Risk information

1. introduction

A capital investment is the use of financial resources to increase assets through income. In the present case, it is the investment of capital in the capital markets by investing in securities.

Risks are part and parcel of every capital investment. Before making an investment, it is essential to develop a basic understanding of the risks associated with investments, investment products and investment services. The explanations in this document are intended to provide the customer with such an understanding.

1.1 Objective

The aim of capital investment is to preserve or increase assets. The main difference between investments in capital markets and traditional forms of savings, such as savings books, call money or time deposit accounts, is the targeted assumption of risks in order to take advantage of opportunities for returns. With traditional forms of savings, on the other hand, the amount paid in (nominal) is guaranteed, but the return is limited to the agreed interest rate.

Traditional saving is one of the most popular forms of investment in Germany. Here, the assets are mainly built up nominally, i.e. through regular payments and interest income. The amount saved is not subject to fluctuations. However, this supposed security may only exist in the short or medium term. This is because the assets can be gradually devalued by inflation. If the interest rate on savings is lower than inflation, the investor must accept a loss of purchasing power and thus a loss of assets. The longer the investment period, the greater the negative impact of inflation on assets.

Investment in the capital markets is intended to protect against this creeping loss of wealth by generating a return above the level of inflation. However, the investor must be prepared to bear the risks of the various asset classes.

1.2 Interplay between return, security and liquidity

In order to select an investment strategy and the appropriate investment instruments, it is important to be aware of the importance of the three basic pillars of investment, namely return, security and liquidity:

* Yield is the measure of the economic success of an investment, measured in terms of gains or losses. This includes, among other things, positive price developments and distributions such as dividends or interest payments.

* Security is aimed at preserving the invested assets. The security of an investment depends on the risks to which it is exposed.

* Liquidity describes the availability of the invested assets, i.e. in what period and at what cost the invested assets can be sold.

The objectives of return, security and liquidity are interrelated. An investment with high liquidity and high security usually does not offer high profitability. An investment with high profitability and relatively high safety usually does not have high liquidity. An investment with high profitability and high liquidity usually has low safety.

An investor must weigh these goals against each other according to his or her individual preferences as well as financial and personal circumstances. Investors should be aware that an investment that promises to achieve all three objectives is usually "too good to be true.

1.3 Risk diversification

For capital investment, it is particularly important not only to know and consider the risks of individual investments or asset classes, but also to understand the interplay of the various individual risks in the portfolio context.

Taking into account the targeted return, the portfolio risk should be optimally reduced by a suitable combination of investment instruments. This principle, i.e. the reduction of investor risk through an appropriate portfolio composition, is referred to as risk spreading or diversification. The principle of diversification follows the principle of not putting "all your eggs in one basket." Those who spread their capital investment over too few investments expose themselves to an unnecessarily high risk. With appropriate diversification, the risk of a portfolio can be reduced not only to the

average of the individual risks of the portfolio components, but usually also below. The degree of risk reduction depends on how independently the prices of the portfolio components develop from each other.

Correlation expresses the degree of dependence of the price development of the individual portfolio components on each other. To reduce the overall risk of the portfolio, investors should allocate their funds to investments that have as low or negative a correlation to each other as possible. To this end, investments can be spread across regions, sectors and asset classes, among others. In this way, losses on individual investments can be partially offset by gains on other investments.

2. general risks of the capital investment

In addition to specific risks associated with individual asset classes, investment instruments and securities services, there are general risks associated with investing. Some of these risks are described below.

2.1 Economic risk

The overall economic development of a national economy typically proceeds in wave movements, the phases of which can be subdivided into upswing, peak phase, downswing and trough phase. These economic cycles and the interventions by governments and central banks that are often associated with them can last for several years or decades and have a significant impact on the performance of various asset classes. Unfavorable economic phases can thus have a long-term impact on an investment.

2.2 Inflation risk

The inflation risk describes the danger of suffering a financial loss due to the devaluation of money. If inflation - i.e. the positive change in the prices of goods and services - is higher than the nominal return on an investment, this results in a loss of purchasing power equal to the difference. This is referred to as negative real interest rates.

The real rate of return can serve as a benchmark for a possible loss of purchasing power. If the nominal return on an investment is 4 % over a certain period and inflation is 2 % over this period, the real return is +2 % per year. In the case of inflation of 5 %, the real return would only be -1 %, which would correspond to a loss of purchasing power of 1 % per year.

2.3 Country risk

A foreign state can influence the movement of capital and the transferability of its currency. If, for this reason, a debtor domiciled in such a country is unable to meet an obligation (on time) despite its own solvency, this is referred to as country or transfer risk. An investor may suffer a financial loss as a result.

Reasons for exerting influence on the financial markets and/or transfer restrictions despite sufficient creditworthiness may include, for example, a lack of foreign exchange, political and social events such as changes in government, strikes or foreign policy conflicts.

2.4 Currency risk

In the case of investments in a currency other than the investor's home currency, the return achieved does not depend exclusively on the nominal return on the investment in the foreign currency. It is also influenced by the development of the exchange rate of the foreign currency to the home currency. A pecuniary loss may arise if the foreign currency in which the investment was made depreciates against the domestic currency. Conversely, if the home currency depreciates, the investor may benefit. A currency risk exists not only in the case of cash investments in foreign currencies, but also in the case of investments in shares, bonds and other financial products which are quoted in a foreign currency or make distributions in a foreign currency.

2.5 Liquidity risk

Assets that can usually be bought and sold at short notice and whose buying and selling prices are near

together are referred to as liquid. For these investments, there is usually a sufficient number of buyers and sellers to ensure continuous and smooth trading. In the case of illiquid investments, on the other hand, or even during market phases in which there is insufficient liquidity, there is no guarantee that it will be possible to sell an investment at short notice and at a small price discount. This can lead to asset losses if, for example, an investment can only be sold with price losses.

2.6 Cost risk

Costs are often neglected as a risk factor of capital investment. However, open and hidden costs are of crucial importance for investment success. For long-term investment success, it is essential to pay close attention to the costs of a capital investment.

Banks and other securities institutions generally pass on transaction costs for the purchase and sale of securities to their customers and may also charge a commission for the execution of the order. In addition, banks, fund providers or other securities service providers or intermediaries usually charge so-called follow-up costs, such as costs for custody account management, management fees, issue surcharges or pay commissions, which are not readily apparent to the customer. These costs should be included in the overall economic analysis: The higher the costs, the lower the effectively achievable return for the investor.

2.7 Tax risks

Income generated from investments is generally subject to tax and/or duties for the investor. Changes in the tax framework for investment income may lead to a change in the tax and duty burden. In the case of investments abroad, double taxation may also occur. Taxes and duties therefore reduce the effectively achievable return for the investor. In addition, tax policy decisions can have a positive or negative impact on the performance of the capital markets as a whole.

2.8 Risk of credit-financed investments

Investors may be able to obtain additional funds for investment by borrowing or lending against their securities with the aim of increasing the amount invested. This approach results in leverage of the capital invested and may lead to a significant increase in risk. In the event of a falling portfolio value, it may no longer be possible to service additional funding obligations of the loan or interest and redemption claims of the loan, and the investor is forced to (partially) sell the portfolio. Credit-financed investments are therefore generally not advisable. Investors should only use freely disposable capital that is not required for day-to-day living or to cover current liabilities.

2.9 Risk of incorrect information

Accurate information forms the basis for successful investment decisions. Wrong decisions can be made due to missing, incomplete or incorrect information as well as faulty or delayed transmission of information. For this reason, it may be appropriate under certain circumstances not to rely on a single source of information, but to obtain further information.

2.10. Risk of self-custody

The proprietary custody of securities opens up the risk of loss of the certificates. The replacement of the securities certificates embodying the investor's rights can be time-consuming and costly. Self-custodians also risk missing important deadlines and dates, so that certain rights can only be asserted with delay or not at all.

2.11. Risk of custody abroad

Securities acquired abroad are usually held in custody abroad by a third party selected by the custodian bank. This may result in increased costs, longer delivery times and uncertainties with regard to foreign legal systems. In particular, in the event of insolvency proceedings or other enforcement measures against the foreign custodian, access to the securities may be restricted or even excluded.

3. functioning and risks of different asset classes

3.1. shares

3.1.1 General

Shares are securities issued by companies to raise equity capital and certify a share right in the equity capital of a company. A shareholder is therefore not a creditor as in the case of a bond, but a co-owner of the company. The shareholder participates in the economic success and failure of the company through profit distributions, so-called dividends, and the development of the share price. There are different types of shares with different rights. The most important types are common shares, preferred shares, bearer shares and registered shares. Ordinary shares carry voting rights and are the most common type of share in Germany. In contrast, preferred shares do not carry voting rights. To compensate for this, shareholders receive preferential treatment, e.g. in the distribution of dividends. A bearer share does not require the shareholder to be entered in a share register. The shareholder can exercise his rights even without registration. Bearer shares are therefore more easily transferable, which typically improves their tradability. In the case of a registered share, the name of the holder is entered in a share register. Without registration, the rights arising from ownership of the share cannot be exercised. In the past, shares have shown higher long-term returns or risk premiums compared with other asset classes. However, it should be noted that the historical performance of individual shares or share indices does not allow any conclusions to be drawn about future performance. The U.S. S&P 500 stock index, which comprises the shares of the 500 largest listed U.S. companies, generated an average annual return of 9.6 % between 1928 and 2014. During the same period, an investment in 10-year U.S. Treasury bonds provided a return of 5.0 %. Thus, an investment in the stock index provided an investor with an excess return, or risk premium, of 4.6 % per year. However, this also entailed a comparatively higher risk: Stock returns on the S&P 500 had an average annual fluctuation margin of almost 20 %. U.S. government bond yields fluctuated only about 8 % over the same period. Over the 86 years of observation, the maximum loss of an investment in the broadly diversified S&P 500 stock index was -44 %; by contrast, the maximum loss of an investment in U.S. government bonds was -11.12 %.

3.1.2 Specific risks

* Price risk: Shares can be traded on the stock exchange, but also over the counter. The price of a share is determined by supply and demand. There is no calculation formula for the "correct" or "fair" price of a share. Models for calculating share prices are always subject to subjective assumptions. Price formation depends to a large extent on the different interpretations of the accessible information by market participants. Numerous empirical studies show that stock prices cannot be forecast systematically. Share prices are influenced by many factors. The associated risk of negative share price development can be roughly divided into company-specific risk and general market risk. The company-specific risk depends on the economic development of the company. If the company's economic development is worse than expected, this can lead to negative share price developments. In the worst case, namely in the event of insolvency and subsequent bankruptcy of the company, the investor may suffer a total loss of his invested capital. However, it is also possible for the price of a share to move as a result of changes in the market as a whole, without this price change being based on company-specific circumstances. Price changes that are more likely to occur due to general trends in the stock market and are independent of the economic situation of the individual company are referred to as general market risk.

* Insolvency risk: Since shareholders are not serviced in the event of insolvency until all other creditor claims have been serviced, shares are to be regarded as a relatively high-risk asset class.

* Dividend risk: Shareholders' participation in the company's profits through monetary distributions are called dividends. Just like a company's future profits, future dividends cannot be forecast. If a company generates a lower-than-planned profit or no profit at all and has not set aside any reserves, the dividend may be reduced or suspended altogether. However, an equity investor is not entitled to a distribution even if a profit is generated. If provisions are deemed necessary by the company, e.g. due to expected future costs (lawsuits, restructuring, etc.), the company may under certain circumstances be able to reduce the dividend despite a

suspend the profit achieved.

* Interest rate risk: As interest rates rise, share prices may decline because, for example, the company's borrowing costs may increase or future profits may be discounted at a higher interest rate and thus be valued lower at the present time.

* Liquidity risk: Usually, buying and selling prices are quoted on an ongoing basis for shares traded on the stock exchange, especially for companies with a high enterprise value that are part of a major share index, such as the DAX. If, for various reasons, no tradable prices are available on the market, the shareholder temporarily has no possibility to sell his share position, which may have a negative impact on his investment.

3.2. bonds

3.2.1 General

Bonds refer to a wide range of interest-bearing securities, also known as fixed-income securities. In addition to "classic" bonds, these include index-linked bonds, mortgage bonds, inflation-linked bonds and structured bonds. The basic mode of operation is common to all bond types. In contrast to equities, bonds are issued by companies as well as by public institutions and governments (so-called issuers). They do not grant the holder any share rights. By issuing bonds, an issuer raises debt capital. Bonds are tradable securities with a nominal amount (amount of debt), an interest rate (coupon) and a fixed term.

As with a loan, the issuer undertakes to pay the investor a corresponding interest rate. Interest payments can be made either at regular intervals during the term or cumulatively at the end of the term. At the end of the term, the investor also receives the nominal amount. The amount of the interest rate to be paid depends on various factors. The most important parameters for the level of the interest rate are usually the credit rating of the issuer, the term of the bond, the underlying currency and the general market interest rate level. In the case of inflation bonds, the nominal amount and interest rate also depend on the development of inflation.

Depending on the method of interest payment, bonds can be divided into different groups. If the interest rate is fixed from the outset for the entire term, they are referred to as "straight bonds". Bonds where the interest rate is linked to a variable reference interest rate and the interest rate can change during the term of the bond are called "floaters". A possible company-specific premium or discount on the respective reference interest rate is usually based on the credit risk of the issuer. A higher interest rate generally means a higher credit risk. Just like shares, bonds can be traded on stock exchanges or over the counter.

The returns that investors can achieve by investing in bonds result from the interest on the nominal amount of the bond and from any difference between the buying and selling price. Empirical studies show that the average returns achieved with bonds over a longer time horizon have in the past been higher than those achieved with investments in fixed-term deposits, but lower than those achieved with investments in equities.

3.2.2 Specific risks

* Issuer/creditworthiness risk: An obvious risk when investing in bonds is the issuer's default risk. If the issuer cannot fulfill its obligation to the investor, the investor faces a total loss. In contrast to equity investors, however, investors in bonds are better off in the event of insolvency, as they provide the issuer with borrowed capital and their claim can be serviced (in part, if necessary) from any insolvency assets that may arise. The creditworthiness of many issuers is assessed at regular intervals by rating agencies and divided into risk classes. An issuer with a low credit rating generally has to pay a higher interest rate to the buyers of the bonds as compensation for the credit risk than an issuer with an excellent credit rating. In the case of secured bonds ("covered bonds"), the credit rating depends primarily on the extent and quality of the collateralization (cover pool) and not exclusively on the creditworthiness of the issuer.

* Inflation risk: Inflation risk is the change in the purchasing power of the final repayment and/or the interest income from an investment. If, during the term of a bond, inflation changes in such a way that it exceeds the bond's interest rate, the investor's effective purchasing power decreases (negative real interest).

* Interest rate risk and price risk: The key interest rate level determined by the central bank has a significant influence on the value of a bond. When interest rates rise, for example, the interest on a fixed-rate bond becomes relatively less attractive and the price of the bond falls. So a rise in market interest rates is usually accompanied by falling bond prices. Thus, even if an issuer pays all interest and the nominal amount at maturity, a bond investor may incur a loss if, for example, he sells before maturity at a price lower than the issue or purchase price of the bond.

3.3 Raw materials

3.3.1 General

Investments in commodity products are categorized as alternative asset classes. Unlike shares and bonds, commodities, if traded for the purpose of capital investment, are usually not physically transferred but traded via derivatives (mostly futures, forwards or swaps). Derivatives are contracts in which the contracting parties agree to buy or sell a certain commodity (underlying) in the future at a fixed price. Depending on whether the market price of the commodity is above or below the agreed price, the value of the derivative is positive or negative. In most cases, there is no actual delivery of the commodity, but a settlement payment for the difference between the market price and the agreed price. This approach facilitates trading as challenges such as storage, transportation and insurance of the commodities can be ignored. However, this synthetic way of investing in commodities comes with some unique features that need to be considered. Commodities only provide an investor with the prospect of income through price gains and do not offer distributions.

If the investor only wants to invest in one commodity, he must buy a corresponding security that tracks the performance of commodities (exchange-traded commodities, ETCs). Like ETFs, ETCs are traded on the stock exchange. However, there is one important difference to note: The capital invested in an ETC is not a special asset that is protected in the event of the issuer's insolvency. This is because an ETC is a debt security of the ETC issuer. Compared to a (physical) ETF, the investor thus has an issuer risk with an ETC. To minimize this risk, issuers rely on different methods of collateralization. The criteria relevant for the selection of an ETF are correspondingly applicable to ETCs (see section 4.6.4).

3.3.2 Specific risks

* Price risk: In general, investments in commodities are exposed to the same price risks as direct investments in commodities. Special events such as natural disasters, political conflicts, government regulation or weather fluctuations can affect the availability of commodities and thus lead to a drastic change in the price of the underlying and, under certain circumstances, also of the derivative. This can also lead to a restriction of liquidity and result in falling prices. As a production factor for industry, demand for certain commodities such as metals and energy sources is also significantly dependent on general economic developments.

* Counterparty risk: Trading in derivatives entails a risk with regard to the structure of the derivative contract. If the counterparty is unable or unwilling to fulfill its obligation under the derivative contract, the derivative contract may not be performed in whole or in part.

3.4 Foreign currencies

3.4.1 General

Investments in foreign currencies offer investors an opportunity to diversify their portfolios. Furthermore, investments in the aforementioned asset classes, among others, are often associated with the assumption of foreign currency risks. For example, if a German investor invests directly or indirectly (e.g. via a fund or ETF) in U.S. equities, his investment is subject not only to equity risks but also to the exchange rate risk between the euro and the U.S. dollar, which can have a positive or negative impact on the value of his investment.

3.4.2 Specific risks

* Exchange rate risk: Exchange rates of different currencies may change over time and significant price fluctuations may occur. For example, if a German investor invests in U.S. dollars or in a U.S. dollar-denominated stock, a depreciation of the U.S. dollar against the euro (i.e., appreciation of the

euro) has a negative impact on its investment. Under certain circumstances, even a positive share price performance may be overcompensated by the weakening of the U.S. dollar.

* Interest rate risk: If interest rates change in the home market or in the market of the foreign currency, this can have a significant impact on the exchange rate, as changes in interest rate levels can sometimes trigger large cross-country capital movements.

* Regulatory risks: Central banks play a crucial role in the pricing of exchange rates. In addition to money supply and interest rates, some central banks also control exchange rates. They intervene in markets when certain thresholds are reached by selling or buying their own currency, or they peg the exchange rate fully or partially to a foreign currency. If these strategies are changed or cancelled, this can lead to significant distortions in the respective foreign exchange markets. This was observed, for example, when the Swiss National Bank abandoned the setting of the minimum exchange rate of the Swiss franc against the euro of EUR 1.20/CHF in January 2015 and the exchange rate fell from EUR 1.20/CHF to EUR 0.97/CHF on the same day.

3.5. real estate

3.5.1 General

This asset class includes residential real estate (e.g., apartments and townhouses), commercial real estate (e.g., office buildings or retail space), and companies that invest in or manage real estate. Investments may be made either directly by purchasing the properties or indirectly by purchasing shares in real estate investment trusts, real estate investment trusts (REITs), and other real estate companies.

3.5.2 Special risks

* Earnings risk: The acquisition of real estate requires a high investment at the outset, which is only amortized over time through cash flows from renting and leasing. However, the earnings situation can be disrupted relatively easily by restrictions on usability in terms of time and object, so that the amortization of the initial investment takes a longer period of time.

* Valuation risk: A large number of criteria play a role in the valuation of a property (location, size, environment, area of use, etc.). In addition, the real estate market consists of geographically separate submarkets. For these reasons, real estate valuation is subject to numerous imponderables that are difficult to forecast in detail.

* Liquidity risk: Real estate is a relatively illiquid asset class because the process of valuation, sale and transfer of ownership can take a long time due to the high degree of individuality of real estate and the existence of submarkets. A quick realization of the value of a property is therefore usually not possible. The indirect acquisition of real estate through shares in real estate companies reduces this risk.

* Transaction costs: The process of valuation, sale and transfer of direct real estate assets incurs relatively high costs compared to financial assets.

* Price risk: When investing indirectly in real estate through the purchase of units in real estate funds or REITs, the investor is exposed to a price risk. The price may change in the course of general market fluctuations without any change in the situation of the fund.

3.6 Open-ended investment funds

3.6.1 General

Investment funds are vehicles for collective investment in accordance with the provisions of the German Investment Code. A distinction must be made between open-ended investment funds, which are open to an unlimited number of investors, and closed-end investment funds, which are open to a limited number of investors. A capital management company determines the investment strategy of an open-ended investment fund and manages the fund assets professionally. For reasons of investor protection, the fund assets must be strictly separated from the assets of the capital management company. For this reason, the

The assets belonging to the investment fund are held in safe custody by the so-called depositary. Depending on the type of investment fund, the fund assets may consist of a wide variety of assets (e.g. securities, money market instruments, bank deposits, investment units and derivatives).

Investors may acquire a co-entitlement to the fund assets at any time by purchasing investment unit certificates via a credit institution or the capital management company. Under certain circumstances, however, the capital management company may temporarily restrict, suspend or permanently discontinue the issue of fund units. The liquidation of investment units can be effected in two ways. On the one hand, it is generally possible to return the investment unit certificates to the capital management company at the official redemption price. Secondly, the investment unit certificates may be traded on a stock exchange. Third-party costs may be incurred in the case of both the purchase and the liquidation of investment unit certificates (e.g. issue premium, redemption discount, commission).

The value of an individual investment unit certificate is calculated by dividing the value of the fund assets by the number of investment unit certificates issued. The value of the fund's assets is usually determined using a predefined valuation method. For exchange-traded investment funds, continuous exchange trading is also available for pricing purposes.

The key investor information, the sales prospectus and the investment conditions provide information on the investment strategy, the ongoing costs (management fee, operating costs, costs of the depositary, etc.) and other key information relating to the open-ended investment fund. In addition, the semi-annual and annual reports to be published are an important source of information.

Foreign capital management companies may be legally structured differently from their German counterpart. However, if these foreign capital management companies distribute open-ended investment funds in Germany, they must meet certain legal requirements and are subject to supervision by German supervisory authorities.

The different types of open-end investment funds can be differentiated according to the following criteria:

* Composition: Fund assets may be composed of different asset classes (e.g. equities, interest-bearing securities, commodities).

* Geographic focus: Open-ended mutual funds can either focus on specific countries or regions or invest globally.

* Time investment horizon: Open-end mutual funds may have a fixed or an unlimited maturity.

* Use of income: Open-ended investment funds may distribute income on a regular basis or use it to increase the fund's assets (reinvest).

* Currency: The prices of the investment unit certificates of open-ended investment funds may be offered in Euro or a foreign currency.

* Hedging: The capital management company or a third party can guarantee a certain performance, certain distributions or a certain preservation of value.

3.6.2 Exchange Traded Funds in Particular

Exchange Traded Funds ("ETFs") are exchange-traded open-ended investment funds that track the performance of an index - such as the DAX. They are also referred to as passive index funds. In contrast to active investment strategies, which aim to outperform a comparative index ("benchmark") by selecting individual securities ("stock picking") and determining favorable times for entry and exit ("market timing"), a passive investment strategy is designed not to outperform a comparative index, but to track it at the lowest possible cost.

Like other open-end mutual funds, ETFs give investors access to a broad portfolio of stocks, bonds or other asset classes such as commodities or real estate. Unlike other open-end mutual funds, ETFs are usually not bought or sold directly from a capital management company, but trade on a stock exchange or other trading venue. Thus, an ETF can be traded like a stock on securities exchanges. To improve liquidity, market makers are usually appointed for ETFs to ensure sufficient liquidity through the

are intended to ensure the regular provision of buying and selling prices. However, there is no obligation to provide liquidity.

ETFs can replicate their underlying indices in two different ways. In the case of physical mapping (so-called replication), the index is replicated by purchasing all index components (for example, the 30 shares of the DAX) or, if applicable, a relevant subset. In the case of synthetic replication, the ETF provider concludes an agreement in the form of an exchange transaction ("swap") with a bank in which the exact performance of the desired index is guaranteed and collateralized. A synthetic ETF therefore does not hold the underlying shares.

3.6.3 Special risks

* Price risk: Since ETFs passively track an underlying index and are not actively managed, they generally bear the basis risks of the underlying indices. ETFs thus fluctuate directly in proportion with their underlying. The risk-return profile of ETFs and their underlying indices are therefore very similar. For example, if the DAX falls by 10 %, the price of an ETF tracking the DAX will also fall by around 10 %.

* Risk concentration: Investor risk increases as an ETF becomes more specialized, for example in a certain region, sector or currency. However, this increased risk can also bring increased return opportunities.

* Exchange rate risk: ETFs contain exchange rate risks if their underlying index is not quoted in the currency of the ETF. If the index currency weakens against the currency of the ETF, the performance of the ETF will be negatively affected.

* Replication risk: ETFs are also subject to replication risk, i.e. there may be deviations between the value of the index and the ETF ("tracking error"). This tracking error may go beyond the difference in performance caused by the ETF fees. Such a deviation may be caused, for example, by cash holdings, rebalancing, corporate actions, dividend payments or the tax treatment of dividends.

* Counterparty risk: In addition, a counterparty risk exists for synthetically replicating ETFs. If a swap counterparty fails to meet its payment obligations, the investor may incur losses.

* Risk of transfer or termination of the investment fund: Under certain conditions, both the transfer of the investment fund to another investment fund and the termination of management by the capital management company are possible. In the case of a transfer, continued management may take place under less favorable conditions. In the case of termination, there is a risk of (future) lost profits.

* Off-exchange trading: If ETFs and their underlying components are traded on different exchanges with different trading hours, there is a risk that trades in these ETFs are executed outside the trading hours of the respective components. This may lead to a deviation in performance compared to the underlying index.

* Securities lending: An investment fund may enter into securities lending transactions in order to optimize returns. If a borrower cannot fulfill its obligation to return the securities and the collateral provided has lost value, the investment fund faces losses.

3.6.4 Important criteria for selection

When selecting ETFs, the following criteria in particular should be taken into account:

* Low costs: Avoiding costs is one of the most important criteria for long-term investment success. When selecting ETFs, particular attention should be paid to the total cost of index tracking ("total expense ratio", TER) as well as the even broader total cost of an investment ("total cost of ownership", TCO), which additionally took into account external trading costs such as bid-ask spreads, taxes and brokerage commissions.

* High liquidity: ETFs with low trading liquidity usually have wider bid-ask spreads, which increases trading costs. Preference should be given in the selection process to ETFs with large investment volumes and multiple market makers to ensure the best possible tradability and keep trading costs low.

* Low tracking error: The tracking error indicates the accuracy of the index tracking. It is advisable to pay attention to a low deviation of the ETF's performance from the underlying index in order to achieve the most accurate mapping of the intended investment market.

* Appropriate diversification: ETFs usually track broad indices with a large number of individual stocks. Depending on the ETF, these may be spread across countries, currencies and sectors. This broad risk diversification provides access to the fundamental return drivers of each asset class without accepting high individual risks. However, very broad-based indices may also contain a number of small companies with low liquidity and therefore higher trading costs. When selecting, attention should be paid to a balanced and favorable ratio of risk diversification and implicit trading costs of the ETFs.

* Robust replication method: ETFs are offered in two basic designs: with physical and synthetic replication of the underlying index. Synthetic replicating ETFs have a higher risk profile compared to physical replicating ones, as synthetic ETFs are dependent on their swap counterparties and thus have to bear some risk of default. Therefore, due to their somewhat more robust and reliable investment form, physical replicating ETFs are often preferred. However, for investing in certain markets, such as commodity markets or emerging markets, physical replication is not possible or economical. In these cases, synthetic replicating ETFs offer a good market access option.

3.7 Cryptocurrencies

3.7.1 General

Cryptocurrencies, also known as virtual currencies, are defined as a digital representation of value that is not created or guaranteed by a central bank or government agency and does not need to be linked to legal tender. Similar to central bank currencies, cryptocurrencies are used as a medium of exchange and can be transferred,held or traded electronically. Examples of well-known cryptocurrencies are Bitcoin (BTC), Ether (ETH), Ripple (XRP) and Litecoin (LTC).

As exchangeable (fungible) units of value, so-called tokens, cryptocurrencies or other assets are digitally generated in a publicly visible database ("distributed ledger") distributed over a large number of network participants. The creation of new tokens usually takes place via a computationally intensive, cryptographically complicated process ("proof of work") known as "mining." New

Information, such as transaction data, is communicated by so-called "nodes" (nodes) within the peer-to-peer network, validated, and added to the database by "miners" in blocks in an almost irreversible manner. Since this process resembles a chain, this decentralized database is also called a

referred to as the "blockchain". The blockchain records the entire history of the database. A copy of the transaction history is stored with all network participants. Consensus is defined by rules according to which the protocol of the decentralized network operates.

3.7.2 Mapping via Exchange-Traded Products (ETP)

In addition to direct investment in cryptocurrencies via the corresponding crypto platforms or exchanges, it is also possible to invest via exchange-traded securities (exchange-traded products, or "ETPs" for short), which track the value of an underlying asset, e.g. cryptocurrencies. The buyer of an ETP is (usually) entitled to a claim for payment of a certain amount of money or for delivery of the underlying against the issuer of the ETP. The terms and conditions of such a claim are usually explained in the issuer's product documentation. If the issuer becomes insolvent and/or any collateralization of the product is not of value or the delivery of the underlying is partially or completely impossible, the investor may thus suffer a substantial loss up to a total loss.

3.7.3 Special risks

- Price risk: Cryptocurrencies are regularly subject to particularly high price fluctuations. The investor can thus suffer significant losses within a very short period of time. The prices of cryptocurrencies are determined exclusively by supply and demand, and

are historically significantly more volatile than traditional currencies and many other asset classes. Cryptocurrencies have no objectively quantifiable intrinsic value. Valuation models, e.g. of network effects and usage values of the different cryptocurrencies, are subject to subjective assumptions. The price formation depends to a large extent on the different interpretations of the accessible information of the market participants. The value of cryptocurrencies can fluctuate significantly within a short period of time. A potential, permanent and complete loss of value of a cryptocurrency occurs when the acceptance and thus the market for a respective cryptocurrency dwindle. Cryptocurrencies are not legally recognized means of payment. The use and acceptance of cryptocurrencies, e.g. for the purchase of goods and services or for the storage of value, is therefore not guaranteed.

- Liquidity risk: Prompt tradability may not always be guaranteed. Investors may not be able to sell their positions immediately or may only be able to do so by realizing a significant price loss. Furthermore, the trading of individual

cryptocurrencies may be suspended without notice, temporarily or completely. When mapping via ETP, there is an additional risk due to shorter trading times of the ETP compared to the trading times of the respective cryptocurrencies. As a result, the investor may not be able to react immediately to market movements of the underlying.

- Custody risk: Cryptocurrencies are held on publicly visible blockchain addresses within a self-managed or, in the case of mapping via ETP, externally managed "wallet" by securing the associated private cryptographic keys ("private keys"). Loss or mishandling of these keys may result in the complete loss of the ability to access the Tokens. Lost, unsecured keys cannot be recovered. Furthermore, unauthorized persons can gain access, e.g., through improper protection against spyware, and irrevocably transfer the tokens.

- Issuer risk: In the case of mapping via ETP, the investor acquires shares in financial instruments that map the value trend of certain cryptocurrencies. These products are bearer bonds of the issuer. If the issuer becomes insolvent and/or a possible collateralization of the product is not valuable or the delivery of the underlying is partly or completely not possible, the investor may thus suffer a significant loss up to a total loss.

- Legal and political risks: The ownership and trading of cryptocurrencies may be restricted or banned outright by state authorities and governments. This can lead to a significant decrease in the general market acceptance of individual or all cryptocurrencies, even if regulation only affects individual countries outside Germany or Europe.

- Cryptography and technology risk: Cryptocurrencies are mostly based on open source software and significantly on cryptographic algorithms. Even if the software is constantly being further developed by a diverse community, there is a risk of serious, systematic programming errors. Also, the technology of another, new cryptocurrency may be superior to the previous one. There may be a rapid decline in the usability, acceptance and thus the value of the cryptocurrency in question.

- Transaction risk: Transactions on the blockchain are irreversible. Incorrect specification of the public wallet address ("public key") during the transfer leads to the permanent loss of the transferred tokens.

- Risk due to trading interruptions and disruptions: The trading of cryptocurrencies may be interrupted in the meantime, for example due to technical malfunctions or by the execution venue, or may be temporarily unavailable for other reasons. As a result, the investor may not be able to sell cryptocurrencies. In the meantime, losses, up to and including a total loss, may occur.

- Network risk (51% attack): If more than half of the computing power of a proof-of-work blockchain is controlled by one or a group of miners, the integrity and immutability of the blockchain is no longer guaranteed. As a direct result, new blocks with valid transactions may be withheld or double spending may occur. An immediate drop in the price of the cryptocurrency is to be expected if the decentralization of the network is no longer given.- Hard fork risk: Further developments of the software of cryptocurrencies due to a protocol change of the blockchain are usually carried out seamlessly on a continuous basis by a "soft fork". An update of the individually used wallet or node software is not necessary for network participants to continue using the cryptocurrency. In a "hard fork", on the other hand, a protocol change is no longer compatible with the previous protocol. If not all network participants find consensus for the new protocol, a second, alternative blockchain forks. The market decides which of the two parallel and competing blockchains is the "legitimate" cryptocurrency. As the best known "hard fork", the blockchain and community of the cryptocurrency Bitcoin Cash (BCH) split off from Bitcoin (BTC) in 2017.

- Market manipulation risk: Cryptocurrencies are partly traded unregulated and without state supervision. Market and price manipulation by individual market participants cannot be ruled out.

4. functioning and risks of trading securities

4.1 Execution principles, selection principles and conflicts of interest

Buy and sell orders shall be executed by the custodian bank in accordance with its special terms and conditions for securities transactions and its execution policy. If the orders are placed by an asset manager, its selection or execution principles must also be observed. In addition, the respective terms and conditions may contain relevant provisions regarding the handling of conflicts of interest ("Conflict of Interest Policies"). The client's orders may be combined with orders from other clients.

4.2 Commission and fixed price

Dispositions of securities made by the Bank on behalf of the customer may be effected by means of a fixed-price transaction or a commission transaction. Under a fixed-price transaction, the Bank sells or purchases the relevant securities directly to or from the customer at an agreed price. Under a commission transaction, the Bank buys or sells the relevant securities for the account of the customer, so that the terms agreed with the third party are economically attributed to the customer.

4.3 Stock exchange and over-the-counter trading

Customer orders can be executed on exchanges or over-the-counter trading venues, such as interbank trading or multilateral trading systems. Stock exchanges are organized and regulated markets for shares, other securities and commodities. One can differentiate the various types of exchanges according to the density of regulation (regulated market or over-the-counter market) and the type of trading (floor trading or electronic trading system).

4.4 Price fixing

In floor trading, the so-called lead broker determines the corresponding price either within the framework of variable trading or according to a unit price. When determining the unit price, the most-execution principle applies. This means that the price at which the largest turnover occurs with the smallest overhang is determined as the execution price. In electronic trading, prices are determined by electronic systems according to certain rules and usually also in compliance with the most-executed-principle.

4.5 Instructions and limits

Buy and sell orders shall be executed by the custodian bank in accordance with its special conditions for securities transactions and its execution policy. However, the customer's instructions shall take precedence. These instructions may specify price and time limits (limits , validity period or limit supplements). In this way, the customer can "fine-tune" the respective order.

4.6 Special risks

* Transmission risk: If the customer does not issue clear orders, there is a risk of errors in the execution of the order.

* Lack of market liquidity: In case of lack of market liquidity, the corresponding order of the customer cannot be executed or can only be executed with delay.

* Price risk: There may be a certain period of time between order placement and execution. This may result in the stock exchange price developing adversely in the meantime.

* Suspension of trading and other protective measures: Exchange trading may be suspended if orderly exchange trading is temporarily jeopardized or if this appears necessary to protect investors. In addition, trading may be interrupted due to increased volatility of stock market prices.

* Collective orders: They may have a negative impact on market pricing or result in a reduced allocation for the individual customer due to an excessive order volume. In the latter case, the order allocation principles of the custodian bank and, if applicable, of the asset manager apply, which regulate the proper allocation of pooled orders and trades, taking into account the influence of volume and price on the allocation and partial execution of orders.

5. functioning and risks of investment services

Various investment services are offered for capital investment. Before customers decide on an offer, it is very important to understand the differences and the associated typical risks and conflicts of interest.

5.1 Pure execution business

In the case of execution-only transactions, the custodian bank only acts at the instigation of the customer in executing securities orders. No advice or review of appropriateness takes place. Due to legal regulations, execution-only transactions may only be carried out for non-complex financial instruments (e.g. equities, money market instruments, bonds or mutual funds). The customer shall receive a securities statement on the execution, which shall contain the essential execution data (in particular, type of order, designation of the securities, number of units / nominal amount, transaction countervalue, place and time of execution, execution price, settlement date).

5.2 Consultation-free business

A non-advisory transaction is one in which the customer makes an investment decision without having previously been given an investment recommendation by a bank. The bank's duty of exploration is considerably reduced compared with investment advice or financial portfolio management. In contrast to pure execution business, however, there is at least a limited duty of exploration.

5.3 Investment and closing brokerage

In the case of investment and acquisition brokerage, no advice is given to the customer. The customer is merely provided with a financial product. An examination of the suitability of the financial investment for the customer is not required and therefore does not take place, or only to a limited extent. During the brokerage process, the financial product to be brokered is typically advertised exclusively or predominantly. This can give the customer the erroneous impression that it is investment advice. Remuneration for investment and acquisition brokerage is usually paid in the form of a rebate.

by the provider or issuer of the financial product directly to the intermediary, for example via a brokerage commission included in the financial product or a premium to be paid by the customer.

5.4 Investment advice

When providing investment advice, an investment advisor recommends certain securities to the client for purchase or sale. The advisor is obliged to examine the suitability of the recommended investment for the customer, taking into account the customer's investment objectives, financial situation, risk appetite, and knowledge and experience, and to record this in an advisory record. However, the decision to implement the advisor's recommendation must be made by the customer. The customer must act on his own for each transaction and may need to seek further advice. The advisor has no duty to review the investment recommendation or the customer's custody account on an ongoing basis.

Basically, there are two compensation models: fee-based and commission-based consulting. The remuneration of both types of investment advice harbors a potential for conflict. In the case of fee-based consulting, the consulting service is usually charged directly to the customer on a time basis. This gives the advisor an incentive to bill for as many consulting hours as possible. In the case of commission-based consulting, the service is not charged directly to the customer, because the consultant receives a commission from his employer or from the provider of the investment product (e.g., from the fund company or the issuer of a certificate). This entails the risk that the customer is not offered the most suitable security for him, but the one that is most lucrative for the advisor.

5.5 Financial portfolio management

Financial portfolio management (also known as asset management) is fundamentally different from the securities services described previously. The asset manager is given the authority by the client to make investment decisions at his own discretion if they appear expedient for the management of the client's assets.

A separate securities account and clearing account is set up for the customer. The client is the owner of the securities account and account and is the only one who can make transfers and withdrawals. The asset manager receives a disposition power of attorney, which entitles him to carry out securities transactions in the name and for the account of the client. However, as a matter of principle, he may not acquire ownership of the client's assets or transfer them to custody accounts or accounts not belonging to the client. In making investment decisions, the asset manager does not have to seek instructions from the client, but he is bound by the previously agreed investment guidelines, which regulate his powers, as well as the nature and scope of the service. The powers of the asset manager are accompanied by extensive duties. The asset manager not only undertakes securities transactions for the client, but is also responsible for monitoring the portfolio.

Asset management is typically a service aimed at long-term wealth accumulation or preservation. The client should therefore have a long-term investment horizon, as this increases the likelihood that the portfolio can recover in the event of negative performance. It is advisable to use only assets for asset management that are not needed to cover short- and medium-term living expenses or to meet other liabilities.

Asset management also involves a number of risks for the client's asset situation. Although the asset manager is obliged to act in the best interest of the client at all times, wrong decisions and even misconduct may occur. The asset manager cannot guarantee success or that losses will be avoided. Even without intent or negligence, the agreed investment guidelines can be violated by market behavior.

Asset management requires permission from the German Federal Financial Supervisory Authority (BaFin). In the application for permission, BaFin examines, among other things, the suitability of the management, but it expressly does not approve or authorize the specific services or products offered.

As regulated securities institutions, asset managers licensed in Germany belong to the Compensatory Fund of Securities Trading Companies (EdW). The EdW provides compensation if a securities trading company is no longer able to meet its liabilities to its customers arising from securities transactions and BaFin has established the case for compensation. For these claims, the protection is limited to 90 % of the claims, up to a maximum of 20,000 euros per investor. However, the risk of asset management in breach of duty or abuse of power of attorney by the asset manager is not covered by the EdW.

Status:27.02.2019