a Margin Call will be via a pop up screen or screen alert which you will only receive notice of if you access your online Trading Account via your Trading Platform s website. There may be instances where we do not provide you with a Margin Call notifying you of an obligation to meet a Variation Margin. This does not waive your obligation to meet that Variation Margin. If you fail to meet a Variation Margin we may in our absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Transactions Notifications regarding Margin Requirements As described in section 2.4.3, Margin Calls will be notified to you using pop-up screens or screen alerts on the Trading Platform. You are required to log into the Trading Platform regularly when you have open positions to ensure you receive notification of any Margin Calls. Halifax is under no obligation to contact you in the event of any change to the Margin Requirements or any actual or potential shortfalls in your Trading Account Failing to meet a Margin Call Halifax generally applies risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, we may Close Out some or all of your open Transactions without notice to you. The Default Liquidation Threshold is determined by Halifax. It is implemented for risk management purposes, and may be varied by Halifax at any time. Refer to Schedule 1, Annexure C of the Other Material Information document on the Disclose Register for more information. If you fail to meet a Margin Call, then we may in our absolute discretion (but without an obligation to do so) Close Out, without notice, all or some of your open Transactions and deduct the resulting realised loss from your Trading Account. You may be required to provide additional funds to us if the balance of your Trading Account is insufficient to cover these losses. If a Close Out occurs you will not be able to enter into another Transaction until you transfer additional funds to us. HALIFAX NZ 6

12 2.5.6 How Margin Calls are to be met When we make a Margin Call you must immediately transfer the amount of funds that we request into our nominated Trust Account. All funds received from clients are held, used and withdrawn in accordance with our Client Services Agreement and applicable New Zealand laws. All interest that may accrue on any positive balance in your Trading Account will be kept by us, unless we otherwise agree with you How to deposit money with Halifax You will only be permitted to deal in and maintain open positions on the basis of cleared funds being provided to meet your Margin Requirements. It is your responsibility to provide the funds meet for your margin obligations on time. You should bear in mind accepted New Zealand banking practice in relation to fund transfers or deposits from other financial institutions, which typically require three business days clearance for personal cheques and one business days clearance for direct deposits (depending on the timing of your transfer). Any delay in crediting your Margin Requirements is at your risk. In practical terms, you also need to know and prepare yourself for the methods of depositing money in response to a Margin Call as this may determine whether some or all of your open positions are Closed Out. Some of the methods for depositing money in response to a Margin Call that can be used by you are: a. Real time gross settlement (RTGS): This is an immediate transfer of cleared funds which may not be available at the institution that you bank with. b. Electronic transfer of funds (ETF): This is a transfer of funds that in most instances if lodged with a New Zealand bank, will be placed as cleared funds usually within the next business day with Halifax, but can be delayed through various external factors outside of yours or Halifax s control. c. International electronic transfer of funds (IETF): This is a transfer from an overseas bank that in most instances if lodged with an overseas bank will be placed as cleared funds usually within five business days, but can be delayed through external factors outside of yours or Halifax s control. d. Bank cheque: This is a cheque that is issued by a bank that traditionally requires three business days or more to clear and would be required to be deposited with a special answer to be made available as cleared funds the following business day (if required), but can be delayed through external factors outside of yours or Halifax s control. e. Business cheque and personal cheque: This is a cheque that is issued by a business or person that traditionally requires three business days or more to clear and would be required to be deposited with a special answer to be made available as cleared funds the following business day (if required), but can be delayed through external factors outside of yours or Halifax s control. If Halifax receives confirmation of RTGS and ETF, Halifax will determine this as cleared funds. Unfortunately, as IETF, bank cheques, business cheques and personal cheques can be cancelled or withdrawn, Halifax will need to assess on a case by case basis whether this method of deposit is appropriate or, alternately if cleared funds will still need to be provided by you. Whilst RTGS or ETF facilities may imply an immediate transfer of funds, you should also be aware that these processes can take additional time which could have some impact on your ability to trade and to control your open positions while the funds are waiting to be cleared. We recommend that you clarify with your bank or financial institution what timeframes or delays may be experienced when transferring funds via RTGS or ETF facilities to Halifax. Credit cards may not be used to open or trade on your Trading Account at any time. We also do not accept other financial products as collateral for opening or trading on your Trading Account. You should be aware that timing delays in your ability to transfer funds to us could affect your ability to satisfy a Margin Call in time, which could result in us Closing Out an open Transaction. 7 HALIFAX NZ

13 2.6 Entering into, altering and terminating an Exchange Traded Option Contract Opening an account and getting a Trading Account To open a Trading Account, you must firstly contact us either by using the contact details in section 6 of this PDS or by completing an online application and account opening form which can be located on our website at You will also need to execute a Client Services Agreement, which forms part of the account application. The Client Services Agreement sets out the general terms of your dealings with us for the financial products covered by this PDS and also for dealings not covered by this PDS (such as trading in other financial products offered by Halifax). Once you have completed the account application and have opened a Trading Account with us, you may deposit funds in your Trading Account by using one of the methods described in section of this PDS. Once funds have been deposited in your Trading Account and are cleared, you may then place an order (i.e. provide an instruction to either open or Close Out a Transaction) Cooling Off Arrangements There are no cooling-off arrangements for. This is consistent with other product issuers in similar products. This means that when you enter into an Exchange Traded Option Contract, you do not have the right to return the product, nor request a refund of the money paid to hold the product. Should you change your mind after entering into a Transaction, you should Close Out your position by entering into an opposite Transaction (although loss may be incurred in doing so) Opening a position Orders to open a position can be given through your chosen Trading Platform or by contacting us within business hours. Schedule [1B] of the Other Material Information document on the Offer Register sets out the types of orders you can place with Halifax. We are not obliged to accept orders from you. For example, we may refuse to accept orders from you if: a. there is insufficient Net Free Equity in your Trading Account to meet your Margin Requirements (for more information about your margin obligations see section 2.6 of this PDS); b. we are unable to quote values in the relevant Underlying Instrument due to the unavailability of information from the Futures Exchange or Pricing Source (as applicable) on which the Underlying Instrument is traded; c. there are problems with systems, the website or the Trading Platforms (see risks in section 3 of this PDS). Once you have entered an order into one of the Trading Platforms, the system will automatically report the main elements of that order to you in a pop up window or in the trade log. This is a preliminary notification and provides you with a quick reference point for your trade. It will enable you to print a confirmation of the primary data, including the quantity, price, and the date and time the order was transmitted to us. Once your order has been executed you can obtain a comprehensive trade confirmation by accessing the daily statement on your Trading Platform. It is your obligation to review any confirmation immediately to ensure its accuracy and to report any discrepancies within 48 hours Opening and Closing Out an Exchange Traded Option Contract You can open or Close Out an Exchange Traded Option Contract by contacting us via the Trading Platform or by contacting us within business hours to determine the current market price for the Underlying Instrument. After receiving (and accepting) your instructions, we will then provide a quote for the current market price for the Exchange Traded Option Contract. You will then decide whether to accept that price. If you accept the price, you will instruct us to either open a Transaction or Close Out an existing Transaction Expiry Dates may be left open up to and including the Expiry Date and can be Closed Out at any time prior to the Expiry Date (if it is an American Option) or at Expiry Date (if it is a European Option). If you do not Close Out by the Expiry Date then: a. if the Options Contract is out of the money or at the money (in some instances) then it will expire worthless; or b. if the Exchange Traded Option Contract is in the money or at the money (in some instances) then holder will be assigned the Underlying Instrument (i.e. a Futures Contract). HALIFAX NZ 8

14 2.7 How are traded Trading Platforms Halifax enables its clients to trade using Trading Platforms. Each client must select a Trading Platform as part of the account opening and application process. You should carefully consider which of the Trading Platforms is likely to best meet your needs. Before you enter into a you should open a demo account and conduct simulated trading. This enables you to become familiar with the attributes of the various online Trading Platforms. It is important to note that there are significant and fundamental differences between each Trading Platform. These differences include the following: a. The nature of the online interface through which you can transact and monitor your Trading Account. b. The Underlying Instruments over which you can enter into a Transaction. c. The fees and costs you are charged for the Transaction Third party providers of the Trading Platforms Halifax has outsourced the operation of its Trading Platforms to various third parties, and in doing so relies upon these third parties to ensure the relevant systems and procedures of the Trading Platforms are regularly updated and maintained. You can change Trading Platforms at any time by contacting us. You can also choose to use one of the other Trading Platforms. An open position however cannot be transferred from one Trading Platform to another. The Trading Platforms that we use, and the third parties that operate those trading platforms, are set out below. We encourage you to review the website of each Trading Platform to an understanding of how they each operate. Trading Platform Halifaxonline Trader Work Station Third Party for Trading Platform Saxo Capital Markets (Australia) Pty Ltd Interactive Brokers LLC Web address to access Trading Platform or au.saxomarkets.com or Trading Hours The trading hours for the Trading Platforms will depend on the Option Exchange on which the Underlying Instrument is traded or based. A list of the Option Exchange are set out in Schedule 1, Annexure A of the Other Material Information document on the Disclose Register. Outside these hours, you may still access the Trading Platforms and view your Trading Account, market information, research and our other services. However, there will not be any live prices or trading. It is at the sole discretion of Halifax to provide services to you outside these trading hours. Any changes to trading hours will be displayed on our website at 9 HALIFAX NZ

15 3. Risks of these derivatives 3.1 Product Risks Changes in the price, value or level of the Underlying Instrument Trading in the involves a high degree of risk. It is important that you carefully consider whether trading is appropriate for you in light of your investment objectives, financial situation and needs. If there is an adverse change in the price of the Underlying Instrument, you will be required to immediately transfer additional funds to us in order to maintain your position if you do not have sufficient Net Free Equity in your Trading Account. Those additional funds may be substantial. If you fail to provide those additional funds immediately, we may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following those closures. involve a high degree of leverage because the Margin Requirements that must be paid at the outset (referred to as the Initial Margin Requirement) are relatively small in comparison to the price or value of the Underlying Instrument. The use of leverage can lead to large losses. Even a slight fluctuation in the value of the Underlying Instrument could result in you incurring substantial losses. By entering you could lose the full balance of your Trading Account (and more) Other variables that lead to losses for clients The following is a description of some of the other significant risks associated with trading the Exchange Traded Option Contracts offered by us. a. Incorrect details are entered: If you incorrectly place your intended order you are responsible for the result of the incorrectly placed order, including all costs to close out the position and any resulting profit or loss on the outcome. b. Foreign Exchange Risk: In instances where you trade in an Exchange Traded Option Contract based on an Underlying Instrument priced in a currency other than your Trading Account Currency, your profit or loss will be determined by movements in the price of the Underlying Instrument and also by the impact of movements in the Exchange Rate. Adverse Exchange Rate movements could cause you to incur significant losses. c. Market conditions: Under certain market conditions it could become difficult or impossible to manage the risk of open positions by entering into opposite positions in another contract or to Close Out an existing position. Market conditions may also mean that the price of Futures Contract or Options Contract may not maintain their usual relationship with the value of the Underlying Instrument. d. Order Acceptance Risk: When you place an order (i.e. request to open or Close Out a position), we have an absolute discretion whether or not to accept and execute such request. The effect of our discretion is that an order you give may not be executed and you may suffer loss (whether it be actual loss or an opportunity loss) as a result. We are not responsible for such loss. e. Substantial Losses: Stop loss orders are often used to attempt to limit or minimise the amount which can be lost on an open Transaction. Stop loss orders may not always be filled and, in any event, may not limit your losses to the amounts specified in the order. f. Unlimited Losses: When you sell an Exchange Traded Option Contract, although you receive the Premium upfront, you are exposed to potential losses in the future in the event that the price of the Underlying Instrument moves against your position. The maximum amount of this potential loss is unlimited and as such, selling unprotected options comes with a high risk. Exchange Traded Option g. Co-mingling of client monies: Funds paid to Halifax by you are first deposited into a Client Trust Account maintained by Halifax. This means that client funds (and property) deposited with us are held in safe keeping and segregated from our own funds (or property). Client monies are held, used and withdrawn in accordance with this PDS and our Client Services Agreement. This means that those funds are not available to pay general creditors in the event of receivership or liquidation by Halifax. For money deposited in our Client Trust Account, you should be aware that individual client accounts are not separated from each other and all clients funds are co-mingled in the one Client Trust Account. HALIFAX NZ 10

16 3.1.3 The consequences of a failure by the investor to make a payment or delivery If the level of the Underlying Instrument moves against your position, you will be required to have sufficient Net Free Equity your Trading Account to meet your Margin Requirement in order to maintain your position. The amount of funds required may be substantial. If you fail to pay us immediately, your position may be Closed Out at a loss and you will be liable for any shortfall The consequences of altering the terms of a derivative or terminating a derivative An Options Exchange may, in limited circumstances alter the terms of the Exchange Traded Option Contract. An example could include a corporate action in an underlying equity such as a share issue resulting in a change of terms to the Exchange Traded Option Contract. 3.2 Issuer Risk Credit worthiness of Halifax As an investor in the derivatives offered under this PDS, you will be exposed to the risk that we become insolvent and are unable to meet our obligations under the derivative. If we become insolvent, then we may be unable to meet our obligations to you in full or at all. Any funds you transfer to us may not be protected. Halifax s creditworthiness has not been assessed by an approved rating agency. This means that Halifax has not received an independent opinion of its capability and willingness to repay its debts from an approved source Risks when entering or settling the derivatives There are a number of significant risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to: a. risks related to the use of software and/or telecommunications systems such as software errors and bugs; b. delays in telecommunications systems; c. interrupted service; d. data supply errors; and e. faults or inaccuracies and security breaches. A disruption to a Trading Platform could mean you are unable to trade in and that you may suffer a financial loss or an opportunity loss as a result. When you place an order, we have an absolute discretion whether or not to accept and execute any such request. The effect of our discretion is that an order you give may not be executed and you may suffer loss (including actual loss or lost opportunity) as a result. We are not responsible for any such loss. 4. Fees Fees and charges will be charged to your Trading Account at the time a Transaction is entered into and Closed Out and, for open positions, through daily adjustments to your Trading Account. The fees and charges you are required to pay will vary depending on a number of factors, including the following: a. Trading Platform: The Trading Platform that you use. The tables in Schedule 1, Annexure E of the Other Material Information document on the Disclose Register set out some of the differing costs you will incur under each Trading Platform. Please contact Halifax for information in relation to fees for any product not listed in this Schedule. b. Agreed terms: The terms agreed between you and us at the time of entering into the Transaction. c. Option Exchange: The Option Exchange on which the ETO Contract that are traded. 11 HALIFAX NZ

17 4.1 Commission Halifax charges a commission (sometimes referred to as a transaction fee) on each Transaction that is executed. The level of commission may be subject to negotiation between you and Halifax prior to entering into a Transaction. The commission you can expect to pay for transacting in is based on a per lot basis meaning that the commission charged will be dependent on the amount of Exchange Traded Option Contracts you transact at any one time. The details of the amount of commission that you have paid on a Transaction is included in your daily statement. This is an online report that you can access and print upon demand and can be found on your Trading Platform. The level of commission may vary depending on the type and level of service required, and the frequency and size of your Transactions. Refer to Schedule 1, Annexure D of the Other Material Information document on the Disclose Register provides further information regarding the commission charges for each Transaction. 4.2 Interest on Credit and Debit balances Interest is charged where your Net Free Equity is in debit, i.e. the balance of your Trading Account is less than your Margin Requirement. Interest on negative Net Free Equity is calculated daily and applied monthly. The interest rate you will be charged differs depending on your Trading Platform you use and is generally up to 700 basis points per annum on top of the cash rate for your Trading Account Currency. The way we calculate the interest rate for each Trading Platform is set out in Schedule 1, Annexure E of the Other Material Information document on the Disclose Register. Unless otherwise negotiated with us, there is no interest applied where you have a positive balance in your Trading Account. 4.3 Conversion Spread Your Trading Account will always be maintained in a specific currency which you nominate (Trading Account Currency). If you transact in an Exchange Traded Option Contract on a foreign Option Exchange, where the Underlying Instrument is denominated in a currency other than your Trading Account Currency, all Margin Requirements, profits and losses will be converted to your Trading Account Currency. This is performed automatically. For example: If you transact in an ETO Contracts traded on the New York Stock Exchange, this is denominated in USD. Since your nominated currency is NZD, any Margin Requirement, profit or loss will be converted from USD to NZD. The conversion fee is levied at the rate at which the transaction is executed plus or minus 0.5% (depending upon the currency). Thus, the conversion fee is actually reflected in the Exchange Rate at which the transaction is converted and is not an additional fee or charge. The following is an example of how a conversion fee might be charged to you. Example: If you Close Out a Transaction and realise a gross profit of $8,700, this amount would be converted as follows: USD/NZD (rate provided by the third party provider for the Trading Platform) = Adjustment of 0.75% = x = Actual rate used to convert = = Converted amount in NZD = 8,700 x = NZ$ 9, Conversion fee = NZ$ The above example is included for illustrative purposes only. It provides one example of a specific situation only and does not reflect the specific circumstances or the obligations that may arise under a derivative you enter in to. For additional trade examples please refer to Halifax NZ s website at HALIFAX NZ 12

18 4.4 Data charges If you subscribe to a data service through your Trading Platform, the data fees in respect of the service will be charged directly to your Trading Account, subject to any currency conversion (see section 4.3 of this PDS for further information). Live trading data is typically provided free of charge, however other products such as those listed on an Option Exchange may attract exchange fees for live data. 4.5 Phone orders All orders placed over the phone will be charged a fee at our sole discretion. The maximum charge for a telephone instruction for is the higher of $50 NZD or 2.0% of the face value of the Underlying Instrument per Transaction. This amount is in addition to the Trading Platform fee which can be found at Default consequences If you fail to pay, or provide security for, amounts payable to us or fail to perform any of your obligations to us as set out in the Client Services Agreement, we can take steps to protect our position. For example, Closing Out some or all of your open positions, charging interest at a rate of the cash rate for the currency +15% per annum on any debit balance in your Trading Account and any other costs incurred by us associated with recovering payment from you. 5. How Halifax treats funds and property received from you 5.1 How we treat your money held in the Client Trust Account Amounts you pay to us are deposited into the Client Trust Accounts that we maintain. The Client Trust Accounts are held with ANZ Bank New Zealand. This means that client funds (and property) transferred to us through the Trading Platforms are held on trust. Funds we receive are not available to pay any liability of ours, including general creditors in the event of our receivership or liquidation. Any funds of yours required to meet Margin Requirements, including any fees and charges you incur, will be deducted from the Client Trust Account and paid directly to us. For money deposited in the Client Trust Account, you should be aware that: a. individual client accounts are not separated from each other; b. all clients funds are co-mingled into the one account; and c. the client money provisions may not protect any funds of yours if the Client Trust Account is overdrawn. Halifax is entitled to retain all interest earned on the money held in its Client Trust Accounts, with its clearing brokers or from authorised investments made from the Client Trust Account. 5.2 Counterparties It is possible that the Option Exchange or the Clearing Participant may become insolvent. It is also possible that another of Halifax s clients might go into deficit which in turn may result in the overall balance of the Client Trust Account going into deficit. If either of these events occurred, Halifax would use its best endeavours to retrieve your funds and the funds of other clients. However, if Halifax was not able to retrieve your funds it would have to source funds to match the deficit in the Trading Account. Halifax has a comprehensive insurance policy in place to cover a variety of different scenarios some of which may assist in the repayment of deficits to the Trading Account. However, if Halifax was not able to source these funds it could be that Halifax itself was insolvent and unable to provide financial services. Therefore you should carefully consider all third parties that Halifax transacts with as well as those parties financial credentials before deciding to deposit your money with Halifax. 13 HALIFAX NZ