To Our Producer/ End-user Customers/ Counterparties:
As part of our ongoing efforts to improve the provision of services to our customers, Coquest Structured Products, Ltd. (“COQUEST”) has attached a statement of generic risks associated with over-the-counter (“OTC”) derivative transactions in order to identify in general terms certain of the principal risks associated with individually negotiated OTC derivative transactions. This statement does not purport to identify the nature of the specific market or other risks associated with a particular transaction. We are also stating our policy and practice in providing to you valuation estimates of financial market transactions, including positions in OTC derivatives transactions.
Before entering into an OTC derivative transaction, you should ensure that you fully understand the terms of the transaction, relevant risk factors, the nature and extent of your risk of loss and the nature of the contractual relationship into which you are entering. You should also carefully evaluate whether the transaction is appropriate for you in light of your experience, objectives, financial resources, legal capacity and authority, and other relevant circumstances and whether you have the operational resources in place to monitor the associated risks and contractual obligations over the term of the transaction. If you are acting as a financial advisor or agent, you should evaluate these considerations in light of the circumstances applicable to your principal and scope of your authority.
If you believe you need additional assistance in evaluating and understanding the terms or risks of a particular OTC derivatives transaction, you should consult appropriate advisors before entering into the transaction.
Since we are not financial advisors or registered brokers of financial instruments or securities, we are acting in the capacity of an arm’s length contractual counterparty to you in connection with the transaction and not as your financial advisor or fiduciary. Accordingly, you should not regard transaction proposals, suggestions or other written or oral communications from us as recommendations or advice or as expressing our view as to whether a particular transaction of appropriate for you or meets your financial objectives.
Finally, since we are not market-makers of OTC derivatives or any other instruments economically related to OTC derivatives transactions entered into with you, we will undertake hedging transactions directly related to the initiation or termination of an OTC derivative transaction with you.
We value and look forward to our continuing relationship. If you have any questions or if we can otherwise be of service, please do not hesitate to call Norman L. Young at (281) 326-6666 or John Vassallo at (214) 219-7555.
Very truly yours,
Norman L. Young
Vice President – Senior Trader
RISK DISCLOSURE STATEMENT
OTC derivative transactions, like other financial transactions involve a variety of significant risks. The specific risks presented by a particular OTC derivative transaction necessarily depend upon the terms of the transaction and your circumstances. In general, however, all OTC derivative transactions involve some combination of market risk, credit risk, funding risk and operational risk.
Market risk is the risk that the value of a transaction will be adversely affected by fluctuations in the level or volatility of or correlation or relationship between one or more market prices, rates or indices or other market factors or by illiquidity in the market for the relevant transaction or in a related market.
Credit risk is the risk that a counterparty will fail to perform its obligations to you when due.
Funding risk is the risk that, as a result of mismatches or delays in the timing of cash flows due from or to your counterparties in OTC derivatives transactions or related hedging, trading, or collateral or other transactions, you or your counterparty will not have adequate cash available to fund current obligations.
Operational risk is the risk of loss to you arising from inadequacies in or failures of your internal systems and controls for monitoring and quantifying the risks and contractual obligations associated with OTC derivative transactions, for recording and valuing OTC derivative and related transactions, or for detecting human error, systems failure or management failure.
There may be other significant risks which you should consider based on the terms of a specific transaction. Highly customized derivative transactions in particular may increase liquidity risk and introduce other significant risk factors of a complex character. Highly leveraged transactions may experience substantial gains or losses in value as a result of relatively small changes in the value or level of an underlying or related market factor.
Because the price and other terms on which you may enter into or terminate an OTC derivative transaction are individually negotiated, these may not represent the best price or terms available to you from other sources.
In evaluating the risks and contractual obligations associated with a particular OTC derivative transaction, you should also consider that an OTC derivative transaction may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Accordingly, it may not be possible for you to modify, terminate or offset your obligations or your exposure to the risks associated with a transaction prior to its scheduled termination date.
Similarly, while market makers and dealers generally quote prices or terms for entering into or terminating OTC derivative transactions and provide indicative or mid-market quotations with respect to outstanding OTC derivative transactions, they are generally not contractually obligated to do so. In addition, it may not always be possible to obtain indicative or mid-market quotations for an OTC derivative transaction from a market-maker or dealer that is not a counterparty to the transaction. Consequently, it may be difficult for you to establish an independent value for an outstanding OTC derivative transaction. You should not regard our provision of a valuation or indicative price as an offer to enter into or terminate the relevant transaction at that value or price, unless the value or price is identified by us as firm or binding.
Our estimated valuations of OTC derivative transactions are provided to you for information purposes only, and are not intended for use by any third party. Unless otherwise expressly stated, such valuation estimates are not an offer to enter into or terminate a transaction, or a commitment by COQUEST to make such an offer. Such valuation estimates may be for a mid-market valuation for a given transaction, or may be a bid or ask value or some other value provided to us by a market-maker or dealer, and further provided to you in good faith by us. A valuation estimate for an OTC derivative transaction does not necessarily suggest that a market exists for the transaction.
This brief statement does not purport to disclose all of the risks and other material considerations associated with OTC derivative transactions. You should not construe this generic disclosure statement as business, legal, tax or accounting advice or as modifying applicable law. You should consult your own business, legal, tax and accounting advisers with respect to proposed OTC derivative transactions and you should refrain from entering into any OTC derivative transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss.