SFC cautions on crude oil futures and ETFs

24 Apr 2020

In a circular issued today, the Securities and Futures Commission (SFC) required commodity futures brokers to take precautionary measures to manage the risks of trading crude oil futures contracts. Brokers were reminded not to open new positions for clients who do not fully understand these contracts or do not have the financial capability to bear the potential losses. They were also urged to collect sufficient margin from clients in light of the upcoming public holidays in Hong Kong.

"The crude oil market has recently experienced unprecedented volatility, which significantly increases the risks of trading crude oil-related financial products," said Mr Ashley Alder, the SFC’s Chief Executive Officer. "Firms should prudently manage these risks to protect investors."

In a separate circular, also issued today, the SFC reminded managers of SFC-authorised futures-based exchange-traded funds (ETFs) to remain vigilant so that in extreme market conditions the funds can be managed in the best interests of investors. In addition, firms were reminded to ensure compliance with the conduct requirements when providing trading services for futures-based ETFs.

Crude oil ETFs and other commodity futures ETFs are derivatives products targeted at investors who understand the risks. Commodity futures markets are extremely volatile. Investors could suffer substantial or complete losses in a short period of time and should exercise caution when trading these products.

The SFC also cautions investors to be aware that if they engage in leveraged or margin trading of financial products such as crude oil futures and options, they may face large margin calls on their positions on short notice. Their positions might be compulsorily closed out as the market moves against them and they could be liable for any realised losses in excess of their margin deposits.

"Investors should only trade financial products they fully understand, and not simply because the prices of the underlying assets have fallen to very low levels," added Mr Alder.

Page last updated : 24 Apr 2020