Investor characterisation

Financial markets

Key Message:

  • If you do not have the knowledge of derivatives but intend to invest in a derivative product, your intermediary is required to explain to you the relevant risks or advise you if the investment is suitable for you, depending on whether the derivative product is traded on an exchange.

With effect from 4 September 2011, investor characterisation is one of the SFC's latest measures to strengthen investor protection by extending the existing requirement for intermediaries to know their clients by assessing their knowledge of derivatives.

If you are an investor without knowledge of derivatives and you approach an intermediary seeking to purchase a derivative product, referred to as the transaction, the intermediary must do the following:

  • Explain to you the relevant risks associated with the product, if the product is traded on an exchange;
  • Warn you about the transaction and provide appropriate advice as to whether or not the transaction is suitable for you in all the circumstances, if the product is not traded on an exchange.

How you will be assessed

The following are some criteria - but by no means the complete list - for checking if you can be regarded as having knowledge of derivatives:

  • Whether you have undergone training or attended courses on derivative products;
  • Whether you have previous trading experience in derivative products, for example, completing at least five transactions within the last three years; or
  • Whether you have current or previous work experience related to derivative products.

If an intermediary does not have sufficient information to determine whether you have knowledge of derivatives, then he/she will adopt a conservative approach and treat you as not having such knowledge.

Retail investors will be assessed when they open a trading account or trade derivative products for the first time via an intermediary.

The above requirements are meant to ensure that you find the investment products suited to your personal circumstances.