Conflicts of interest and material incentives
A. Our financial market activities may adversely impact Transactions
We may act as, among other things, an investor, research provider, placement agent, underwriter, distributor, remarketing agent, structurer, securitiser, lender, investment manager, investment adviser, commodity trading advisor, municipal advisor, market maker, index sponsor, trader, prime broker or clearing broker. In those and other capacities, we may purchase, sell or hold a broad array of investments, we may trade securities, loans, commodities, currencies, credit instruments, indices, baskets, derivatives, and other financial instruments for our account or for the accounts of our customers and other counterparties, including Transactions, or provide advice or other services that may result in our customers engaging in such activities. We may have other direct or indirect interests in these products and the markets, data providers, index sponsors, clearinghouses, settlement systems and other market utilities with respect to such products. We may provide liquidity to a trading venue, clearing member or exchange member. We may be a participant on an exchange settlement committee. We may be a participant or sole index sponsor in determining the components of an index and may submit or compile estimates or prices upon which an index is based, or provide or calculate transaction data.
We may own equity in, provide financing to, serve on the board of directors of, provide investment banking advice on mergers, restructurings and other corporate actions to, or initiate or participate in the enforcement of remedies against, issuers and other third parties whose activities may influence or otherwise affect the price, value, or level of Underliers and/or the Transaction Economics.
Our financial market activities may, individually or in the aggregate, materially affect the value of an Underlier, either positively, or negatively, and may adversely affect your Transaction Economics. You should expect that our interests, and the interests of our customers or other counterparties, may at times be adverse to your interests under or in connection with Transactions we conduct with you. Unless otherwise required by applicable law or agreed in connection with a particular Transaction, we are not acting in your best interests and we are not assessing the suitability of the Transaction for you. Without limiting the foregoing (except as the same may be limited by applicable law), we may engage in the following activities, which may, individually or in the aggregate, adversely affect your Transaction Economics, create a conflict between your and our interests and give us a material incentive to enter into Transactions with you:
1. Publish research reports or otherwise express views regarding Underliers
We may publish research from time to time on Underliers or Transactions. More generally, we may express views on financial markets and other matters that may influence the price, value, or level of the Underliers and related Transactions in a way that adversely affects your Transaction Economics.
Our personnel, including sales and trading, investment research and investment management personnel, may make investment recommendations, provide market colour or trading ideas, or publish or express independent views in respect of a wide range of issuers, securities, other instruments and market variables, including interest rates, inflation, foreign exchange, commodities and other variables that may be relevant to an Underlier. These strategies may include, for example, buying or selling a financial instrument or buying or selling credit protection against a default or other event involving an issuer or financial instrument. Any of these recommendations and views may be positive or negative with respect to an Underlier or other securities or instruments similar to or linked to an Underlier or may result in trading, investment, or hedging strategies that have a positive or negative impact on the market for such securities or instruments, particularly in illiquid markets. In addition, you should expect that our trading, research or investing personnel will have or develop independent views regarding an Underlier, Transaction or relevant industry or other market trends, which views may be inconsistent with your views or objectives in connection with particular Transactions and may adversely affect your Transaction Economics.
Any research, opinions or recommendations expressed by us or our affiliates may not be consistent with each other and may be modified from time to time without notice. You should make your own independent investigation of the merits of entering into each Transaction and the Underliers.
2. Trade for our own account or the account of customers
We may on a regular basis trade (taking long or short positions, or both concurrently) in instruments identical or economically related to your Transactions or the Underliers. We may engage in these activities for our own proprietary accounts, for accounts under management or to facilitate transactions (including block transactions) on behalf of customers.
Subject to any express agreement in the governing documentation, we may, in our discretion, decide to hedge our exposure under Transactions by taking positions in the Underliers or related instruments. We may adjust our hedge dynamically by purchasing or selling the Underliers or related instruments, and may close out or unwind our hedge positions. Our market activities in connection with such hedging may occur, or become more frequent or of greater magnitude, in connection with or in anticipation of the initiation or termination or exercise of your Transactions, on or before a valuation or observation date, or, in the case of option Transactions, when the price, level or value of the Underlier is near the exercise level or level at which a “barrier” or other condition may be satisfied. We may also structure, trade and market instruments that may take opposing economic positions to your Transaction.
The foregoing trading activities may adversely affect (i) the price, value, or level of Underliers and Transactions, (ii) the likelihood that an option Transaction will be in-the-money or become exercisable or that a barrier event will occur, or (iii) your trading, investment or hedging strategies or results. The results of your Transactions may differ significantly from the results achieved by us for our proprietary or managed accounts. We are under no duty to inform you about the nature or extent of our trading activities or to refrain from or restrict such activities as a result of being your counterparty to Transactions or having received any information regarding your trading interest with respect to Transactions, except in each case to the extent we have expressly agreed in writing or as may be required under applicable law.
3. Engage in similar Transactions with other counterparties
We may engage in Transactions with other counterparties that have trading, investment, or hedging objectives that are similar to yours. This may create potential conflicts where there is limited availability or limited liquidity for those transactions. We may also engage in Transactions with other counterparties that have trading, investment, or hedging objectives adverse to yours. We are under no duty to inform you of the nature or identity of these other counterparties or their respective Transactions.
Transactions by multiple counterparties may have the effect of diluting or otherwise negatively affecting the values, prices or levels of Underliers or Transactions, or your trading, investment or hedging strategies or results. The results of your Transactions may differ significantly from the results achieved by other counterparties.
4. Possess non-public information relevant to Transactions
Acting in the various capacities noted above or elsewhere may give us broad access to the current status of certain markets, investments and products. For example, we may have investment banking or other commercial relationships with and access to information from the issuer(s) of securities, financial instruments, or other interests underlying your Transactions. As a result, we may be in possession of information, which, if known to you, might cause you to seek to dispose of, retain or increase interests in one or more Transactions. Unless otherwise agreed, we will be under no duty to make any such information available to you, except to the extent that disclosure may be required under applicable law.
5. Lack information across business lines and affiliates
As a result of logistical, technical and physical separation between and among business lines, administrative functions and legal entities, including informational barriers constructed between different divisions, the natural persons acting on our behalf to engage in Transactions with you are unlikely to have access to all information known collectively by all of our business lines, and they may not be able to consult with personnel in other business lines. If so, they will not have the benefit of all the information held by and among all of our business lines and administrative functions.
6. Act as calculation agent, valuation agent, collateral agent, or determining party
We may act as the calculation agent, valuation agent, collateral agent, or other determining party with respect to Transactions for determining payments or deliveries during the term of Transactions, upon termination or otherwise, any disruption events, dilution adjustments or termination events, and any other terms of a Transaction as agreed with you. In such capacity, our role and our duties will be limited to those set out in the Transaction or the governing documentation, it being understood that our economic interests with respect to Transactions in which we act as a calculation agent or other determining party are potentially adverse to yours with regard to the Transactions. Determinations we make in one or more of these roles may adversely affect the Transaction Economics.
7. Have an economic interest in the execution venue or clearinghouse
We may have an ownership or other economic interest (such as the right to receive payment for order flow, reporting or other fees) in a swap execution facility, designated contract market, national securities exchange, or other trading venue on which Transactions may be executed. We may have ownership or other economic interests in a clearinghouse to which a Transaction executed between us could be submitted or given up for clearing. We may have access to one or more trading venues or clearinghouses and not others. Our directors or employees may serve as directors of one or more trading venues or clearinghouses. In such cases, we may derive financial or other benefits if your Transaction is executed and/or cleared at such venue or clearinghouse. Conversely, it may be financially advantageous for us if a Transaction is executed bilaterally and not cleared (applicable law permitting). For example, if a Transaction is not cleared, we may incur lower funding costs, derive a funding benefit or face more favorable market conditions in which to hedge our exposure resulting from a Transaction.
8. Act as an agency broker or clearing broker
If we act as your agent for the execution of Transactions, subject to applicable law, we may have discretion to decide where to direct your orders, to solicit persons to trade opposite those orders, or to enter into Transactions opposite those orders for our own account or the account of our affiliates or customers. We may derive financial and other benefits (such as the right to receive payment for order flow, reporting or other fees) from such decisions. We (including an affiliate of your named counterparty) may act as your futures commission merchant or other clearing broker with respect to cleared Transactions. A clearing broker may earn a return from the investment of customer funds deposited to margin cleared Transactions. Accordingly, we may have an incentive to encourage you to use our services (including those of an affiliate) as your futures commission merchant or other clearing broker.
9. Act as index sponsor
We may act as index sponsor for certain indices that may be Underliers to Transactions.
Potential conflicts of interest may exist in such cases as we take on separate roles (i.e. Transaction counterparty, calculation agent and index sponsor). In accordance with the index methodology, the index sponsor will determine the prices and other data relevant to the calculation of the level of the index, including whether a market disruption event or other event permitting suspension of the index has occurred. In limited circumstances, the index sponsor may add, delete or substitute the components of the index, make other methodological changes that could change the level of the index or alter, discontinue or suspend calculation or dissemination of the index, any of which may affect the Transactions.'
As index sponsor we will determine, calculate and publish the index, while we also may issue, enter into, promote, offer or sell transactions or investments linked, in whole or in part, to the index. In addition, we may have, or may have had, interests or positions, or may buy, sell or otherwise trade positions in or relating to the underlying assets linked to the index. Such activities may or may not have an impact on the level of the index and therefore on the value of Transactions. In light of these different roles performed by us, you should be aware of our potential conflicts of interests.
B. Transaction fees and implicit spreads may increase your loss or decrease your return
We generally enter into Transactions to earn a profit or to manage the risks of exposures we have accumulated through the conduct of our business. Our profits may derive from explicit fees and commissions, or may be implicit in the difference between payments and deliveries made to or by us under Transactions and our costs (or gains) in hedging and carrying the resulting exposures. It is possible that we may earn a substantial return from our hedging positions related to a Transaction while the value of the Transaction to you declines or fails to increase by a commensurate amount. Before you enter into a Transaction, you should review and understand all commissions, fees and other charges for which you will be liable, including all amounts payable or due to us. These charges will affect your net profit (if any) or increase your loss. We may be paid a structuring fee distinct from payments made in connection with a Transaction.
C. We may use third parties for marketing or solicitation
We may pay third parties to market or solicit counterparties and/or Transactions on our behalf. Accordingly, any party that referred you to us may have an economic stake in your Transactions.
On occasion, our third party agents may receive:
- A commission for referrals to us by them which results in product sales;
- A referral fee of up to $3 dollars for every $10,000 of spot foreign exchange sales executed based on certain volumes being achieved;
- Up to $5,000 to hold jointly sponsored events
D. Our own transaction fees and costs may be reflected in the price or economic terms of Transactions
We have a variety of costs and expenses associated with entering into and carrying Transactions. These may include, without limitation, fees, commissions and other charges that we may become obligated to pay to third parties from time to time in connection with Transactions, including brokerage fees, referral fees, and execution, clearing and/or reporting fees associated with our compliance with applicable law. Unless otherwise agreed, you will not be obligated to reimburse us for these fees, commissions or other charges, but as with any of our other costs and expenses, you should assume they are reflected in the price or other economics of your Transactions. In this regard, we generally do not disclose our costs and expenses except as may be required by applicable law.
E. Our lobbying activities may adversely impact Transactions
We may directly, indirectly, individually or through participation in industry trade groups or other associations, engage in lobbying or other advocacy efforts, both domestically and internationally, before national and state legislatures, governmental agencies, regulatory bodies or other authorities or officials (including the CFTC, SEC, bank supervisors and securities and financial services regulators) on matters relating to Transactions (whether of a legal, regulatory, financial, tax, or accounting nature or otherwise) in which our interests and positions may conflict with or be adverse to your interests and positions on such matters.
F. Our relative compensation may vary from one Transaction to the next
If we recommend alternative Transactions or alternative Transaction strategies to accomplish a particular financial objective that you may have (each, an “Alternative”), our relative compensation may vary from one such Alternative to the next. Before entering into or adopting any such recommended Alternative, you may wish to consider our relative compensation as it relates to our incentives and potential conflicts of interest. In particular, our relative compensation may be material to our incentives underlying our recommendations, and how we rank our relative compensation from one Alternative to the next may assist you in making your assessment of each Alternative that we may recommend to accomplish a particular financial objective.
1. Relative compensation
As used herein, “relative compensation” means, as between two or more Alternatives, that we may rank our expected compensation as higher, lower or generally equivalent from one such Alternative to the next as of the date of such ranking. For this purpose, “generally equivalent” means that we estimate the difference, if any, in our expected compensation from two or more Alternatives to not be material.
These rankings may be based on good faith estimates and assumptions without intending that our relative compensation reflect the actual compensation that we may book or realize over the life of any of the Alternatives assuming any were to be entered into or adopted, and without any obligation to disclose our expected or actual compensation (including estimates) except as required under CFTC Regulation 23.431(a)(3)(ii). Unlike mid-market marks furnished to our counterparties under CFTC Regulation 23.431, our relative compensation rankings may also take into account, and reflect disparities in, amounts for profit, credit reserves, hedging, funding, liquidity or other costs or adjustments between Alternatives and/or those of any offsetting trading positions, hedges or underlying hedged items. Whether and to what extent our relative compensation is materially affected by one or more of these amounts (or estimates thereof) may depend on a variety of factors, including the type and material characteristics of each Alternative, our pricing assumptions for each Alternative (which may vary from counterparty to counterparty at our discretion), and the risk management strategies we anticipate employing to hedge or otherwise manage our risks associated with each Alternative.
Estimates, assumptions and other factors that we may take into account are subject to change at any time, including as the result of changing market conditions, and therefore no assurances are given that our rankings will be the same from one recommendation to the next. Confidential, proprietary features of our estimation methodology and related assumptions may over-state or under-state our relative compensation, depending on the relevant circumstances. Also, just as expected compensation may vary from one dealer to the next, our rankings may not be representative of those of any other dealer or market participant. Our rankings (and the prices we offer) also may vary from counterparty to counterparty, depending on such factors as (without limitation) counterparty credit risk, margin or collateral arrangements and trading history.
2. Relative compensation disclosure
Transactions typically involve credit risk, and we generally expect to be compensated for exposing ourselves to and managing such risk, whether or not the Transactions are cleared, margined or collateralized. To the extent a Transaction or Transaction strategy involves greater credit risk, we may price such Transaction or Transaction strategy accordingly, such that we may expect to receive more compensation from one versus another to justify the greater credit risk.
Besides credit risk, other factors may be more, less or equally important, such as our costs and risks associated with carrying, hedging and funding a particular Transaction, including capital costs, margin costs, clearing costs, funding costs, operating costs and the costs and risks (including credit risk and basis risk) of acquiring, carrying, margining, funding, managing and disposing of one or more related hedging or trading positions. Of course, the price at which we are willing to offer or accept a Transaction also generally reflects our expectation to earn income or a profit at inception, during the life of, or upon final settlement of the Transaction, or in connection with exercising, amending, transferring or unwinding the Transaction or as the result of another life cycle event, and the exact amount thereof may not be known until after the Transaction is fully performed. Unless otherwise agreed, any price we offer is inclusive of any markup above the price at which we may be able to transact, or have transacted, in related hedging or trading positions. After taking into account these and other pricing factors, we hereby disclose the following in connection with any Transaction or Transaction strategy that we may recommend from time to time to accomplish a particular financial objective:
- Effect of Increased Risk/Protection. Our relative compensation is generally expected to be higher for those Transactions or Transaction strategies that involve larger notional amounts, longer maturities, or factors or features exposing us to higher risk or that increase your protection against economic or other risks.
- Effect of Non-Standard Terms or Adjustments. The inclusion or adjustment of other characteristics of Transactions or Transaction strategies may also increase our relative compensation. For example, as between two alternative Transactions that are identical in all respects except for the inclusion of a financing component (such as the adjustment of a rate or price to reflect the inclusion or deferral of a payment you would otherwise make to or owe us on another transaction or instrument), our relative compensation for the Transaction with the financing component included will generally be higher than for the Transaction without a financing component.
- Effect of Combining Different Swaps and/or Options. When swaps and options are combined into one Transaction, such as an option to enter into a swap, or adding an option to a swap that allows a party to terminate the swap early, either without paying a fee or by paying a reduced fee, the option would generally make the Transaction more expensive for the party that would be acquiring the option. If we would be granting such an option to our counterparty, it can generally be assumed that our relative compensation from such combined swap and option Transaction would be greater than from the swap without such option. Absent our ranking our relative compensation for specific alternative Transactions or Transaction strategies, you should generally assume for purposes of evaluating our incentives and conflicts of interest that any alternative Transaction or Transaction strategy that involves a combination of swaps and/or options or other components will result in higher relative compensation to us than a swap or strategy that does not involve such combination. Of course, there may be benefits associated with such combination to justify the higher relative compensation, but aside from the increased cost to you, there could be other disadvantages, such as exposing you to increased financial or other risks, which could be significant. There also may be exceptions to the foregoing observations and assumptions. For example, if an alternative Transaction or Transaction strategy involves you selling or granting to us an option or other rights, this may reduce our compensation, representing a potential cost savings to you, but there may be disadvantages associated with our acquiring such option or rights from you, including exposing you to financial or other risks, which could be significant.
- Effect of Pre-Payment Features for Options, Forwards and Swaps. Our relative compensation for an option, forward or swap for which you prepay your payment obligations to us would typically be lower than for an equivalent option, forward or swap that you do not prepay because of the absence of credit risk for us in connection with the prepaid option, forward or swap.
Given the variety of possible alternative Transactions or Transaction strategies that market participants may use to hedge or otherwise manage commercial risk (or use for trading or investment purposes), this disclosure of our relative compensation is limited to the specific Transaction characteristics described herein and does not address every possible circumstance.
This disclosure is not meant to describe all of the factors that might affect our relative compensation in connection with a recommendation of alternative Transaction or Transaction strategies, or that we may nevertheless take into account in establishing an actual price for a Transaction regardless of the order in which we may rank our relative compensation from one Transaction or Transaction strategy to the next. These factors may vary from one Transaction asset class to the next or by type of Transaction or Transaction strategy, and may include, without limitation, any or all of the following:
- The size of the Transaction in relation to the volume of market activity at the time of execution, exercise or life cycle event.
- The tenor or maturity of the Transaction.
- The complexity of the Transaction or the structure that is created.
- The bespoke nature of the Transaction’s material characteristics and any associated basis risk.
- Whether the Transaction has a linear payout structure or a non-linear payout structure (the latter of which typically includes options or swaps with option-like features or performance) and the costs and risk associated with dynamic hedging strategies generally associated with carrying non-linear Transaction positions.
- If a Transaction involves two currencies, the implied volatility of the currency pair.
- The liquidity of, or the supply and demand for, the Transaction, an Underlier or related instruments or in markets generally, which may be influenced by political considerations, economic indicators, inflation, interest rate differentials, market perception, and other factors.
- Counterparty-related factors, which may include, without limitation, counterparty type, risk profile, jurisdiction, creditworthiness and credit support.
- Trading and delivery channels, location, taxes and costs.
- The location where physical delivery of an Underlier is to take place.
- Transportation, transmission, storage and other costs associated with an Underlier.
- Settlement risk, including whether settlement will be effected on a “payment-versus-delivery” (PVD) basis.
- Regulatory considerations, given that certain Transactions or structures may be subject to different requirements and costs in the relevant jurisdiction or between jurisdictions in the relevant market(s), e.g. trade execution, clearing, trade processing and margining requirements and costs.
- Market “skew”, implied market bias or other factors that may influence trading or hedging.
- Central bank exchange controls that may restrict currency delivery (such as non-deliverable currencies).
Please note that pricing assumptions, market conditions and other factors may change after we have ranked our relative compensation for alternative Transactions or Transaction strategies, and therefore the price of any such Transaction may not reflect the same factors used and assumptions made in furnishing you with such ranking. Likewise, since rankings are based on our estimates and assumptions, they are not guarantees that any such ranking, or the factors that affect relative compensation generally described herein, will ultimately match the final economic outcome of a particular Transaction or Transaction strategy. As noted above, confidential, proprietary features of our estimation methodology and related assumptions may over-state or under-state our relative compensation, depending on the relevant circumstances.
If we furnish you with a ranking of our relative compensation for specific Transactions or Transaction strategies, such ranking should be only one of many factors that you and your independent financial and other professional advisers take into account in evaluating such Transactions or Transaction strategies. You and your advisers should carefully consider the benefits, costs, risks and other advantages and disadvantages of Alternatives, especially when a Transaction or Transaction strategy combines different swaps and/or options, or components of different swaps and/or options, or is otherwise structured, more complex or otherwise less liquid. For example, there could be accounting or tax issues or consequences associated with different Alternatives that your accountants or tax advisers may identify and advise you to take into consideration in deciding upon an Alternative or choosing between Alternatives.