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Because trading in futures and options is appropriate only for certain businesses and individuals, the CFTC requires that a broker provide you with a disclosure document that describes the risks involved in entering into futures and option contracts.
The document provides you with an opportunity to carefully consider whether futures and options are appropriate for you in light of your experience, objectives, financial resources, and other circumstances.
The broker must receive a signed and dated acknowledgment from you that you have received a disclosure document before he or she can accept any funds, securities, or property from you.
Accounts opened through different types of commodity professionals require different types of risk disclosure documents.
Futures Commission Merchants and Introducing Brokers.
A Futures Commission Merchant or Introducing Broker must provide you with a disclosure statement that informs you of the risks inherent in trading futures contracts and/or options on futures contracts, as well as the effect that leverage may have on potential losses or gains.
The disclosure statement must also inform you that trading futures in foreign markets carries particular risks because of fluctuations in currency exchange rates and differences in regulatory protection.
Commodity Pools.
The disclosure document for a commodity pool must include more extensive information, including the following:
Principal risk factors;
The extent of your potential liability;
The percentage return necessary for you to break even;
Fees and expenses;
Material litigation during the last five years against the pool's operator, manager, trading advisors, principals, the pool's Futures Commission Merchants and Introducing Brokers;
Actual or potential conflicts of interest of the pool's operator, manager or advisors;
Past performance information;
Information about the Commodity Trading Advisor or company and its principals;
The business background of the pool's operator, manager, and advisors;
The volatility of the market;
Limits on your ability to withdraw funds;
Management, advisory, and brokerage fees;
Whether foreign futures and option transactions are involved;
The investment program of the pool and use of proceeds;
Whether those managing your money may trade for their own account;
Information on any protection of your principal investment;
Transferability and redemption;
Liability of participants;
Distribution of profits and taxation;
When trading will begin;
The ownership of the pool; and
Reporting to pool participants.
Before a Commodity Trading Advisor can solicit you concerning the authority to direct or guide your trading, the Commodity Trading Advisor must provide you with a disclosure document containing similar information.
The specific CFTC regulations governing disclosure documents may be obtained by contacting the CFTC Office of External Affairs. Also, see the CFTC Backgrounder entitled, Commodity Trading Advisors and Commodity Pool Operators at www.cftc.gov/opa/backgrounder/opacpocta.htm.
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