DDO REQUIREMENT | APPLICATION TO ETOS |
Class of retail clients that comprise the target market for this product – s 994B(5)(b) |
1. Description of the likely objectives, financial situation and needs of consumers in the target market | Background Tiger Brokers (AU) Pty Limited (“TBAU”) is an online broker that provides financial product trading services to retail and wholesale clients. We are authorized and regulated by the Australian Securities and Investments Commission (ASIC), with license number 300767 and business office located at Suite 28.01, 25 Bligh Street Sydney, NSW 2000. The DDO aims to assist clients to obtain appropriate financial products by requiring product issuers and distributors to have a consumer- centric approach to the design and distribution of financial products. If you are a retail client as defined under s761G of the Corporation Act 2001, you should refer to the relevant Product Disclosure Statement (PDS) before deciding whether to acquire or continue to hold the relevant product. You can get a copy of the relevant PDS from our website. You should not base any decision to trade solely on the contents of this TMD. Before deciding to open a trading account, you should read this TMD alongside the PDS and FSG. Target Market TBAU currently offers clients to trade equity and index options listed on US markets and perform following types of transactions: Type1: buy calls and puts on equity and index options Type2: short covered calls on equity options Type3: short cash-secured put options on equity and index options Given the nature of ETOs offered by TBAU and the associated option trading strategies, the ETO products are likely to be suitable to clients who fall within one or more of the categories below: High risk tolerance investors: Clients seeking to make profit via speculative trading with taking corresponding risks which can be substantial; Risk mitigation investors: Clients seeking to hedge the potential risk and exposures to the underlying assets and/or other ETOs or financial products from other investments or exposures or seek to lock in a price to potentially purchase or sell underlying investments; Premium/income seeking investors: clients seeking to generate extra income through earning a premium from selling options with taking corresponding risks which can be substantial
The categories above are not mutually exclusive. That said, the client can fall under one or both categories and it is sufficient for a client to fall within one of the categories above to be within the target market of the ETOs offered by TBAU. Clients must also meet the following conditions: Clients who are above the age of 18; Clients who have requisite knowledge by declaring they understand the ETO PDS and The ASX Understanding Options Trading booklet and passed the ETO knowledge assessment Clients who either declare they have prior experiences in option trading or confirm they have or will have traded in options in simulated trading environment prior to transitioning to live trading if they only have limited option trading experiences declared. Clients who declare they fit into one of the following categories of Customers seeking to trade options: (a) risk mitigation customers and/or (b) premium/income seeking investors and/or (c) high risk tolerance customers Clients who declare they understand ETOs trading involves financial risk with some trades having the potential for significant losses, and have the ability to bear potential losses from Options trading in a way that is consistent with their financial situation Clients who declare they have the necessary financial resources, such as liquid assets and regular income, to manage financial obligations that may arise from trades they undertake including trade settlement and financial obligation Clients who declare they understand market movement and volatility will affect their portfolios and they have the capacity to monitor my options positions and takes actions as required Clients who accept the trading condition that American style put options and index call options on international exchange, such as US exchanges, cannot be exercised early For Self-managed super funds(SMSF), the trustee must ensure that the option trading is in line with SMSF’s trust deed, derivative risk statement and investment strategy
Likely purposes and objectives Type 1 Speculative trading; and/or Hedging (including hedging exposure to underlying assets and/or hedging positions taken in relation to other ETOs or financial products); and/or Diversify investment portfolio using leverage.
Type 2 Seek for extra income from selling options; and/or Seek to add limited downside cushion to mitigate the potential decline in value of underlying assets; and/or Speculate with a view of a steady or slightly rising market price for at least the term of the option. This Strategy may not be appropriate or ideal for very bearish or very bullish investor.
Type 3 Seek for extra income from selling options; and/or A share acquisition strategy for price-sensitive investors who seek to acquire the underlying stocks at predetermined price via assignment. The Exercise price, less the premium received, presents the desirable purchase price; and/or Speculate with the view of price appreciation.
Likely financial situations Type 1 Have the ability, including necessary financial resources, such as liquid assets and regular income, to manage their financial obligations and bear the potential loss that can be substantial and significant, without materially impacting their standard of living; and/or Have existing or forthcoming exposures which the clients need to hedge or diversify.
Type 2 Type 3 Likely needs Type 1 Speculative trading: seek higher return with corresponding higher risk which can be substantial. Hedging: protect previous gains or mitigate against potential future losses and/or lower the economic exposure to the underlying assets. The risk of financial loss is limited to the option premium and fees and brokerage paid. However, depending upon the trading strategy used, the losses can still be substantial.
Type 2 Income generation; and Be willing to forfeit much of the underlying asset’s potential; and Be prepared to be called away if the market price rallies above the exercise price. The risk of financial loss is limited but can be substantial, the worst case of which is when the underlying assets become worthless. However such risk is not introduced by writing the option and it is inherent in almost any form of stock ownership.
Type 3 Income generation; and/or Acquire the underlying stocks at exercise price via assignment. The risk of financial loss is limited but can be substantial, the worst case of which is when the underlying assets become worthless. Your liability in relation to write the cash-secured put option is limited to the amount of cash balance set aside as cash collateral and you are generally not subject to any margin call risk. However, this will not, in any way, alleviate the significant loss potential.
Liquidity needs Type 1 ETO trading is generally settled on T+1, which means clients should have the ability to meet the outstanding settlement obligations and not require proceeds from the sales to be settled earlier than T+1. Type 2 You shall not require or expect the premium to be settled earlier than T+1. Clients can only sell the underlying stocks up to a quantity not being used for the purpose of covering any short call positions. Therefore, you may need to close part of all short call positions to release the required number of shares for the sale.
Type 3 You shall not require or expect the premium to be settled earlier than T+1 The cash balance set aside and used as cash collateral for shorting the put options will not be available for withdrawal or any other purposes until the corresponding short put positions are closed. Therefore, you will forego the liquidity and investment potential of the cash balance that are being used as cash collateral. Clients shall also be aware of the liquidity risk under Section significant risk of options in the PDS. Under certain market conditions, it could become difficult or impossible to trade ETOs or the trade may be filled at an unfavorable price.
Investment timeframe There is no recommended or set investment timeframe for option trading. The investment timeframe will vary vastly among investors, which may depend upon, among other factors, their purposes of trading, investment strategies and/or exposures to be hedged. While the ETOs generally have limited life spans, the time to expiry set by the Exchanges does not necessarily, and often does not, equate to clients’ investment timeframe. When ETO’s time to expiry is different to clients’ intended investment timeframe, clients could choose to close the position, subject to liquidity, any time prior to the expiry or roll the option position out to a later expiration date by closing the existing one and opening a new one to meet their intended investment timeframe. Clients shall be aware of the time decay impact. That is, when time draws closer to expiry, the time value of the option declines and it does not decay at a constant rate but becomes more rapid towards expiry. Retail clients for whom our products are unsuitable Our products are generally unsuitable for the following classes of retail clients Clients who are natural persons below the age of 18; and/or Clients who do not understand the characters and risks of ETOs as applicable to their proposed trading; and/or Clients who do not have sufficient option trading experiences are not willing to trade in simulated trading environment prior to living trading; and/or Clients who have a risk appetite that is inconsistent with the risk and potential financial loss set out above; and/or Clients who cannot bear the consequence of potential losses without material impact on their standard of living; and/or Clients who seek to exercise American style put options and index call options on international exchange early; and/or Client s who are unable to monitor their positions and take actions as required; and/or Clients who have low levels of financial literacy and technological literacy; and/or Clients who reside in a country which restricts or prohibits in trading in ETOs; and/or
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2. Description of ETOs (including its key attributes) | ETOs have the following key attributes: ETOs are a type of derivative giving the buyer (the taker) the right, but not the obligation, to buy or sell the underlying product at a specified price on or before a specified date. On the opposite side, the seller (the writer), has the obligation to perform the contract, that is, either buy or sell the underlying product. The terms and specifications of ETOs (other than the premium) are determined by the relevant exchange. ETOs have a limited life span and their value erodes the closer it reaches its expiry date. The value of ETOs will fluctuate depending on a range of factors, including the price, volatility, remaining to expiry date, interest rates, dividends, exchange rates and general risks applicable to markets. Since ETOs are an international product, client obligations and contract requirements for each contract may differ.
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3. Explanation of why ETOs, including its key attributes, is likely to be consistent with the likely objectives, financial situation and needs of consumers in the target market | ETOs are complex and may potentially be leveraged instruments depending on several factors including the trading strategies employed. Accordingly, they are only appropriate for experienced or knowledgeable traders who have the ability to bear some losses. Under certain conditions, such as an absence or reduction in the number of willing buyers and sellers in the ETO market or underlying market, it may become difficult or impossible to close out an open ETO position, potentially leading to significant losses. ETOs can be used for a variety of purposes, including hedging, speculation, diversification and generating extra income, hence consumers with these investment objectives will likely be within the target market. Type 1 is likely to be consistent with speculative trading and hedging purposes because ETOs offer high risk tolerance investor the potential for enhanced return with corresponding higher risk and offer risk mitigation investors the ability to economically protect or lock in any previous profits or forthcoming profits from exposure to an underlying asset and/or protect against future loss. For instance, through buying a put option on an underlying asset, clients may attempt to profit from the downward market movements. In scenarios where clients already maintain a long exposure to the same underlying asset, the resultant exposure and prospective profit derived from the put option can serve to mitigate any potential losses incurred from the existing long position. We expect high risk tolerance investors and risk mitigation investors will be likely to trade Type 1 transaction. Type 2 is likely to be consistent with speculative trading, risk mitigation and extra income generation purposes. Investors can receive option premium upfront(less brokerage and fees paid) for entering such transactions. The transactions can be speculative given the writers enter such transactions essentially based upon their market views. It can also be served for risk mitigation purposes because, for example, the premium received can provide some downside cushion, which mitigates the potential decline in value of the underlying assets. We expect high risk tolerance investors, risk mitigation investors and income seeking investors will be likely to trade Type 2 transaction. Type 3 is likely to be consistent with speculative trading, risk mitigation and extra income generation purposes. Investors can receive option premium upfront(less brokerage and fees paid) for entering such transactions. The transactions can be speculative, given the writers enter such transactions essentially based upon their market views. The strategy can also be used for risk mitigation purposes by price-sensitive investors to potentially purchase the underlying assets at a predetermined price if the option is exercised and assigned. The Exercise price, less the premium received, presents the desirable purchase price, which can be lower than the current market price if an at the money or out of money put option is written. We expect high risk tolerance investors, risk mitigation investors and extra income seeking investors will be likely to trade Type 3 transaction.
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Conditions and restrictions relating to the distribution of this product – s 994B(5)(c) |
4. Outline of the conditions and restrictions relating to distribution of ETOs | The products are distributed by TBAU and various third parties who may be involved in the distribution of the products, including various introducing brokers (each a Distributor, and together, the Distributors). TBAU as the distributor Any distribution of ETOs by TBAU directly to clients will need to ensure that ETOs are only issued to clients who are reasonably likely to be within the target market. The following controls are in place: TBAU’s website provides clients with easy access to FAQs, PDS, TMD, and the link to educational materials, which helps clients to assess if the product is consistent with their objectives, needs and financial situations.
ETO is generally not marketed alone but as an addition to the branding awareness or other products offerings and/or the message is generally limited to the scope of informing recipients regarding the offering availability. The disclaimer will emphasize that option trading carries a high level of risk and may not be suitable for all investors. ETO trading requires an additional activation step, which not only requires clients to take and pass the knowledge test but also brings forward the followings to clients’ attention prior to the trading application:
1. Specific and limited option function and offering 2. A requirement to read and understand TMD, PDS and education materials 3. suitable client categories 4. Significant high risk in nature 3rd party distributor: TBAU takes due skill and care in choosing suitable distributors. 3rd party distributor must be a regulated person under Corporation Act S994A(1). All distributors must complete the compliance and due diligence questionnaire during the onboarding process, which will be used, among other information, to assess their eligibility to become TBAU’s distributors. Distributors are obligated to take reasonable steps that will or are reasonably likely to result in the distribution of the financial products being consistent with the TMD. Distributors are required to: Ensure the distribution method or channel is reasonably likely to be consistent with the target market; Put in place effective governance arrangements to allow for an appropriate degree of control and oversight over the distribution process;
Implement a process which identifies changes that may impact on the effectiveness of governance arrangements to ensure they remain effective; Eliminate or manage the risk incentives may influence behaviors that could result in distribution being inconsistent with the TMD; Ensure that remuneration and incentives for distribution/sales staff will not result in distribution being inconsistent with the TMD; Ensure staff involved in distribution receive sufficient training; Submit all marketing and promotional materials to TBAU for review and approval prior to the release.
TBAU will seek regular data from 3rd party distributors to ensure that the distributors are complying with the requirement to distribute TBAU’s ETOs only to persons within the target market. TBAU requires distributors to report: the complaints and feedbacks received about the product within 10 business days after the end of each quarter Significant dealings: as soon as practicable and in any event within 10 business days after becoming aware
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5. Explanation of why these distribution conditions and restrictions will make it more likely that the consumers who acquire the ETOs are in the target market | TBAU as the distributor The Website provides clients with multiple ways to easily access the required information to assess if the product is consistent with their personal objectives, needs and financial situations. The marketing restrictions in place effectively limits ETO’s potential exposures to the general public, which, therefore, reduces the likelihood of being read by potential clients who are less likely to be within in the target market as a message of solicitation, invitation, or recommendations to trade ETO. ETO’s high risk in nature and not being suitable to all investors addressed in disclaimers serve as an additional alert of reminding recipients regarding the limited target market. Setting up a separate trading permission process for ETO is consistent with the fact that not all clients will be within the target market.
Clients will be reminded regarding ETO’s limited target market and high risk in nature at the start of the process. Clients are mandated to disclose their level of experience in option trading. Those with limited exposure to option trading are subject to additional cautionary measures, wherein they are once again apprised of the high risk and complex nature of the ETOs. Furthermore, such clients are advised to engage in simulated trading environments to familiarize themselves with the ETOs before committing capital to live trading. Clients must confirm their completion or intent to engage in simulated trading prior to transitioning to live trading. The A knowledge test is implemented, which helps helpful for TBAU and clients to ascertain if clients have certain basic but key understanding towards the nature of the product. Clients can attempt the assessment up to 3 times per day and will need to wait at least 24 hours to re-read PDS, TMD and other educational materials before they can apply again. This is, which is consistent with the requirement that clients shall have the requisite knowledge of ETOs.
The restrictions placed on the content and nature of the correspondence with clients are believed to reduce the likelihood of introducing ETOs to clients not within the target market because there may not be sufficient information provided by clients for representatives to assess if the client is likely to be within the target market. The training and compliance review will help representatives improve their understanding towards the product, which is another reasonable step taken to improve the distribution of ETOs within the target market.
3rd party distributor: The compliance due diligence check during the selection process is helpful for TBAU to assess if the distributor has sound and solid compliance framework. TBAU has placed contractual obligations on third party distributors that they must have established, implemented and maintained appropriate procedures, processes and controls with a view to ensuring that ETOs are distributed in accordance with this TMD. TBAU has a high degree of control over the distribution in that TBAU applies the same stringent marketing review criteria on distributor’s promotional material and all clients will be subject to the same ETO trading activation process as direct clients.
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Reviews |
6. Outline of the events and circumstances that would reasonably indicate to TBAU that the TMD for ETOs is no longer appropriate (i.e. "review triggers" – s 994B(5)(d) | Review Triggers when: There are significant dealings in issuing ETOs, which are not consistent with the target market or this TMD. This trigger occurs where significant distribution is occurring outside the target market, and does not refer to any one particular dealing in ETOs Distributor has reported a large volume of complaints related to ETOs TBAU has received a large volume of complaints in relation to ETOs, indicating that the nature and risks of ETOs are not well understood Significant compensation paid out in relation to ETOs TBAU has made known of a material number of clients who suffered financial hardship due to ETO trading TBAU has detected significant issues with the distribution of ETOs through monitoring of our day-today activities, or the monitoring and supervision of our Distributors Material changes to key attributes, investment objective and/or fees Key attributes have not performed as disclosed by a material degree and for a material period The use of Product Intervention Powers, regulator orders or directions that affects the product
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7. The period of time between the start of the day this TMD is made and the day that the first periodic review of the TMD will conclude – s 994B(5)(e) | The first periodic review of this TMD will occur in January 2023. |
8. The period of time between the conclusion of a periodic review of the TMD and the start of the next periodic review – s 994B(5)(f) | TBAU will review the appropriateness of its target market on an annual basis |
Reporting period for reporting information about the number of complaints about the product – s 994B(5)(g) |
9. The reporting period in which the distributors of TBAU's financial products are required to provide information about the number of complaints received about the product | TBAU will require that Distributors report information about the number and nature of complaints received about the product and whether any persons not in the target market were distributed TBAU issued ETOs, within 10 business days after the end of each quarter. |
Information Sharing |
10. Outline of the kinds of information that TBAU will require from distributors to promptly identify that the TMD for ETOs is no longer appropriate – s 994B(5)(h) | Complaint: the number, nature, resolution and compensation of complaints about ETOs Feedback: client feedback about ETOs and/or the target market Significant dealings: details and reasons why they are considered as the significant dealings; how they are identified steps taken or to be taken to persons affected steps taken or to be taken to stop it happening again
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11. The distributors that will be required to provide the information specified above – s 994B(5)(h)(i) | TBAU will require all of the above data from all Distributors. No party may engage in the distribution of TBAU’s ETOs unless they have entered into a service level agreement with us. |
12. The reporting period for the relevant distributors to provide the information specified above – s 994B(5)(h)(ii) | Complaint: Quarterly Feedback: Quarterly Significant dealing: as soon as practicable and in any event within 10 business days after becoming aware. |