Risk disclosures

Risks and features - definitions

• Market Risk

  Market risks are risks that may impact the entire market and relate to the risk that an investor may experience losses due to a change in the value of a financial instrument. 

  Market risk may materialise due to both macroeconomic factors as well as factors specific to the Financial Instrument. Macroeconomic risks may include interest rate risk, foreign exchange rates risk, commodity risk, equity risk, economic stability, inflation, political factors, regulation and taxes.

  Instrument specific market risks may materialise due to supply and demand, factors affecting the issuer of the Financial Instrument and the liquidity and the volatility in the market for that instrument.

  Some of these risks are described in more detail below.

• Credit Risk

  Any investment in a Financial Instrument is likely to be impacted by the credit worthiness of the issuing entity.  As such, any reduction of the creditworthiness of that entity is likely to result in a reduction of the value of Financial Instruments issued by it. Further, any investment in a financial instrument carries the risk that the issuing entity may not be able to meet its obligations as contracted by the transaction, for instance an inability to make interest payments owed to the investor.

  Investec may trade with you Financial Instruments issued by Investec itself or by third parties so you should ensure that you understand who the issuing entity is and that you are satisfied with their credit worthiness.

• Volatility Risk

  Volatility describes the price fluctuation or price change of a Financial Instrument over a certain period of time. When the price fluctuation is high over a relatively short period of time, the Financial Instrument has a high volatility. A Financial Instrument with low volatility will still see price changes but they will take place at a steady pace over time.

  If a Financial Instrument has a high volatility there is a greater risk that an investor may lose some or all of their investment in a short time frame.

• Liquidity Risk

  Liquidity describes the ability to buy and sell Financial Instruments in a timely manner. If trading is relatively infrequent or only undertaken in small order amounts, the Financial Instrument is described as illiquid. 

  Buying and selling illiquid Financial Instruments can be difficult as prices can be volatile and can easily be affected by the size of the order. Also, illiquid instruments may be subject to a larger spread between the possible buying and selling prices in the market. Illiquidity can make it more difficult and expensive if an investor wishes to exit a transaction early.

• FX Risk

  Investment in Financial Instruments may involve risks relating to exchange rates.  This may be a direct risk, such as a trade in a foreign exchange derivative contract or shares traded in a foreign currency, or indirect, such as an investment in a company which derives its revenues in multiple currencies).

  Exchange rates are determined by a number of factors including supply and demand and macroeconomic factors.

• Concentration Risk

  Concentration risk relates to the risk of having a narrow pool of investments and therefore being especially exposed to a specific factor, such as a particular issuer or sector. Concentration risk can be reduced by using a diversified portfolio of investments. 

• Conflicts

  As an integrated investment bank with a range of products and services, conflicts may arise in a number of different circumstances within Investec. Investec therefore has in place robust conflict management processes and controls to identify and manage conflicts arising from its business and will inform its clients where it does not believe it is able to manage a particular conflict prior to entering into any transactions.

  Investec also has in place a conflicts of interest policy which can be found on our website which provides more detail.

• Transparency

  Transparency relates to the ease with which investors can obtain information about a Financial Instrument and/or the issuer of a Financial Instrument. Markets in different Financial Instruments are subject to differing levels of transparency. It may be difficult to find accurate current market data on certain Financial Instruments.

• Margin

  In respect of certain Financial Instruments, clients of Investec may be required to post margin against the investment for the duration of the contact agreed with Investec. The amount of margin is calculated pursuant to an agreed formula.

  When you transfer margin, or collateral, to Investec this will not be held as client money under the FCA client money rules and, depending on certain factors, including your client classification, may involve a transfer of title to IBP for the period that the funds are held.

• Contingent Liabilities

  Certain Financial Instruments may give rise to financial commitments and other additional obligations over and above the initial purchase price.  To the extent this is the case, such obligations will be agreed between IBP and you prior to any investment.

• Exit Costs

  Certain Financial Instruments may contain restrictions on when they can be exited and / or may contain additional charges if you wish to exit the transaction or contract with Investec before the end of the agreed term. These costs are referred to as exit or break costs and will be disclosed to you prior to any investment. 

• Leverage

  Leverage relates to a feature within a Financial Instrument which may result in market movements leading to a substantially magnified change in the value of the Financial Instrument.

  Financial Instruments with a leverage feature are therefore inherently more risky as they can give rise to greater losses and have the effect of increasing market risk. Investors using leveraged products could end up with losses greater than their invested amount.

  Investec does not sell leveraged products to all types of investor and will explain any leverage features prior to entering into any transaction.

• Interest Rate Risk

  Investment in Financial Instruments may involve risks relating to interest rates. This may be a direct risk, such as a trade in an interest rate derivative contract, or indirect, such as interest rate changes impacting the value of other Financial Instruments like a foreign exchange forward contract, for example.

  Interest rates are determined by a number of factors including supply and demand within the international markets as well as macroeconomic factors such as political change and central bank / government action.