July 15, 2018 | Author: Melvyn Hunter | Category: N/A
1 DISCLOSURE STATEMENT Index or Basket-Linked Certificates of Deposit JPMorgan Chase Bank, N.A. 270 Park Avenue, New Yor...
DISCLOSURE STATEMENT
Index or Basket-Linked Certificates of Deposit JPMorgan Chase Bank, N.A. 270 Park Avenue, New York, New York 10017 (212) 270-6000 We, JPMorgan Chase Bank, N.A. (the “Bank”), are offering our certificates of deposit (“CDs”) from time to time. We describe the terms that will generally apply to these CDs in this disclosure statement. We will describe the specific terms of any particular CDs we are offering in a separate term sheet or disclosure supplement. We refer to such term sheets and disclosure supplements generally in this disclosure statement as term sheets. If the terms described in the applicable term sheet are inconsistent with those described herein, the terms described in the relevant term sheet shall control. The following terms may apply to particular CDs we may offer: REDEMPTION: The CDs may be either callable by us or withdrawn early by you in limited circumstances. PAYMENTS: Payments on the CDs may be linked to the value of a single index, shares of an exchange-traded fund or a weighted basket composed of any number of indices and/or exchangetraded funds. OTHER TERMS: As specified under “Description of the CDs” and in the attached term sheet. Investing in the CDs involves risks, including the risk that you will receive no more than the full principal amount of your CDs at maturity. See the section entitled “Risk Factors” on page S-11. The CDs will be obligations of JPMorgan Chase Bank, N.A. only, and not obligations of your broker or any affiliate of JPMorgan Chase Bank, N.A., including J.P. Morgan Securities Inc., JPMorgan Investment Management Inc. and JPMorgan Chase & Co. The principal amount of the CDs, and, if applicable, any Minimum Return that may have accrued, is insured by the Federal Deposit Insurance Corporation (the “FDIC”) within the limits and to the extent described in this disclosure statement (currently $250,000 for all accounts held by a depositor in the same ownership capacity with JPMorgan Chase Bank, N.A. and per participant for certain retirement accounts as described in the section entitled “Deposit Insurance” in this disclosure statement). A depositor purchasing a principal amount of CDs that is in excess of $250,000, or which, together with other deposits that it maintains at JPMorgan Chase Bank, N.A. in the same ownership capacity, is in excess of such limit should not rely on the availability of deposit insurance with respect to such excess. Under FDIC interpretations, the Additional Amount (as defined herein) payable at maturity, if any, based upon changes in an Index (as defined herein) and any secondary market premium paid by a depositor above the principal amount of the CDs are not insured by the FDIC. In addition, depending on the structure of the Minimum Return (as defined herein), if applicable, that amount may not be subject to FDIC insurance prior to the maturity date. For additional information, please see “Risk Factors – The CDs may be subject to the credit risk of JPMorgan Chase Bank, N.A.” In the event of a commodity hedging disruption event, we have the right, but not the obligation, to cause the calculation agent to determine the value of the Additional Amount payable upon maturity based on the forward price of the embedded option representing the Additional Amount payable on the CDs prior to, and without regard to the level of the Index or Basket on, the Observation Date or any of the Averaging Dates, as the case may be. Our affiliate, J.P. Morgan Securities Inc. and other broker-dealers may use this disclosure statement and an accompanying term sheet in connection with the offers and sales of the CDs after the date hereof. J.P. Morgan Securities Inc. may act as principal or agent in those transactions.
February 1, 2010
DESCRIPTION OF THE CDs General At maturity, the CDs will pay the principal amount plus an interest payment, if any (the “Additional Amount”), which, unless otherwise provided in the applicable term sheet, will be related to the change in the value of a single index, shares of an exchange-traded fund or a weighted basket (the “Basket”) composed of any number of indices and/or exchange-traded funds over the term of the CDs. We refer to an index that tracks the performance of equity securities, fixed income instruments or commodity futures contracts as an “Index,” and to more than one of such indices as “Indices,” and we refer to an exchangetraded fund that tracks the performance of an underlying index or basket of securities, commodities, currencies or other market measures, primarily by holding securities or other instruments related to such underlying index or basket, as the “ETF.” We refer to each Index and ETF to which the CDs are linked, whether or not included in a Basket, as a “Component,” and collectively as the “Components.” The Bank will be obligated to repay the principal amount plus the Minimum Return, if any, of the CDs at maturity regardless of any changes in the Component or Basket, as applicable. The Additional Amount, if any, will be paid at the stated maturity date of the CDs, together with the principal amount of the CDs, unless otherwise described in the applicable term sheet. Other terms relating to particular CDs we may offer, including any special tax considerations, will be described in the applicable term sheet. On the stated maturity date you will receive the principal amount of your CD plus the Additional Amount, if any. There will be no other payments, including payments of interest, periodic or otherwise, prior to the maturity date. Unless otherwise specified in the applicable term sheet, the CDs will be denominated in U.S. dollars in denominations of $1,000. The deposit amount for the CDs is $1,000 and then in additional increments of $1,000. CDs are insured only within the limits and to the extent described herein under the section entitled “Deposit Insurance.” You should compare the features of the CDs to other available investments before deciding whether to purchase a CD. Due to the uncertainty as to whether the CDs will earn the Additional Amount prior to their stated maturity date, the returns that may be received with respect to the CDs may be higher or lower than the returns available on other deposits available at the Bank or through your brokers. You should reach an investment decision only after carefully considering the suitability of an investment in the CDs in light of your particular circumstances. Payment at Maturity The maturity date for the CDs will be set forth in the relevant term sheet and is subject to adjustment if such day is not a business day or if the final Observation Date is postponed as described below. We will specify, in each case if applicable, the Participation Rate, Minimum Return, Maximum Return, KnockOut Event, Knock-Out Level, Knock-Out Rate and any other applicable payment terms in the relevant term sheet. The return on the CDs will be linked to the performance during the life of the CDs of a single index, an exchange-traded fund or a weighted Basket of Components consisting of one or more of the Components described herein: the MSCI World IndexSM (“MSCI World”), the S&P 500® Index (“SPX”), the S&P 500® Risk Control 10% Excess Return Index (“SPX Risk Control Index”), the Dow Jones EURO STOXX 50® Index (“SX5E”) (each, an “Equity Index,” and collectively, the “Equity Indices”), the JPMorgan GBI Global Bond Total Return Index Hedged into U.S. Dollars (“JHDCGBIG”) (the “Bond Index”), shares of the iShares® MSCI EAFE Index Fund (“EFA”) (the “ETF”) and the Dow Jones-UBS Commodity IndexSM (“DJ-UBS”) (the “Commodity Index”). Unlike ordinary bank deposits, the CDs do not pay interest at regular periods. Instead, at maturity, you will receive a cash payment for each $1,000 CD of $1,000 plus the Additional Amount, if any. 1
The “Additional Amount” will depend on the Component Return or Basket Return, as the case may be, and the specific terms of the CDs as set forth in the applicable term sheet. Unless otherwise specified in the term sheet, the Additional Amount paid at maturity per $1,000 CD will equal (A) $1,000 x Component Return (or Basket Return, as the case may be) x Participation Rate, provided the Additional Amount will not be less than zero or the Minimum Return, if applicable, or greater than the Maximum Return, if applicable or (B) an amount calculated according to the formula in clause A, unless the applicable Index closing level, the applicable closing price of shares of the ETF or Basket Closing Level, as the case may be, exceeds a specified level (which we refer to as the Knock-Out Level) on any of the trading days specified in the applicable term sheet, in which case the Additional Amount will equal $1,000 x the Knock-Out Rate. The “Minimum Return” or the “Maximum Return,” if applicable, will be a fixed dollar amount per $1,000 principal amount CD and will be specified in the applicable term sheet. The closing levels of the Index or the closing price of one share of the ETF used to determine the Component Return or Basket Return, as the case may be, will be calculated on a single date or on several dates, each of which we refer to as an “Observation Date” or an “Averaging Date,” as specified in the applicable term sheet. Unless otherwise specified in the relevant term sheet, daily monitoring is applicable to the CDs. For example, the relevant term sheet may specify Component monitoring weekly, monthly or on specified day(s) during a week or month for purposes of determining whether a Knock-Out Event has occurred. We refer to each such specified day as a “Monitoring Day.” The “Monitoring Period” or “Monitoring Day(s)” will be specified in the relevant term sheet. For example, the relevant term sheet may specify that the Monitoring Period consists of each trading day from the pricing date to and including the Observation Date. Alternatively, the relevant term sheet may specify that the Monitoring Days consist of the last calendar day of each month, commencing on a specified date and ending on the Observation Date. The “Participation Rate” will be a percentage, which may be more or less than 100%, as specified in the applicable term sheet. If the participation rate is less than 100% you will participate in less than the full change in value of the underlying Component or Components. If the participation rate is greater than 100% you will participate in the change in value of the underlying Component or Components on a leveraged basis. Unless otherwise specified in the relevant term sheet, a “Knock-Out Event” occurs when the applicable Index closing level, the applicable closing price of one share of the ETF or Basket Closing Level, as the case may be, is greater than the Knock-Out Level on any of the trading days during the Monitoring Period (or on the Monitoring Day). For example, the term sheet may specify a single trading day as the only trading day on which a Knock-Out Event can occur, or the term sheet may specify that a Knock-Out Event can occur on any trading day during the term of the CDs. The “Knock-Out Level” will be a percentage of the Starting Index Level, the Initial ETF Share Price or Starting Basket Level, as the case may be, or a fixed level of the Index, a fixed price of one share of the ETF or a fixed level of the Basket, as the case may be, as specified in the relevant term sheet. The “Knock-Out Rate,” will be a percentage, as specified in the relevant term sheet. The “Index Return,” unless otherwise set forth in the applicable term sheet, is calculated as follows: Ending Index Level – Starting Index Level Starting Index Level The “Starting Index Level” will be set to equal the closing level of the Index on the pricing date, or such other value as specified in the applicable term sheet. 2
The “Ending Index Level” will be the closing level of the Index on the Observation Date or the arithmetic average of the closing levels of the Index on each of the Observation Dates if more than one Observation Date is specified in the applicable term sheet or such other date or dates specified in the applicable term sheet. The “ETF Share Return,” unless otherwise set forth in the applicable term sheet, is calculated as follows:
Final ETF Share Price – Initial ETF Share Price Initial ETF Share Price The “Initial ETF Share Price” will be set to equal the closing price of one share of the ETF on the pricing date or such other value as specified in the applicable term sheet, in each case, divided by the Share Adjustment Factor, as may be adjusted throughout the term of the CDs. The “Final ETF Share Price” will be the closing price of one share of the ETF on the Observation Date or the arithmetic average of the closing prices of one share of the ETF on each of the Observation Dates if more than one Observation Date is specified in the applicable term sheet or such other date or dates specified in the applicable term sheet. The “Share Adjustment Factor” is, unless otherwise specified in the relevant term sheet, set initially equal to 1.0 on the pricing date, subject to adjustment under certain circumstances as described below under “General Terms of the CDs – Anti-Dilution Adjustments.” We refer to each of the Index Return and the ETF Share Return as a “Component Return.” For CDs linked to the value of a Basket composed of more than one Component, the payment at maturity will be as set forth above except that: The “Basket Return,” unless otherwise set forth in the applicable term sheet, is calculated as follows: Ending Basket Level – Starting Basket Level Starting Basket Level The “Starting Basket Level” will be set to equal 100 on the pricing date, or such other value as specified in the applicable term sheet. The “Ending Basket Level” will be the Basket Closing Level on the Observation Date or such other date or dates specified in the applicable term sheet. The “Basket Closing Level” will be the combined return of each of the Components, weighted according to their respective weights in the Basket, as set forth in the applicable term sheet. For example, for an equally weighted basket including the seven Components specified below, the Basket Closing Level would be calculated as follows: 100 x [1 + (MSCI World Return + SPX Return + SPX Risk Control Return + SX5E Return + JPMorgan GBI Return + DJ-UBS Return + EFA Return) / 7], where the MSCI World Return, SPX Return, SPX Risk Control Index Return, SX5E Return, JPMorgan GBI Return, DJ-UBS Return and EFA Return are the performance of the respective Components, expressed as a percentage, from the respective Index closing level or the closing price of one share of the ETF on the pricing date to the respective Index closing level or the closing price of one share of the ETF on the Observation Date (or, if more than one Observation Date is specified in the 3
applicable term sheet, the arithmetic average of the closing levels or closing prices of the Components on each of the Observation Dates) or such other date or dates specified in the applicable term sheet. The “MSCI World Return” is calculated as follows, unless otherwise specified in the applicable term sheet: MSCI World Return =
MSCI World Ending Level – MSCI World Starting Level MSCI World Starting Level
where the “MSCI World Starting Level” is the closing level of the MSCI World IndexSM on the pricing date and the “MSCI World Ending Level” is the closing level of the MSCI World IndexSM on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing levels of the MSCI World IndexSM on each of the Observation Dates) or on any trading day specified in the relevant term sheet. The “SPX Return” is calculated as follows, unless otherwise specified in the applicable term sheet: SPX Return =
SPX Ending Level – SPX Starting Level SPX Starting Level
where the “SPX Starting Level” is the closing level of the S&P 500® Index on the pricing date and the “SPX Ending Level” is the closing level of the S&P 500® Index on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing levels of the S&P 500® Index on each of the Observation Dates) or on any trading day specified in the relevant term sheet. The “SPX Risk Control Index Return” is calculated as follows, unless otherwise specified in the applicable term sheet: SPX Risk Control Index Return =
SPX Risk Control Index Ending Level – SPX Risk Control Index Starting Level SPX Risk Control Index Starting Level
where the “SPX Risk Control Index Starting Level” is the closing level of the SPX Risk Control Index on the pricing date and the “SPX Risk Control Index Ending Level” is the closing level of the SPX Risk Control Index on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing levels of the SPX Risk Control Index on each of the Observation Dates) or on any trading day specified in the relevant term sheet. The “SX5E Return” is calculated as follows, unless otherwise specified in the applicable term sheet: SX5E Return =
SX5E Ending Level – SX5E Starting Level SX5E Starting Level
where the “SX5E Starting Level” is the closing level of the Dow Jones EURO STOXX 50® Index on the pricing date and the “SX5E Ending Level” is the closing level of the Dow Jones EURO STOXX 50® Index on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing levels of the Dow Jones EURO STOXX 50® Index on each of the Observation Dates) or on any trading day specified in the relevant term sheet. The “JPMorgan GBI Return” is calculated as follows, unless otherwise specified in the applicable term sheet: 4
JPMorgan GBI Return =
JPMorgan GBI Ending Level – JPMorgan GBI Starting Level JPMorgan GBI Starting Level
where the “JPMorgan GBI Starting Level” is the closing level of the JPMorgan GBI Global Bond Total Return Index Hedged into U.S. Dollars on the pricing date and the “JPMorgan GBI Ending Level” is the closing level of the JPMorgan GBI Global Bond Total Return Index Hedged into U.S. Dollars on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing levels of the JPMorgan GBI Global Bond Total Return Index Hedged into U.S. Dollars on each of the Observation Dates) or on any trading day specified in the relevant term sheet. The “DJ-UBS Return” is calculated as follows, unless otherwise specified in the applicable term sheet: DJ-UBS Return =
DJ-UBS Ending Level – DJ-UBS Starting Level DJ-UBS Starting Level
where the “DJ-UBS Starting Level” is the closing level of the Dow Jones-UBS Commodity IndexSM on the pricing date and the “DJ-UBS Ending Level” is the closing level of the Dow Jones-UBS Commodity IndexSM on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing levels of the Dow Jones-UBS Commodity IndexSM on each of the Observation Dates) or on any trading day specified in the relevant term sheet. The “EFA Return” is calculated as follows, unless otherwise specified in the applicable term sheet: EFA Return =
Final EFA Share Price – Initial EFA Share Price Initial EFA Share Price
where the “Initial EFA Share Price” is the closing price per share of the iShares® MSCI EAFE Index Fund on the pricing date, divided by the Share Adjustment Factor, as may be adjusted throughout the term of the CDs, and the “Final EFA Share Price” is the closing price per share of the iShares® MSCI EAFE Index Fund on the Observation Date (or if more than one Observation Date is specified in the applicable term sheet, the arithmetic average of the closing price per share of the iShares® MSCI EAFE Index Fund on each of the Observation Dates) or on any trading day specified in the relevant term sheet. For all CDs, with respect to each Index (other than the Bond Index), as applicable, the “closing level” on any trading day will equal the official closing value of such Index, or any successor index thereto (as described below) published following the regular official weekday close of trading for such Index on that trading day. In certain circumstances, the “closing level” for an Index will be based on the alternative calculation of such Index described under “General Terms of CDs — Discontinuation of an Index; Alteration of Method of Calculation.” With respect to the Bond Index, the “closing level” on any trading day will equal either (a) the closing level of the Bond Index or any GBI successor index on the applicable trading day or (b) the closing level of the GBI successor index or alternative calculation of the Bond Index (as described under “The JPMorgan GBI Global Bond Total Return Index – Discontinuation of the GBI Total Return Index; Alteration of Method of Calculation”) at the regular official weekday close of the relevant exchange or market of the Bond Index or GBI successor index last to close on the applicable trading day. With respect to the ETF, unless otherwise specified in the relevant term sheet, the “closing price” of one share of the ETF (or any relevant successor ETF (as defined under “General Terms of CDs — Discontinuation of the ETF; Alternate Calculation of Closing Price”) or one unit of any other security for which a closing price must be determined) on any trading day (as defined below) means:
5
• if the shares of the ETF (or any such successor ETF or such other security) are listed or admitted to trading on a national securities exchange, the last reported sale price, regular way (or, in the case of The NASDAQ Stock Market, the official closing price) of the principal trading session on such day on the principal U.S. securities exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on which the shares of the ETF (or any such successor ETF or such other security) are listed or admitted to trading; • if the shares of the ETF (or any such successor ETF or such other security) are not listed or admitted to trading on any national securities exchange but is included in the OTC Bulletin Board Service (the “OTC Bulletin Board”) operated by the Financial Industry Regulatory Authority (the “FINRA”), the last reported sale price of the principal trading session on the OTC Bulletin Board on such day; • if the shares of the ETF (or any such successor ETF) are de-listed, liquidated or otherwise terminated, the closing price calculated pursuant to the alternative methods of calculating the closing price described under “General Terms of CDs — Discontinuation of the ETF; Alternate Calculation of Closing Price”; or • if, because of a market disruption event (as defined under “General Terms of CDs — Market Disruption Events”) or otherwise, the last reported sale price or official closing price, as applicable, for the shares of the ETF (or any such successor ETF or such other security) is not available pursuant to the preceding bullet points, the mean, as determined by the calculation agent, of the bid prices for the shares of the ETF (or any such successor ETF or such other security) obtained from as many recognized dealers in such security, but not exceeding three, as will make such bid prices available to the calculation agent. Bids of any of our affiliates may be included in the calculation of such mean, but only to the extent that any such bid is not the highest or the lowest of the bids obtained, in each case subject to the provisions of “General Terms of CDs — Discontinuation of the ETF; Alternate Calculation of Closing Price.” The term OTC Bulletin Board will include any successor service thereto. With respect to the ETF, a “trading day” is, unless otherwise specified in the relevant term sheet, a day, as determined by the calculation agent, on which trading is generally conducted on the New York Stock Exchange Arca, Inc. (the “NYSE Arca”), the NYSE Amex U.S. LLC (the “Amex”), The NASDAQ Stock Market, the Chicago Mercantile Exchange Inc., the Chicago Board Options Exchange, Incorporated and in the over-the-counter market for equity securities in the United States. With respect to an Equity Index, a “trading day” is, unless otherwise specified in the relevant term sheet, a day, as determined by the calculation agent, on which trading is generally conducted on (i) the relevant exchanges (as defined below) for securities underlying such Equity Index or the relevant successor index or relevant successor index fund, if applicable, and (ii) the exchanges on which futures or options contracts related to such Equity Index or the relevant successor index or relevant successor index fund, if applicable, are traded, other than a day on which trading on such relevant exchange or exchange on which such futures or options contracts are traded is scheduled to close prior to its regular weekday closing time. With respect to the Commodity Index, a “trading day” is, unless otherwise specified in the relevant term sheet, a day, as determined by the calculation agent, on which trading is generally conducted on (i) such Commodity Index or any successor index is calculated and (ii) futures contracts constituting more than 80% of the value of such Commodity Index or such successor index on such day are capable of being traded on their relevant exchanges during the one half hour before the determination of the closing level of such Commodity Index or such successor index. With respect to the Bond Index, a “trading day” is a day, as determined by the calculation agent, on which the Bond Index or any GBI successor index is calculated and published. The maturity date will be specified in the applicable term sheet. If the scheduled maturity date (as specified in the applicable term sheet) is not a business day, then the maturity date will be the next succeeding business day following such scheduled maturity date. If, due to a market disruption event or 6
otherwise, the final Observation Date is postponed so that it falls less than three business days prior to the scheduled maturity date, the maturity date will be the third business day following that final Observation Date, as postponed, unless otherwise specified in the applicable term sheet. We describe market disruption events under “General Terms of the CDs—Market Disruption Events.” A “business day” is, unless otherwise specified in the relevant term sheet, any day other than a day on which banking institutions in The City of New York are authorized or required by law, regulation or executive order to close or a day on which transactions in dollars are not conducted. CDs Linked to a Single Equity Index, the Bond Index or the ETF CDs with a maturity of more than one year If an Observation Date is not a trading day or if there is a market disruption event on such date, the applicable Observation Date will be postponed to the immediately succeeding trading day during which no market disruption event shall have occurred or be continuing. In no event, however, will any Observation Date be postponed more than ten business days following the date originally scheduled to be such Observation Date. If the tenth business day following the date originally scheduled to be the applicable Observation Date is not a trading day or if there is a market disruption event on such tenth business day, the calculation agent will determine the closing level or closing price, as applicable, for such Observation Date on such tenth business day in accordance with the formula for and method of calculating such closing level or closing price, as applicable, last in effect prior to commencement of the market disruption event (or prior to the non-trading day), using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, the calculation agent’s good faith estimate of the closing price that would have prevailed but for such suspension or limitation or non-trading day) on such tenth business day of each security most recently constituting the applicable Equity Index, Bond Index or ETF. CDs with a maturity of not more than one year If an Observation Date is not an trading day, or if there is a market disruption event on such date, the applicable Observation Date will be postponed to the immediately succeeding trading day during which no market disruption event shall have occurred or be continuing. In no event, however, will any Observation Date be postponed more than ten business days following the date originally scheduled to be such Observation Date; provided that no Observation Date, as postponed, will produce a maturity date more than one year (counting for this purpose either the issue date or the last possible date that the CDs could be outstanding) after the issue date (the last date that could serve as the final Observation Date without causing the maturity date to be more than one year after the issue date, the “Final Disrupted Observation Date”). If the tenth business day following the date originally scheduled to be the applicable Observation Date is not a trading day or if there is a market disruption event on such tenth business day, the calculation agent will determine the closing level or closing price, as applicable, for such Observation Date on such tenth business day in accordance with the formula for and method of calculating such closing level or closing price, as applicable, last in effect prior to the commencement of the market disruption event (or prior to the non-trading day), using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, the calculation agent’s good faith estimate of the closing price that would have prevailed but for such suspension or limitation or non-trading day) on such tenth business day of each security most recently constituting the applicable Equity Index, Bond Index or ETF. Notwithstanding the foregoing, if any Observation Date has been postponed to the Final Disrupted Observation Date (treating any such Observation Date that is not the final Observation Date as if it were the final Observation Date), and such Final Disrupted Observation Date is not a trading day, or if there is a market disruption event on such Final Disrupted Observation Date, the calculation agent will determine the closing level or closing price, as applicable, on such Final Disrupted Observation Date in accordance with the formula for and method of calculating such closing level or closing price, as applicable, last in effect prior to commencement of the market disruption event (or prior to the non-trading day), using the 7
closing price (or, if trading in the relevant securities has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation or non-trading day) on the business day immediately preceding such Final Disrupted Observation Date of each security most recently constituting the applicable Equity Index, Bond Index or ETF. For the avoidance of doubt, in no event shall any Observation Date occur after the Final Disrupted Observation Date. CDs linked to a Single Commodity Index CDs with a maturity of more than one year If an Observation Date is not an trading day or if there is a market disruption event on such date (such day, a “Disrupted Day”), the applicable Observation Date will be postponed to the immediately succeeding trading day that is not a Disrupted Day; provided that the closing level of the Index on such Observation Date, as postponed, will be determined by the calculation agent in accordance with the formula for and method of calculating such closing level last in effect prior to such Disrupted Day, using (i) with respect to each futures contract included in the Commodity Index that is not affected by such Disrupted Day (an “Unaffected Contract”), the official settlement price, fixing level or any other relevant published trading price or level, as applicable (such price or level, the “Contract Price”) as of the originally scheduled Observation Date (including any delayed publication of such Contract Price, for the originally scheduled Observation Date that occurred on or prior to the determination of the postponed Observation Date), and (ii) with respect to each futures contract included in the Commodity Index that is affected by such Disrupted Day (an “Affected Contract”), the Contract Price for such Affected Contract as of the immediately succeeding trading day that is not a Disrupted Day. Any Observation Date may be postponed as described above for up to ten scheduled trading days following the originally scheduled Observation Date. On the tenth scheduled trading day following the originally scheduled Observation Date, if the Contract Price with respect to any Affected Contract (a “Final Affected Contract”) has not been determined in accordance with the immediately preceding paragraph, the calculation agent will determine the closing level of the Index for such Observation Date on the eleventh scheduled trading day following the originally scheduled Observation Date in accordance with the formula for and method of calculating such closing level last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the applicable Contract Price as of the originally scheduled Observation Date (including any delayed publication as described above), (ii) with respect to each Affected Contract (other than any Final Affected Contract), the applicable Contract Price for such Affected Contract determined in the manner described in the immediately preceding paragraph, and (iii) with respect to each Final Affected Contract, the calculation agent’s good faith estimate of the applicable Contract Price for such Final Affected Contract on such eleventh scheduled trading day that would have prevailed but for such Disrupted Day. A “scheduled trading day” is, with respect to the futures contracts underlying the Commodity Index or the relevant successor index, as applicable, a day, as determined by the calculation agent, on which the relevant exchange is scheduled to open for trading for its regular trading session. CDs with a maturity of not more than one year If an Observation Date is a Disrupted Day, the applicable Observation Date will be postponed to the immediately succeeding trading day that is not a Disrupted Day; provided that the closing level of the Index on such Observation Date, as postponed, will be determined by the calculation agent in accordance with the formula for and method of calculating such closing level last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the Contract Price as of the originally scheduled Observation Date (including any delayed publication of such Contract Price for the originally scheduled Observation Date that occurred on or prior to the determination of the postponed Observation Date), and (ii) with respect to each Affected Contract, the Contract Price for such Affected Contract as of the immediately succeeding trading day that is not a Disrupted Day. 8
Any Observation Date may be postponed as described above for up to ten scheduled trading days following the originally scheduled Observation Date; provided that no Observation Date, as postponed, will produce a maturity date more than one year (counting for this purpose either the issue date or the last possible date that the CDs could be outstanding) after the issue date (the earlier of (a) the last date that could serve as the final Observation Date without causing the maturity date to be more than one year after the issue date and (b) the eleventh scheduled trading day following the originally scheduled Observation Date, the “Final Disrupted Observation Date”). On the Final Disrupted Observation Date, if the Contract Price with respect to any Affected Contract has not been determined in accordance with the immediately preceding paragraph, the calculation agent will determine the closing level for such Observation Date on the Final Disrupted Observation Date in accordance with the formula for and method of calculating the closing level of the Index last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the applicable Contract Price as of the originally scheduled Observation Date (including any delayed publication as described above), (ii) with respect to each Affected Contract (other than any Final Affected Contract), the applicable Contract Price for such Affected Contract determined in the manner described in the immediately preceding paragraph, and (iii) with respect to each Final Affected Contract, the calculation agent’s good faith estimate of the applicable Contract Price for such Final Affected Contract on such Final Disrupted Observation Date that would have prevailed but for such Disrupted Day. For the avoidance of doubt, in no event shall any Observation Date occur after the Final Disrupted Observation Date. CDs Linked to a Basket of Components CDs with a maturity of more than one year If an Observation Date is a Disrupted Day with respect to any Component (any such Component affected by a Disrupted Day, a “Disrupted Component”), the applicable Observation Date will be postponed to the immediately succeeding trading day for any such Disrupted Component that is not a Disrupted Day for such Component; provided that the Basket Closing Level on such Observation Date, as postponed, will be determined by using (a) the closing level or closing price, as applicable (the “Component Price”), for each Component (other than any such Disrupted Component) (an “Unaffected Component”) on the originally scheduled Observation Date, (b) the Component Price for any such Disrupted Component (other than the Commodity Index) on the immediately succeeding trading day for such Disrupted Component that is not a Disrupted Day for such Disrupted Component and (c) if any such Disrupted Component is the Commodity Index, the closing level of the Index of the Commodity Index for such Observation Date as determined by the calculation agent in accordance with the formula for and method of calculating such closing level last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the applicable Contract Price as of the originally scheduled Observation Date (including any delayed publication of such Contract Price for the originally scheduled Observation Date that occurred on or prior to the determination of the postponed Observation Date), and (ii) with respect to each Affected Contract, the Contract Price for such Affected Contract as of the immediately succeeding trading day that is not a Disrupted Day. For the avoidance of doubt, if an Observation Date is to be postponed as described above, and there are two or more Disrupted Components and the first trading day on which there is no market disruption event relating to the first Disrupted Component is different from such trading day for one or more of the other Disrupted Components, such Observation Date will be postponed to the latest of such trading days. Under these circumstances, the calculation agent will calculate the Basket Closing Level for such Observation Date using the Component Prices of the Disrupted Components on different trading days and apply the Component Prices of the Disrupted Components on the first trading day that is not a Disrupted Day with respect to such Disrupted Component. Any Observation Date may be postponed as described above for up to ten scheduled trading days following the originally scheduled Observation Date. On the tenth scheduled trading day following the originally scheduled Observation Date,, if the Component Price with respect to any Affected Component (a “Final Disrupted Component”) or the Contract Price with respect to any Affected Contract has not been determined in accordance with the immediately preceding paragraph, the calculation agent will 9
determine the Basket Closing Level for such Observation Date on the eleventh scheduled trading day following the originally scheduled Observation Date, using (a) with respect each Unaffected Component, the Component Price for such Unaffected Component on the originally scheduled Observation Date, (b) with respect to each Disrupted Component (other than the Commodity Index with a Final Affected Contract and any Final Disrupted Component), the Component Price for any such Disrupted Component determined in the manner described in the immediately preceding paragraph, (c) with respect to each Final Disrupted Component, the Component Price for such Final Disrupted Component on such eleventh scheduled trading day as determined by the calculation agent in accordance with the formula for and method of calculating such Component Price last in effect prior to the applicable Disrupted Day, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, the calculation agent’s good faith estimate of the closing price that would have prevailed but for such Disrupted Day) on such eleventh scheduled trading day of each security most recently constituting such Final Disrupted Component and (d) if the Commodity Index includes a Final Affected Contract, the closing level for the Commodity Index for such Observation Date on such eleventh scheduled trading day as determined by the calculation agent in accordance with the formula for and method of calculating such closing level last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the Contract Price as of the originally scheduled Observation Date (including any delayed publication as described above), (ii) with respect to each Affected Contract (other than any Final Affected Contract), the Contract Price for such Affected Contract determined in the manner described in the immediately preceding paragraph, and (iii) with respect to each Final Affected Contract, the calculation agent’s good faith estimate of the Contract Price for such Final Affected Contract on such eleventh scheduled trading day that would have prevailed but for such Disrupted Day. CDs with a maturity of not more than one year If an Observation Date is a Disrupted Day with respect to a Component, the applicable Observation Date will be postponed to the immediately succeeding trading day for any such Disrupted Component that is not a Disrupted Day for such Component; provided that the Basket Closing Level on such Observation Date, as postponed, will be determined by using (a) the Component Price for each Unaffected Component on the originally scheduled Observation Date, (b) the Component Price for any such Disrupted Component (other than the Commodity Index) on the immediately succeeding trading day for such Disrupted Component that is not a Disrupted Day for such Disrupted Component and (c) if any such Disrupted Component is the Commodity Index, the closing level of the Commodity Index for such Observation Date as determined by the calculation agent in accordance with the formula for and method of calculating such closing level last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the Contract Price as of the originally scheduled Observation Date (including any delayed publication of such Contract Price for the originally scheduled Observation Date that occurred on or prior to the determination of the postponed Observation Date), and (ii) with respect to each Affected Contract, the Contract Price for such Affected Contract as of the immediately succeeding trading day that is not a Disrupted Day for such Affected Contract. For the avoidance of doubt, if an Observation Date is to be postponed as described above, and there are two or more Disrupted Components and the first trading day on which there is no market disruption event relating to the first Disrupted Component is different from such trading day for one or more of the other Disrupted Components, such Observation Date will be postponed to the latest of such trading days. Under these circumstances, the calculation agent will calculate the Basket Closing Level for such Observation Date using the Component Prices of the Disrupted Components on different trading days and apply the Component Prices of the Disrupted Components on the first trading day that is not a Disrupted Day with respect to such Disrupted Component. Any Observation Date may be postponed as described above for up to ten scheduled trading days following the originally scheduled Observation Date; provided that no Observation Date, as postponed, will produce a maturity date more than one year (counting for this purpose either the issue date or the last possible date that the CDs could be outstanding) after the issue date. On the Final Disrupted Observation Date, if the Component Price with respect to any Final Affected Component or the Contract Price with respect to any Affected Contract has not been determined in accordance with the immediately 10
preceding paragraph,, the calculation agent will determine the Basket Closing Level for such Final Disrupted Observation Date using (a) with respect each Unaffected Component, the Component Price for such Unaffected Component on the originally scheduled Observation Date, (b) with respect to each Disrupted Component (other than the Commodity Index with a Final Disrupted Component and any Final Disrupted Component), the Component Price for any such Disrupted Component determined in the manner described in the immediately preceding paragraph, (c) with respect to each Final Disrupted Component, the Component Price for such Final Disrupted Component on such Final Disrupted Observation Date as determined by the calculation agent in accordance with the formula for and method of calculating such Component Price last in effect prior to the applicable Disrupted Day, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, the calculation agent’s good faith estimate of the closing price that would have prevailed but for such Disrupted Day) on such Final Disrupted Observation Date of each security most recently constituting such Final Disrupted Component and (d) if the Commodity Index includes a Final Affected Contract, the closing level for the Commodity Index for such Observation Date on such Final Disrupted Observation Date as determined by the calculation agent in accordance with the formula for and method of calculating such closing level last in effect prior to the applicable Disrupted Day, using (i) with respect to each Unaffected Contract, the Contract Price as of the originally scheduled Observation Date (including any delayed publication as described above), (ii) with respect to each Affected Contract (other than any Final Affected Contract), the Contract Price for such Affected Contract determined in the manner described in the immediately preceding paragraph, and (iii) with respect to each Final Affected Contract, the calculation agent’s good faith estimate of the Contract Price for such Final Affected Contract on such Final Disrupted Observation Date that would have prevailed but for such Disrupted Day. For the avoidance of doubt, in no event shall any Observation Date occur after the Final Disrupted Observation Date. A “scheduled trading day” is, with respect to an Equity Index, a Bond Index, the ETF or the futures contracts underlying the Commodity Index or the relevant successor index, as applicable, a day, as determined by the calculation agent, on which the relevant exchange is scheduled to open for trading for its regular trading session.
11
RISK FACTORS Risks Relating to the CDs Generally The CDs differ from conventional bank deposits. The CDs combine features of equity and debt. The terms of the CDs differ from those of conventional bank deposits in that we will not pay regular interest. For CDs in which the Additional Amount is calculated based on a single Index, if the Ending Index Level does not exceed, or in certain cases, equal, the Starting Index Level, and if the applicable Index closing level is less than the Knock-Out Level, if any, on each of the trading days specified in the relevant term sheet, at maturity you will receive only $1,000 (plus the Minimum Return, if any) for each $1,000 CD, unless otherwise specified in the relevant term sheet. For CDs in which the Additional Amount is calculated based on the ETF, if the Final ETF Share Price does not exceed, or in certain cases, equal, the Initial ETF Share Price, and if the applicable closing price of one share of the ETF is less than the Knock-Out Level, if any, on each of the trading days specified in the relevant term sheet, at maturity you will receive only $1,000 (plus the Minimum Return, if any) for each $1,000 CD, unless otherwise specified in the relevant term sheet. For CDs in which the Additional Amount is calculated based on a Basket of two or more Components, if the Ending Basket Level does not exceed, or in certain cases, equal, the Starting Basket Level, and if the Basket Closing Level is less than the Knock-Out Level, if any, on each of the trading days specified in the relevant term sheet, at maturity you will receive only $1,000 (plus the Minimum Return, if any) for each $1,000 CD, unless otherwise specified in the relevant term sheet. Therefore, the return on your investment in the CDs may be less than the amount that would be paid on an ordinary bank deposit. The return at maturity of only the principal amount plus the Minimum Return, if any, of each CD will not compensate you for any loss in value due to inflation and other factors relating to the value of money over time. The inclusion in the original issue price of the agent’s commission, commissions of affiliates of the agent and the cost of hedging our obligations under the CDs through one or more of our affiliates is likely to adversely affect the value of the CDs prior to maturity. While the payment at maturity will be based on the full principal amount of your CDs as described in the relevant term sheet, the original issue price of the CDs includes the agent’s commission, commissions of affiliates of the agent and the cost of hedging our obligations under the CDs. Such cost includes expected cost of providing such hedge, as well as the profit our affiliates expect to realize in consideration for assuming the risks inherent in providing such hedge. As a result, assuming no change in market conditions or any other relevant factors, the price, if any, at which J.P. Morgan Securities Inc. (“JPMSI”) will be willing to purchase CDs from you in secondary market transactions, if at all, will likely be lower than the original issue price. In addition, any such prices may differ from values determined by pricing models used by JPMSI, as a result of such compensation or other transaction costs. The CDs may be subject to the credit risk of JPMorgan Chase Bank, N.A. A depositor purchasing a principal amount of CDs in excess of FDIC insurance limits, when aggregated with all other deposits held by the depositor in the same right and capacity at JPMorgan Chase Bank, N.A., will be subject to the credit risk of JPMorgan Chase Bank, N.A. and our credit ratings and credit spreads may adversely affect the market value of the CDs. Investors are dependent on JPMorgan Chase Bank, N.A.’s ability to pay amounts due on the CDs in excess of FDIC insurance limits at maturity or on any other relevant payment dates, and therefore investors are subject to our credit risk and to changes in the market’s view of our creditworthiness. Any decline in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk is likely to adversely affect the value of the CDs. For more information, see “Deposit Insurance” in this disclosure statement.
12
At maturity, the CDs may not pay more than the principal amount plus the Minimum Return, if any, per $1,000 CD. For CDs in which the Additional Amount is calculated based on a single Component, if the Ending Index Level or the Final ETF Share Price is less than or equal to the Starting Index Level or the Initial ETF Share Price, and the applicable Index closing level or the applicable closing price of one share of the ETF is less than the Knock-Out Level, if any, on all of the trading days specified in the relevant term sheet, you will receive only your $1,000 deposit plus the Minimum Return, if any, for each $1,000 CD you hold at maturity. This will be true even if the value of the Index or one share of the ETF was higher than the Starting Index Level or the Initial ETF Share Price at some time during the life of the CDs before later falling below the Starting Index Level or the Initial ETF Share Price. For CDs in which the Additional Amount is cacluated based on a Basket of two or more Components, if the Ending Basket Level is less than or equal to the Starting Basket Level, and the Basket Closing Level is less than the Knock-Out Level, if any, on all of the trading days specified in the relevant term sheet, you will receive only your $1,000 deposit plus the Minimum Return, if any, for each $1,000 CD you hold at maturity. This will be true even if the value of the Basket was higher than the Starting Basket Level at some time during the life of the CDs before later falling below the Starting Basket Level. The appreciation potential of the CDs may be limited by the Knock-Out Level, if applicable. If the CDs have a Knock-Out Level, the appreciation potential of the CDs is limited by the Knock-Out Level and the corresponding Knock-Out Rate. Once the applicable Index closing level, closing price of one share of the ETF or Basket Closing Level, as the case may be, equals or exceeds the Knock-Out Level, the appreciation potential of the CDs is limited to the Knock-Out Rate, even if the Component Return or Basket Return, as the case may be, is greater than the Knock-Out Rate. For example, if the applicable Index closing level, closing price of one share of the ETF or Basket Closing Level, as the case may be, is greater than the Knock-Out Level on any trading day specified in the relevant term sheet, the return on the CDs will equal the Knock-Out Rate multiplied by the applicable principal amount of the CDs and will not be determined by reference to the Component Return or Basket Return, as applicable. This return may not compensate you for any loss in value due to inflation and other factors relating to the value of money over time. Therefore, your return may be less than the return you would have otherwise received if you had invested directly in the Index, the ETF or Basket, the stocks underlying the Index, the ETF or Basket or contracts relating to the Index, the ETF or Basket or their underlying stocks, contracts or derivatives. Under these circumstances, your return will not reflect any potential increase in the Ending Index Level, Final ETF Share Price or Ending Basket Level, as the case may be, as compared to the Starting Index Level, Initial ETF Share Price or Starting Basket Level, as the case may be, of greater than the Knock-Out Rate. The appreciation potential of the CDs will be limited by the Maximum Return, if applicable. If the CDs have a Maximum Return, the appreciation potential of the CDs is limited to the fixed dollar amount per $1,000 CD specified in the applicable term sheet as the Maximum Return. The Additional Amount will equal no more than the Maximum Return. Accordingly, the appreciation potential of the CDs will be limited to the Maximum Return even if the Additional Amount calculated with reference to the Component Return or Basket Return, as the case may be, and Participation Rate would otherwise be greater than the Maximum Return. The Ending Index Level, Final ETF Share Price or Ending Basket Level may be less than the closing levels of the Index, the closing price per share of the ETF or the closing level of the Basket, as applicable, at various other times during the term of the CDs. Because the Ending Index Level or the Final ETF Share Price used to calculate the Component Return or, for CDs where the Additional Amount is based on a Basket of two or more Components, the Ending Basket Level used to calculated the Basket Return will equal either (i) the closing level of the Index, the closing price of one share of the ETF or the Basket Closing Level on the Observation Date, which is a single trading day near the end of the term of the CDs or (ii) the arithmetic average of the closing level of the Index, the closing price of one share of the ETF or the Basket Closing Levels on a 13
specified number of Observation Dates throughout the term of the CDs, the level or price of the Components or the Basket, as applicable, at the maturity date or at various other times during the term of the CDs, including other dates near the Observation Dates, could be higher than the Ending Index Level, Final ETF Share Price or Ending Basket Level. This difference could be particularly large for single Observation Dates, if there is a significant increase in the level of the Component or the Components after the final Observation Date, if there is a significant decrease in the level of the Component or the Components during the latter portion of the term of the CDs or if there is significant volatility in the closing levels or closing prices of the Component or the Components during the term of the CDs. On the other hand, for CDs with periodic Observation Dates during the term of the CDs the difference between the level of the Component or Basket at maturity or at other times during the term of the CDs could be particularly large, as compared to the level on each Observation Date if there is a significant increase in the level of the Component or Basket during the latter portion of the term of the CDs or there is significant volatility in the closing level or closing price of the Component or Basket during the term of the CDs. For example, if CDs have periodic Observation Dates during the term of the CDs and the closing level or closing price of the Component or the Basket initially declines or remains relatively constant and then significantly increases above the Starting Index Level, Initial ETF Share Price or Starting Basket Level, as the case may be, in the year prior to maturity, the Ending Index Level, Final ETF Share Price or Ending Basket Level, as the case may be, will be significantly lower than the actual closing level or closing price of the Component or the Basket at maturity. This is because the Ending Index Level, Final ETF Share Price or Ending Basket Level, as the case may be, will be based on the closing level or closing price of the Component or Basket on each of the periodic Observation Dates. Similarly, if the closing level or closing price of the Component or Basket steadily increases during the term of the CDs and then steadily decreases back to its starting level or initial price by maturity, the Ending Index Level, Final ETF Share Price or Ending Basket Level, as the case may be, will be significantly less than the closing level or closing price of the Component or Basket at its peak. A high closing level or closing price on one or more Observation Dates including the final Observation Date, may be substantially or entirely offset by a low closing level or closing price on one or more other Observation Dates. Similarly, if the CDs have only one Observation Date towards the end of the term and the closing level or closing price of the Component or the Basket increases during the first part of the term and then decreases back to the Starting Index Level, Initial ETF Share Price or Starting Basket Level, as the case may be, by maturity, the Ending Index Level, Final ETF Share Price or Ending Basket Level, as the case may be, will be significantly less than the closing level or closing price of the Component or the Basket, as applicable, at its peak. Under either of these circumstances, you may receive a lower payment at maturity than you would have received if you had invested in the Component or the Components, as applicable, component stocks or future contracts or derivatives of the Component or the Components or contracts related to the Component or Components for which there is an active secondary market. The Starting Index Level, the starting level for any Index or the Initial ETF Share Price may be determined after the issue date of the CDs. If so specified in the relevant term sheet, the Starting Index Level, the starting level for any Index or the Initial ETF Share Price will be determined based on the arithmetic average of the closing level or closing price of the Component or the Components, as applicable, on the Observation Dates specified in that relevant term sheet. One or more of the Observation Dates specified may occur on or following the issue date of the CDs; as a result, the Starting Index Level, the starting level for any Index or the Initial ETF Share Price may not be determined, and you may therefore not know such value, until after the issue date. The Starting Index Level, the starting level for any Index or the Initial ETF Share Price will be used in the calculation of the Component Return or the Basket Return, as applicable, and the payment at maturity. If there are any increases in the closing levels or closing prices for the Components on the 14
Observation Dates that occur after the issue date and such increases result in the Starting Index Level, the starting level for any Index or the Initial ETF Share Price being higher than the closing level or closing price of such Component or Components, as applicable, on the issue date, this may establish higher levels that the Component or Components, as applicable, must achieve for you to attain a positive return on your investment. If your CDs are linked to a volatile Component, there is a great likelihood that a Knock-Out Event will occur. For CDs with a Knock-Out feature, the likelihood that the closing level or closing price of a Component will be greater than the Knock-Out Level at any applicable time during the Monitoring Period will depend in large part on the volatility of such Component—the frequency and magnitude of changes in the level or price of such Component. One or more of the Components to which your CDs may be linked may have experienced significant volatility since inception.
If your CDs have a Knock-Out feature and are linked to more than one Component, you will be exposed to the risk of each Component triggering a Knock-Out Event. For CDs with a Knock-Out feature, you will receive the Additional Amount only if none of the Components to which your CD is linked appreciates by an amount that triggers a Knock-Out Event at any applicable time during the Monitoring Period. Unlike an instrument with a return linked to a basket of common stocks or other underlying assets and without a Knock-Out feature, in which risk is mitigated and diversified among all of the components of the basket, your risk will increase the more Components are linked to your CD. Strong performance by any one Component over the term of the CDs may negatively affect your likelihood of receiving the Additional Amount on a CD linked to more than one Component and will not be offset or mitigated by the performance of any other Component. Your return on the CDs should not be expected to match the performance of a direct investment in one or more of the Components or the equity securities underlying such Component or Components. You cannot predict future performance of a Component based on its historical performance. The level or price of a Component may increase so as to trigger a Knock-Out Event even though such Component has not experienced such an increase in the past. The Basket may not be equally weighted. Unless otherwise specified in the relevant term sheet, your CD may be linked to a Basket composed of two to more Components, each of which may have a different weight in determining the value of the Basket, depending on the Component weightings specified in the relevant term sheet. For example, for a Basket composed of three Components, the relevant term sheet may specify that the MSCI World weighting, the JPMorgan GBI weighting and the DJ-UBS weighting are 70%, 20%, and 10%, respectively. One consequence of such an unequal weighting of the Components is that the same percentage change in two of the Components may have a different effect on the Basket Closing Level. For example, if the DJ-UBS weighting is greater than the MSCI World weighting, a 5% decrease in the DJ-UBS Index will have a greater effect on the Basket Closing Level than a 5% decrease in the MSCI World Index. The weight of each Component may be determined on a date other than the pricing date. If so specified in the relevant term sheet, the weight of each Component in the Basket may be determined on a date or dates other than the pricing date. For example, the relevant term sheet may specify that the weights of the Components in the Basket will be determined based on the relative magnitude of the Component Return of each Component on the Observation Date. As a result, if the relevant term sheet so specifies, you will not know the weight assigned to each Component until a date 15
later than the pricing date, and you may not know the weight assigned to each Component in the Basket prior to such Observation Date. Changes in the value of the Components may offset each other. For CDs in which the Additional Amount is based on a Basket composed of two or more Components, price movements in the Components may not correlate with each other. At a time when the value of some of the Components increases, the value of other Components may not increase as much or may decline. Therefore, in calculating the Ending Basket Level, increases in the value of some of the Components may be moderated, or more than offset, by lesser increases or declines in the level or price of the other Components. For example, for an equally weighted Basket composed of the Equity Index and the Commodity Index, a 10% appreciation in the Equity Index on any Observation Date would be completely offset by a 10% decline in the Commodity Index on such Observation Date. Similarly, for a Basket composed of three unequally weighted Components, 8% depreciation in a Component that comprises 1/2 of the Basket outweighs a 5% appreciation in each of the remaining Components comprising 1/4 of the Basket each. Unless the relevant term sheet provides for a Knock-Out feature (and a Knock-Out Event has occurred) and/or a Minimum Return, if the Basket Return is flat or negative, you will only receive the principal amount of your CDs plus the Minimum Return, if any, per $1,000 CD at maturity. If the Participation Rate is less than 100%, the Additional Amount will be limited by the Participation Rate. For CDs in which the Additional Amount is based on a single Component, if the Participation Rate is less than 100% and the Ending Index Level or Final ETF Share Price exceeds the Starting Index Level or the Initial ETF Share Price, the Additional Amount you receive at maturity will equal only a percentage, as specified in the relevant term sheet, of the performance of the Component above the Starting Index Level or the Initial ETF Share Price. Under these circumstances, the Additional Amount you receive at maturity will not fully reflect the performance of the Component. For CDs in which the Additional Amount is calculated based on a Basket of two or more Components, if the Participation Rate is less than 100% and the Ending Basket Level exceeds the Starting Basket Level, the Additional Amount you receive at maturity will equal only a percentage, as specified in the relevant term sheet, of the performance of the Basket above the Starting Basket Level. Under these circumstances, the Additional Amount you receive at maturity will not fully reflect the performance of the Basket of Components. The Basket may consist of only one Basket Component. In certain cases, only one Basket Component may compose the entire Basket. If there is only one Basket Component, that Basket Component will be weighted as 100% of the Basket. In these cases, the Basket Closing Level will be determined with respect to the closing level or closing price of that single Basket Component. The CDs are designed to be held to maturity. The CDs are not designed to be short-term trading instruments. The price at which you will be able to sell your CDs prior to maturity may be at a substantial discount from the principal amount of the CDs, even in cases where the Component or the Basket has appreciated since the date of the issuance of the CDs. The potential returns described in the relevant term sheet assume that your CDs are held to maturity. Secondary trading may be limited. Unless otherwise specified in the relevant term sheet, the CDs will not be listed on an organized securities exchange. There may be little or no secondary market for the CDs. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the CDs easily. 16
JPMSI may act as a market maker for the CDs, but is not required to do so. Because we do not expect that other market makers will participate significantly in the secondary market for the CDs, the price at which you may be able to trade your CDs is likely to depend on the price, if any, at which JPMSI is willing to buy the CDs. If at any time JPMSI is not acting as a market maker, it is likely that there would be little or no secondary market for the CDs. The value of the CDs will be influenced by many unpredictable factors. Many economic and market factors will influence the value of the CDs. We expect that generally, the level or price of the Component or Basket that the CDs are linked to and interest rates on any day will affect the value of the CDs more than any other single factor. However, you should not expect the value of the CDs in the secondary market to vary in proportion to changes in the level or price of the Component or the Basket. The value of the CDs will be affected by a number of other factors that may either offset or magnify each other, including:
the expected volatility in the Component or each of the Components;
the market price of the physical commodities upon which the futures contracts that compose the Commodity Index are based (the “Index Commodities”) or the exchange-traded futures contracts on the Index Commodities;
the time to maturity of the CDs;
the dividend rate on the equity securities underlying each Equity Index or the ETF (while not paid to holders of the CDs, dividend payments on the equity securities underlying the Equity Indices or the ETF may influence the levels of the Equity Indices, the price of the ETF or the market value of related options, and therefore affect the market value of the CDs);
the occurrence of certain events related to the ETF that may or may not require an adjustment to the Share Adjustment Factor;
interest and yield rates in the market generally as well as in each of the markets of the securities comprising the Component or each of the Components;
economic, financial, political, regulatory, geographical, agricultural or judicial events that affect (i) the stocks represented in any Equity Index, any Equity Index that forms part of the Basket of Components or stock markets generally, (ii) the market price of the Index Commodities or the exchange-traded futures contracts that compose the Commodity Index, or (iii) underlying instruments of the ETF that may affect the Ending Index Level, Final ETF Share Price or the Ending Basket Level.
the exchange rate and the volatility of the exchange rate between the U.S. dollar and the various currencies relevant to the Component or the Basket of Components, and, for ETFs, if the net asset value of the ETF is calculated in one currency and the equity securities underlying the ETF are traded in another currency, the correlation between those rates and the price of the ETF; and
our creditworthiness, including actual or anticipated downgrades in our credit ratings.
You cannot predict the future performance of any Component or the Basket based on their historical performances. The Ending Index Level, Final ETF Share Price or Ending Basket Level may be flat or negative as compared to the Starting Index Level, Initial ETF Share Price or Starting Basket Level, in which event you will only receive the principal amount of your CDs per $1,000 CD at maturity unless the relevant term sheet provides for a Minimum Return or includes a Knock-Out feature and a Knock-Out Event has occurred.
17
The FDIC’s powers as receiver or conservator could adversely affect your return. If the FDIC were appointed as conservator or receiver of the Bank, the FDIC would be authorized to disaffirm or repudiate any contract to which the Bank is a party, the performance of which was determined to be burdensome, and the disaffirmance or repudiation of which was determined to promote the orderly administration of the Bank’s affairs. It is likely that for this purpose deposit obligations, such as the CDs, would be considered “contracts” within the meaning of the foregoing and that the CDs could be repudiated by the FDIC as conservator or receiver of the Bank. Such repudiation should result in a claim by a depositor against the conservator or receiver for the principal of the CDs. No claim would be available, however, for any secondary market premium paid by a depositor above the principal amount of a CD and no claims would likely be available for any Additional Amount. The FDIC as conservator or receiver may also transfer to another insured depository institution any of the insolvent institution’s assets and liabilities, including liabilities such as the CDs, without the approval or consent of the beneficial owners of the CDs. The transferee depository institution would be permitted to offer beneficial owners of the CDs the choice of (i) repayment of the principal amount of the CDs or (ii) substitute terms which may be less favorable. If a CD is paid off prior to its stated maturity date, either by a transferee depository institution or the FDIC, its beneficial owner may not be able to reinvest the funds at the same rate of return as the rate on the original CD. As with all deposits, if it becomes necessary for federal deposit insurance payments to be made on the CDs, there is no specific time period during which the FDIC must make insurance payments available. Accordingly, in such an event, you should be prepared for the possibility of an indeterminate delay in obtaining insurance payments. Except to the extent insured by the FDIC as described in this disclosure statement, the CDs are not otherwise insured by any governmental agency or instrumentality or any other person. The full principal amount of your CDs, any Minimum Return, and the Additional Amount may not be protected by deposit insurance. The CDs are insured by the FDIC only within the limits and to the extent described below under the section entitled “Deposit Insurance.” The Emergency Economic Stabilization Act of 2008, which was enacted on October 3, 2008, temporarily raised the maximum deposit insurance amount from $100,000 to $250,000 per account (without changing limits for certain retirement accounts which had already been $250,000) until December 31, 2009. On May 20, 2009, the Emergency Economic Stabilization Act was amended by the Helping Families Save Their Homes Act of 2009 (the “Helping Families Save Their Homes Act”), extending the increased limit until December 31, 2013. Unless the increased coverage is extended by law or regulation, the maximum deposit insurance amount will revert to $100,000 per account after December 31, 2013, which may be several months or years prior to the maturity date of the CDs. As a general matter, holders who purchase CDs in a principal amount, which includes the Minimum Return, greater than $250,000 will not be insured by the FDIC for the principal amount plus any Minimum Return exceeding $250,000. After December 31, 2013, subject to a change in FDIC deposit insurance regulations, holders who purchase or own CDs in a principal amount, which includes the Minimum Return, greater than $100,000 will not be insured by the FDIC for the principal amount plus any Minimum Return exceeding $100,000. Because the Additional Amount is calculated, in part, using the closing level of the Component or the Components, as applicable, on the final Observation Date, the Additional Amount will not accrue to a holder of a CD until the final Observation Date. Accordingly, any potential Additional Amount will not be eligible for federal deposit insurance prior to the final Observation Date. The Additional Amount will be eligible for deposit insurance coverage only from the final Observation Date until the time the Bank makes payment. 18
FDIC deposit insurance regulations may change from time to time in a manner that could adversely affect your eligibility for deposit insurance. For more information, see “Deposit Insurance” in this disclosure statement. If the Basket includes MSCI World, the ETF or the Bond Index, the CDs will be subject to currency exchange risk. Because the prices of the equity securities composing MSCI World are converted into U.S. dollars for the purposes of calculating the value of MSCI World, the prices of the equity securities underlying the ETF are converted into U.S. dollars for the purposes of calculating the net asset value of the ETF (we refer to the equity securities of each Component herein as the “Component Securities”), and the rebalancing of the Bond Index entails purchasing a forward rate on the first business day of each month and then marking to market such forward rate on each day throughout the month, the holders of the CDs will be exposed to currency exchange rate risk with respect to each of the currencies in which the Component Securities or the bonds composing the Bond Index trade. An investor’s net exposure will depend on the extent to which such currencies strengthen or weaken against the U.S. dollar and the relative weight of the Component Securities and the bonds composing the Bond Index denominated in each such currency. If, taking into account such weighting, the U.S. dollar strengthens against such currencies, the value of MSCI World, the ETF or the Bond Index will be adversely affected and the payment at maturity of the CDs may be reduced. Of particular importance to potential currency exchange risk are:
existing and expected rates of inflation;
existing and expected interest rate levels;
the balance of payments; and
the extent of governmental surpluses or deficits in the component countries and the United States of America.
All of these factors are in turn sensitive to the monetary, fiscal and trade policies pursued by the governments of various component countries and the United States and other countries important to international trade and finance. If the Basket includes MSCI World, the ETF or the Bond Index, changes in the volatility of exchange rates, and the correlation between those rates and the levels of MSCI World, the Bond Index or the net asset value of the ETF are likely to affect the market value of the CDs. The exchange rate between the U.S. dollar and each of the currencies in which the Component Securities or the currencies in which the bonds composing the Bond Index are denominated refers to a foreign exchange spot rate that measures the relative values of two currencies — the particular currency in which a Component Security or a government bond composing the Bond Index is denominated and the U.S. dollar. This exchange rate reflects the amount of the particular currency in which a Component Security or a government bond composing the Bond Index is denominated that can be purchased for one U.S. dollar and thus increases when the U.S. dollar appreciates relative to the particular currency upon which a Component Security or a government bond composing the Bond Index is denominated. The volatility of the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities or the bonds composing the Bond Index are denominated refer to the size and frequency of that exchange rate. Because MSCI World and the net asset value of the ETF are calculated, in part, by converting the closing prices of the Component Securities into U.S. dollars, and because the Bond Index is rebalanced, in part, by purchasing a forward rate on the first business day of each month and then marking to market such forward rate on each day throughout the month, volatility of the exchange rate between the 19
U.S. dollar and each of the currencies in which the Component Securities and the bonds are denominated could affect the market value of the CDs. The correlation of the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities and the government bonds composing the Bond Index are denominated and the level of MSCI World and the Bond Index and the net asset value of the ETF refer to the relationship between the percentage changes in that exchange rate and the percentage changes in the level of MSCI World and the Bond Index and the net asset value of the ETF. The direction of the correlation (whether positive or negative) and the extent of the correlation between the percentage changes in the exchange rate between the U.S. dollar and each of the currencies in which the Component Securities or the government bonds composing the Bond Index are denominated and the percentage changes in the level of MSCI World and the Bond Index and the net asset value of the ETF could affect the value of the CDs. The Index Return or Basket Return, as the case may be, for the CDs will not be adjusted for changes in exchange rates that might affect the Dow Jones EURO STOXX 50® Index. Although some of the stocks comprising the Dow Jones EURO STOXX 50® Index are traded in currencies other than U.S. dollars, and the CDs, which may be linked to the Dow Jones EURO STOXX 50® Index, are denominated in U.S. dollars, the amount payable on the CDs at maturity will not be adjusted for changes in the exchange rate between the U.S. dollar and each of the currencies upon which the stocks comprising the Dow Jones EURO STOXX 50® Index are denominated. Changes in exchange rates, however, may reflect changes in various non-U.S. economies that in turn may affect the Index Return or the Basket Return, as the case may be, for the CDs. The amount we pay in respect of the CDs (including the Additional Amount) on the maturity date will be determined solely in accordance with the procedures described in “Description of the CDs—Payment at Maturity.” For CDs linked to the S&P 500® Index or the S&P 500® Risk Control 10% Excess Return Index, we are currently one of the companies that make up the S&P 500® Index and the S&P 500® Risk Control 10% Excess Return Index, but, to our knowledge, we are not currently affiliated with any other company the equity securities of which are included in the S&P 500® Index or the S&P 500® Risk Control 10% Excess Return Index. We are currently one of the companies that make up the S&P 500® Index and the S&P 500® Risk Control 10% Excess Return Index, but, to our knowledge, we are not currently affiliated with any other issuers the equity securities of which are included in the S&P 500® Index or the S&P 500® Risk Control 10% Excess Return Index. As a result, we will have no ability to control the actions of the issuers of such equity securities, including actions that could affect the value of the equity securities included in the S&P 500® Index, the S&P 500® Risk Control 10% Excess Return Index or your CDs. None of the money you pay us will go to the Index Sponsor or any of the other issuers of the equity securities included in the S&P 500® Index or the S&P 500® Risk Control 10% Excess Return Index and none of those issuers will be involved in the offering of the CDs in any way. Neither those issuers nor we will have any obligation to consider your interests as a holder of the CDs in taking any actions that might affect the value of your CDs. In the event we become affiliated with any other issuers the equity securities of which are included in the S&P 500® Index or the S&P 500® Risk Control 10% Excess Return Index, we will have no obligation to consider your interests as a holder of the CDs in taking any action with respect to such issuer that might affect the value of your CDs. Unless otherwise specified in any relevant term sheet or any related index supplement, to our knowledge, we are not affiliated with any company the securities of which are included in any Components (other than the S&P 500® Index and the S&P 500® Risk Control 10% Excess Return Index). To our knowledge, we are not currently affiliated with any other issuers the securities of which are included in any Components (other than the S&P 500® Index and the S&P 500® Risk Control 10% Excess 20
Return Index). As a result, we will have no ability to control the actions of the issuers of such securities, including actions that could affect the value of the securities included in the Components (other than the S&P 500® Index and the S&P 500® Risk Control 10% Excess Return Index), or your CDs. None of the money you pay us will go to the Index Sponsors or any of the other issuers the securities of which are included in the Components (other than the S&P 500® Index and the S&P 500® Risk Control 10% Excess Return Index) and none of those issuers will be involved in the offering of the CDs in any way. Neither those issuers nor we will have any obligation to consider your interests as a holder of the CDs in taking any actions that might affect the value of your CDs. See any related index supplement or the relevant term sheet for additional information on whether we are one of the companies included in such Component. In the event we become affiliated with any issuers, the equity securities of which are included in any Components, we will have no obligation to consider your interests as a holder of the CDs in taking any actions that might affect the value of your CDs. We or our affiliates may have adverse economic interests to the holders of the CDs. JPMSI and other affiliates of ours trade the stocks and government bonds underlying the Components described herein, the Index Commodities underlying the Commodity Index, the futures contracts that compose the Commodity Index, options on such futures contracts and other financial instruments related to the Components and their component stocks, government bonds or futures contracts, or such options and Index Commodities on a regular basis, for their accounts and for other accounts under their management. JPMSI and these affiliates may also issue or underwrite or assist unaffiliated entities in the issuance or underwriting of other securities or financial instruments with returns linked to an Index or a Basket composed of the Components described herein. To the extent that we or one of our affiliates serves as issuer, agent or underwriter for such securities, our or their interests with respect to such products may be adverse to those of the holders of the CDs. Any of these trading activities could potentially affect the level or price of the Index, the ETF or Components your CD is linked to and, accordingly, could affect the value of the CDs and the Additional Amount payable to you at maturity. We or our affiliates may currently or from time to time engage in business with companies the stock of which is included in one of the Components described herein, including extending loans to, or making equity investments in, or providing advisory services to them, including merger and acquisition advisory services. In the course of our business, we or our affiliates may acquire non-public information about the companies, and we will not disclose any such information to you. In addition, one or more of our affiliates may publish research reports or otherwise express views about companies the stock of which is included in one of the Components described herein. Any prospective purchaser of CDs should undertake an independent investigation of each company in the relevant Component as in its judgment is appropriate to make an informed decision with respect to an investment in the CDs. In the course of our business, we or our affiliates may acquire non public information about a Component or the equity securities or government bonds, as applicable, underlying such Component, and we will not disclose any such information to you. In addition, one or more of our affiliates may publish research reports or otherwise express views about an Index or the government bonds or equity securities, as applicable, underlying such Component. Any prospective purchaser of CDs should undertake an independent investigation of each Component and the government bonds and equity securities, as applicable, underlying each Component as in its judgment is appropriate to make an informed decision with respect to an investment in the CDs. In the course of our business, we or our affiliates may acquire non-public information about a Commodity Index, the futures contracts underlying a Commodity Index and the Index Commodities, and we will not disclose any such information to you. In addition, one or more of our affiliates may publish research reports or otherwise express views about a Commodity Index, the Index Commodities or the Designated Contracts. Any prospective purchaser of CDs should undertake an independent investigation of a Commodity Index, the futures contracts underlying a Commodity Index, the Index Commodities and 21
the related Designated Contracts as in its judgment is appropriate to make an informed decision with respect to an investment in the CDs. Additionally, we or one of our affiliates may serve as issuer, agent or underwriter for additional issuances of CDs with returns linked or related to changes in the level or price of any Component or the Basket, the commodity future contracts which comprise the Commodity Index or the stocks which comprise each Equity Index. By introducing competing products into the marketplace in this manner, we or one or more of our affiliates could adversely affect the value of the CDs. We may have hedged our obligations under the CDs through certain affiliates or unaffiliated counterparties, who would expect to make a profit on such hedge. Because hedging our obligations entails risk and may be influenced by market forces beyond our control, such hedging may result in a profit that is more or less than expected, or it may result in a loss. We or one of our affiliates may currently or from time to time engage in trading activities related to the currencies in which the stocks composing the MSCI World, the equity securities held by the ETF or the bonds composing the Bond Index, are denominated or traded. These trading activities could potentially affect the exchange rates with respect to such currencies and, because currency exchange rate calculations are involved in the calculation of the closing levels or closing prices of such Components, could affect the closing levels or closing prices of such Components and, accordingly, the value of the CDs. In the course of our or our affiliates’ currency trading activities, we or our affiliates may acquire material nonpublic information with respect to currency exchange rates, and we will not disclose any such information to you. In addition, one or more of our affiliates may produce and/or publish research reports, or otherwise express views, with respect to expected movements in currency exchange rates. We do not make any representation or warranty to any purchaser of CDs with respect to any matters whatsoever relating to future currency exchange rate movements and any prospective purchaser of CDs should undertake an independent investigation of the currencies in which the stocks composing the MSCI World, the equities held by the ETF or the bonds composing the Bond Index, are denominated or traded and their related exchange rates as, in its judgment, is appropriate to make an informed decision with respect to an investment in the CDs. JPMSI, one of our affiliates, will act as the calculation agent. The calculation agent will determine, among other things, the closing level or closing price of a single Component and each Component in the Basket, whether a Knock-Out Event has occurred (for CDs with a Knock-Out feature) as specified in the relevant term sheet, and Basket Closing Level, if applicable, on the pricing date and the relevant Observation Dates, the Basket Return, each Component Return, including the Starting Index Level and Ending Index Level (or Initial ETF Share Price and Final ETF Share Price, if applicable), the Share Adjustment Factor and anti-dilution adjustments, if any, related to the ETF and the Additional Amount, if any, in cash we will pay you at maturity of the CDs. In addition, the calculation agent will determine whether a market disruption event has occurred or whether any of the Components have been discontinued calculating, if applicable, the Option Value of your CDs on the commodity hedging disruption date in the event of a commodity hedging disruption event, and whether there has been a material change in the method of calculating the Component or any of the Components, as well as which exchange-traded fund will be substituted for the ETF (or relevant successor exchange-traded fund (“successor ETF”), if applicable) if the ETF (or relevant successor ETF, if applicable) is de-listed, liquidated or otherwise terminated; whether the index underlying the ETF (or the index underlying relevant successor ETF, if applicable) has been changed in a material respect and whether the ETF (or relevant successor ETF, if applicable) has been modified so that the ETF (or relevant successor ETF, if applicable) does not, in the opinion of the calculation agent, fairly represent the price of the ETF (or relevant successor ETF, if applicable) had those modifications not been made. In performing these duties, JPMSI may have interests adverse to the interests of the holders of the CDs, which may affect your return on the CDs, particularly where JPMSI, as the calculation agent, is entitled to exercise discretion. 22
Our affiliate, J.P. Morgan Securities Inc. and its affiliates may have published research, expressed opinions or provided recommendations that are inconsistent with investing in or holding the CDs, and may do so in the future. Any such research, opinions or recommendations could affect the value of each Component or the Components or the securities and futures contracts underlying each Component or the Components, and therefore the market value of the CDs. JPMSI and its affiliates publish research from time to time on financial markets and other matters that may influence the value of the CDs, or express opinions or provide recommendations that are inconsistent with purchasing or holding the CDs. JPMSI and its affiliates may have published research or other opinions that call into question the investment view implicit in an investment in the CDs. Any research, opinions or recommendations expressed by JPMSI or its affiliates may not be consistent with each other and may be modified from time to time without notice. Investors should make their own independent investigation of the merits of investing in the CDs and the Components described herein and the securities and futures contracts underlying the Components described herein to which the CDs are linked. Market disruptions may adversely affect your return. The calculation agent may, in its sole discretion, decide that the markets have been affected in a manner that prevents it from properly valuing the Ending Basket Level, Basket Closing Level, Basket Return, Final ETF Share Price, the ETF Share Return, Ending Index Level, or the Index Return, as applicable, and calculating the Additional Amount that we are required to pay you. These events may include disruptions or suspensions of trading in the markets as a whole. If the calculation agent, in its sole discretion, determines that these events prevent us or any of our affiliates from properly hedging our obligations under the CDs, it is possible that the Observation Dates and maturity date will be postponed and your return will be adversely affected. See “Description of the CDs—Market Disruption Events.” In addition, if we or our affiliates are unable to effect transactions necessary to hedge our obligations under the CDs due to a commodity hedging disruption event, we have the right, but not the obligation, to adjust your payment at maturity. In making such adjustment, we will determine the forward price of the embedded option representing the Additional Amount payable on the CDs at maturity (the “Option Value”) as of the date on which we declare a commodity hedging disruption event (such date, a “commodity hedging disruption date”). At maturity, we will pay you, instead of the amount specified under “Description of the CDs — Payment at Maturity,” the amount described under “General Terms of the CDs — Consequences of a Commodity Hedging Disruption Event,” which will not be less than $1,000 for each $1,000 CD. If a commodity hedging disruption event occurs and we decide to exercise our right to adjust your payment at maturity and in doing so determine the Option Value of your CDs, such Option Value will be determined by the calculation agent on the commodity hedging disruption date in good faith and in a commercially reasonable manner; however, the amount due and payable per $1,000 CD will be due and payable only at maturity. The amount you receive at maturity will not reflect any further appreciation or depreciation of the Index after the Option Value is determined on the commodity hedging disruption date. Furthermore, you will not receive any amounts (related to the Option Value or otherwise) until maturity. Additionally, if a commodity hedging disruption event ceases to exist, the amounts determined on the commodity hedging disruption date will not be revised after such commodity hedging disruption date. See “General Terms of the CDs — Consequences of a Commodity Hedging Disruption Event.” Generally, if the term of the CDs is not more than one year, the CDs will be treated as short-term debt instruments for U.S. federal income tax purposes. In general, if the term of the CDs is not more than one year (including either the issue date or the last possible date that the CDs could be outstanding, but not both), the CDs will be treated as “short-term” debt instruments for U.S. federal income tax purposes. No statutory, judicial or administrative authority directly addresses the treatment of CDs or instruments similar to the CDs for U.S. federal income tax purposes, and no ruling is being requested from the Internal Revenue Service (the “IRS”) with respect to the CDs. As a result, certain aspects of the tax treatment of an investment in the CDs are uncertain. You should review carefully the section entitled “Certain U.S. Federal Income Tax Consequences” in this 23
disclosure statement and consult your tax adviser regarding your particular circumstances. As discussed in “Certain U.S. Federal Income Tax Consequences – No Reliance,” you cannot use the tax summaries herein for the purpose of avoiding penalties that may be asserted against you under the Internal Revenue Code of 1986, as amended (the “Code”). Generally, if the term of the CDs is more than one year, we expect that the CDs will be treated as contingent payment debt instruments for U.S. federal income tax purposes. In general, if the term of the CDs is more than one year (including either the issue date or the last possible date the CDs could be outstanding, but not both), we expect that the CDs will be treated as “contingent payment debt instruments” for U.S. federal income tax purposes. Assuming this treatment, subject to the occurrence of a commodity hedging disruption event or a Knock-Out Event, you generally will be required to recognize interest income in each year at the “comparable yield,” as determined by us, although we will not make any payments with respect to the CDs until maturity. Interest included in income will increase your basis in your CDs. Special rules may apply in the event of the occurrence of a commodity hedging disruption event or a Knock-Out Event. Generally, amounts received at maturity or on earlier sale or exchange in excess of your basis will be treated as additional interest income, while any loss will generally be treated as an ordinary loss to the extent of all previous inclusions with respect to your CDs, which to that extent will be deductible against other income (e.g., employment and interest income), with the balance treated as capital loss, which may be subject to limitations. Losses may be subject to special reporting requirements. You should review carefully the section entitled “Certain U.S. Federal Income Tax Consequences” in this disclosure statement and consult your tax adviser regarding your particular circumstances. As discussed in “Certain U.S. Federal Income Tax Consequences – No Reliance,” you cannot use the tax summaries herein for the purpose of avoiding penalties that may be asserted against you under the Code. An investment in the CDs is subject to risks associated with non-U.S. securities markets. The stocks that compose the MSCI World, the SX5E and the equities held by the ETF have been issued by non-U.S. companies. Investments in CDs linked to the value of such non-U.S. equity securities involve risks associated with the securities markets in those countries, including risks of volatility in those markets, governmental intervention in those markets and cross shareholdings in companies in certain countries. Also, there is generally less publicly available information about companies in some of these jurisdictions than about U.S. companies that are subject to the reporting requirements of the Securities and Exchange Commission (the “SEC”), and generally non-U.S. companies are subject to accounting, auditing and financial reporting standards and requirements and securities trading rules different from those applicable to U.S. reporting companies. The prices of securities in non-U.S. jurisdictions may be affected by political, economic, financial and social factors in such markets, including changes in a country’s government, economic and fiscal policies, currency exchange laws or other foreign laws or restrictions. Moreover, the economies in such countries may differ favorably or unfavorably from economies in the United States in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources and self sufficiency. Such countries may be subjected to different and, in some cases, more adverse economic environments. The economies of emerging market countries in particular face several concerns, including the relatively unstable governments which may present the risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets, and which may have less protection of property rights than more developed countries. These economies may also be based on only a few industries, be highly vulnerable to changes in local and global trade conditions and may suffer from extreme and volatile debt burdens or inflation rates. In addition, local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times, and securities traded in such markets may be subject to higher transaction and other costs. The risks of the economies of emerging market countries are relevant for securities linked to a foreign Index composed of securities traded in one or more emerging market countries. 24
Some or all of these factors may influence the closing level of the MSCI World or the SX5E and the closing price per share of the ETF. The impact of any of the factors set forth above may enhance or offset some or all of any change resulting from another factor or factors. You cannot predict the future performance of any Component based on its historical performance. The value of any Component may decrease such that you may not receive more than the principal amount of your CDs (other than, if applicable, any payment of the Minimum Return). There can be no assurance that the closing level or the closing price of any Component will not decrease so that you will receive more than the principal amount of your CDs at maturity (other than, if applicable, any payment of the Minimum Return). Historical performance of each Component should not be taken as an indication of the future performance of such Component during the terms of the CDs. The actual performance of each Component over the term of the CDs, as well as the amount payable at maturity, may bear little relation to the historical performance of such Component. The trading prices of the securities or futures contracts underlying a Component will determine the level or price of such Component. As a result, it is impossible to predict whether the level or price of any Component will rise or fall. You will have limited rights to withdraw your funds prior to the stated maturity date of the CDs. By purchasing a CD, you will agree with the Bank to keep your funds on deposit for the term of the CD. Early withdrawals are permitted only in the event of the death or adjudication of incompetence of the beneficial owner of a CD. Therefore, you should not rely on this possibility for gaining access to your funds prior to the stated maturity date. State law limits the amount of interest that may be paid on loans (including bank certificates of deposit). New York State law governs the CDs. New York has certain usury laws that limit the amount of interest that may be charged and paid on loans, including bank certificates of deposit such as the CDs. Under present New York law, the maximum rate of interest is 25% per annum on a simple interest basis. This limit may not apply to instruments in which $2,500,000 or more has been invested. While we believe that New York law would be given effect by a state or Federal court sitting outside of New York, many other states also have laws that regulate the amount of interest that may be charged to and paid by a borrower. We will promise, for the benefit of the holders of the CDs, to the extent permitted by law, not to claim voluntarily the benefits of any laws concerning usurious rates of interest. MSCI Inc., Standard & Poor’s Financial Services LLC, STOXX Limited, J.P. Morgan Securities Inc., UBS Securities LLC and Dow Jones Company, Inc. (the “Index Sponsors”) may adjust each Equity Index, the Bond Index and the Commodity Index in a way that affects its level, and the Index Sponsors have no obligation to consider your interests. The Index Sponsors are responsible for calculating and maintaining their respective Index. Any Index Sponsor can add, delete or substitute the stocks underlying its respective Index or make other methodological changes that could change the level of such Index and, therefore, affect whether a KnockOut Event occurs and/or the amount payable on the CDs at maturity, and the value of the CDs before maturity. You should realize that the changing of companies included in the Index may affect the Index as a newly added company may perform significantly better or worse than the company or companies it replaces. Additionally, any of the Index Sponsors may alter, discontinue or suspend calculation or dissemination of its Index. Any of these actions could affect whether a Knock-Out Event occurs and/or the amount payable on the CDs at maturity, and could therefore adversely affect the value of the CDs before maturity. The Index Sponsors have no obligation to consider your interests in calculating or revising the Indices.
25
Risks Relating to the Equity Indices Your return on the CDs will not reflect dividends on the common stocks of the companies in the Equity Indices. Your return on the CDs that are linked to the performance of the Equity Indices will not reflect the return you would realize if you actually owned the common stocks of the companies included in the Equity Indices and received the dividends paid on those stocks. This is because the calculation agent will calculate the amount payable to you upon maturity by reference to the Ending Index Level or Ending Basket Level, as the case may be. The Ending Index Level or Ending Basket Level, as the case may be, reflects the prices of the common stocks in the Equity Indices without taking into consideration the value of dividends paid on those stocks. You will have no shareholder rights in the companies whose stocks comprise the Equity Indices. As a holder of the CDs, you will not have voting rights or rights to receive dividends or other distributions or other rights that holders of the securities composing the Equity Indices would have (while not paid to holders of the CDs, dividend payments on the equity securities underlying an Equity Index may influence the levels of such Equity Index and the market value of options on such Equity Index, and therefore affect the value of the CDs). The S&P 500® Risk Control 10% Excess Return Index has a limited history and may perform in unexpected ways. The S&P 500® Risk Control 10% Excess Return Index began publishing on May 13, 2009 and, therefore, has a limited history. Standard & Poor’s Financial Services LLC (“S&P”) has calculated the returns that hypothetically might have been generated had the S&P 500® Risk Control 10% Excess Return Index existed in the past, but those calculations are subject to many limitations. Such hypothetical calculations do not reflect actual trading, liquidity constraints, fees and other costs. In addition, the models used to calculate these hypothetical returns are based on certain data, assumptions and estimates. Different models or models using different data, assumptions or estimates might result in materially different hypothetical performance. Regardless of the hypothetical historical and actual historical performance of the S&P 500® Risk Control 10% Excess Return Index, the Ending Index Level may be lower than or equal to the Starting Index Level, which may limit your payment at maturity to $1,000 for each $1,000 CD. The S&P 500® Risk Control 10% Excess Return Index may not be successful, may not outperform the S&P 500® Total Return Index and may not achieve its target volatility. The S&P 500® Risk Control 10% Excess Return Index employs a mathematical algorithm intended to control the level of risk of the S&P 500® Total Return Index by establishing a specific volatility target and dynamically adjusting the exposure to the S&P 500® Total Return Index based on its observed historical volatility. No assurance can be given that the volatility strategy will be successful or that the S&P 500® Risk Control 10% Excess Return Index will outperform the S&P 500® Total Return Index or any alternative strategy that might be employed to reduce the level of risk of the S&P 500® Total Return Index. We also can give you no assurance that the S&P 500® Risk Control 10% Excess Return Index will achieve its target volatility of 10%. The S&P 500® Risk Control 10% Excess Return Index dynamically adjusts exposure to the S&P 500® Total Return Index based on observed volatility that may lead to an under-exposure of your CDs to the performance of the S&P 500® Total Return Index. The S&P 500® Risk Control 10% Excess Return Index represents a portfolio consisting of the S&P 500 Total Return Index and a borrowing cost component accruing interest based on U.S. LIBOR. The S&P 500® Risk Control 10% Excess Return Index dynamically adjusts its exposure to the S&P 500® Total Return Index based on the S&P 500® Total Return Index’s observed volatility. The S&P 500® Risk ®
26
Control 10% Excess Return Index’s exposure to the S&P 500® Total Return Index will decrease, or deleverage, when historical volatility causes the risk level of the S&P 500® Total Return Index to reach a high threshold. If, at any time, the S&P 500® Risk Control 10% Excess Return Index exhibits low exposure to the S&P 500® Total Return Index and the S&P 500® Total Return Index subsequently appreciates significantly, the S&P 500® Risk Control 10% Excess Return Index will not participate fully in this appreciation. Under these circumstances, the Additional Amount, if any, payable on the CDs may be less than the amount you would have received by investing the same principal amount directly in the S&P 500® Total Return Index or in the underlying securities composing the S&P 500® Total Return Index. Our affiliate, J.P. Morgan Securities Inc., helped develop the S&P 500® Risk Control 10% Excess Return Index. JPMSI, one of our affiliates, worked with S&P in developing the guidelines and policies governing the composition and calculation of the S&P 500® Risk Control 10% Excess Return Index. Although judgments, policies and determinations concerning the S&P 500® Risk Control 10% Excess Return Index were made by JPMSI, JPMorgan Chase & Co., as the parent company of JPMSI, ultimately controls JMPSI. In addition, the policies and judgments for which JPMSI was responsible could have an impact, positive or negative, on the level of the S&P 500® Risk Control 10% Excess Return Index and the value of your CDs. JPMSI is under no obligation to consider your interests as an investor in the CDs in its role in developing the guidelines and policies governing the S&P 500® Risk Control 10% Excess Return Index or making judgments that may affect the level of the S&P 500® Risk Control 10% Excess Return Index. Furthermore, the inclusion of equity securities in the S&P 500® Risk Control 10% Excess Return Index is not an investment recommendation by us or JPMSI of the equity securities underlying the S&P 500® Risk Control 10% Excess Return Index. The S&P 500® Risk Control 10% Excess Return Index is subject to short-term money market fund borrowing costs. The S&P 500® Risk Control 10% Excess Return Index is designed to track an unfunded investment in the S&P 500® Total Return Index with a leveraged or deleveraged position according to the target volatility of 10%. As an “excess return” index, the S&P 500® Risk Control 10% Excess Return Index calculates the return on a leveraged or deleveraged investment with an increased or decreased exposure to the S&P 500® Total Return Index where the investment was made through the use of borrowed funds. Thus the return of the S&P 500® Risk Control 10% Excess Return Index will be equal to the leveraged or deleveraged return of the S&P 500® Total Return Index less the associated borrowing costs. Because this “excess return” index represents an unfunded position in the S&P 500® Total Return Index, the performance of the S&P 500® Risk Control 10% Excess Return Index will be subject to short-term money market fund borrowing costs and will not include any “total return” feature or cash component of a “total return” index, which represents a funded position in the S&P 500® Total Return Index. Risks Relating to the Bond Index Purchasing the CDs is not the same as owning the government bonds included in the JPMorgan GBI Global Bond Total Return Index. While the CDs may be linked to the JPMorgan GBI Global Bond Total Return Index, the return on your CDs will not reflect the return you would realize if you actually purchased the government bonds included in such Index. You will not have any rights that holders of such instruments have. The concentration of the JPMorgan GBI Global Bond Total Return Index components may adversely affect your return. The methodology for calculating the JPMorgan GBI Global Bond Total Return Index could result in the JPMorgan GBI Global Bond Total Return Index comprising components concentrated from a 27
particular region or country. Since the JPMorgan GBI Global Bond Total Return Index was created, JPMorgan GBI Global Bond Total Return Index securities have been concentrated in securities from the U.S. and Japan. As of March 31, 2009, the JPMorgan GBI Global Bond Total Return Index securities from the U.S. and Japan comprised approximately 59.433% of the JPMorgan GBI Global Bond Total Return Index’s weighting. Such a concentration could have an aggregate adverse impact on the level of the JPMorgan GBI Global Bond Total Return Index if a region or a country that has issued a number of JPMorgan GBI Global Bond Total Return Index securities experiences adverse political, economic or market conditions. In particular, JPMorgan GBI Global Bond Total Return Index securities are debt instruments issued by sovereign issuers. Such instruments reflect risks which are influenced by, among other things, the political, economic and market conditions present in the country issuing such an instrument. An issuer may at any time experience budgetary shortfalls, high unemployment, an inability to attract foreign investment, high inflation, credit devaluation or high credit risk, or other negative macroeconomic effects beyond its control. If, as a result of any such factors or others, a government from a country that has JPMorgan GBI Global Bond Total Return Index securities outstanding were to default on its debt obligations, the level of the JPMorgan GBI Global Bond Total Return Index could be negatively affected. Credit ratings of the JPMorgan GBI Global Bond Total Return Index components could adversely affect your return. The JPMorgan GBI Global Bond Total Return Index tracks the value of bonds and loans that are rated “Baa1” or below by Moody’s Investor Services, Inc. and “BBB+” or below by Standard & Poor’s Financial Services LLC which meet the rules for inclusion in the JPMorgan GBI Global Bond Total Return Index and are issued by countries deemed to be emerging markets. Emerging markets issuers of the JPMorgan GBI Global Bond Total Return Index securities with such ratings are considered by the major credit ratings agencies to have a comparatively high risk of default. If one or more of such issuers does in fact default, the level of the JPMorgan GBI Global Bond Total Return Index could decrease, which may adversely affect the value of the CDs. We are affiliated with the Index Sponsor of the JPMorgan GBI Global Bond Total Return Index. The Index Sponsor of the JPMorgan GBI Global Bond Total Return Index is JPMSI, which is an affiliate of ours. Nevertheless, we will not control the actions of JPMSI, including actions that could affect the value of the JPMorgan GBI Global Bond Total Return Index or your CDs. Neither JPMSI nor we will have any obligation to consider your interests as a holder of the CDs in taking any actions that might affect the value of your CDs. If the CDs are linked to the Bond Index, an investment in the CDs may be subject to risks associated with non-U.S. investments. The bonds that constitute the JPMorgan GBI Global Bond Total Return Index have been issued by 13 countries. Investments in the CDs which are linked to the value of such countries involve risks associated with investments in, or the securities markets in, those countries. The prices of the government bonds may be affected by political, economic, financial and social factors in such markets, including changes in a country’s government, economic and fiscal policies, currency exchange laws or other foreign laws or restrictions. Moreover, the economies in some countries may differ favorably or unfavorably from economies in other countries in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources and self sufficiency. Such countries may be subjected to different and, in some cases, more adverse economic environments. The Bond Index is used in calculating the Index Return or Basket Return. If the CDs are linked to the Bond Index, the value of the Index used in calculating the Index Return or Basket Return and therefore the value of your CDs is the Bond Index rather than the JPMorgan GBI Global Bond Total Return Index value itself. The JPMorgan GBI Global Bond Total Return Index value is 28
publicly available. However, although the Bond Index is currently available via the Bloomberg system (ticker “JHDCGBIG”), this value may not be publicly available on Bloomberg throughout the term of your CDs. In such event, the Bond Index can be obtained by contacting JPMSI at
[email protected] or at 1-800-576-3529. Risks Relating to the Commodity Index Owning the CDs is not the same as owning the commodities underlying the Commodity Index or the futures contracts that compose the Commodity Index, or certain other commodity-related contracts directly. The return on your CDs will not reflect the return you would realize if you actually purchased the futures contracts that compose a Commodity Index, or exchange-traded or over-the-counter instruments based on the Commodity Index. You will not have any rights that holders of such assets or instruments have. Suspension or disruptions of market trading in the commodity and related futures markets may adversely affect the value of the CDs. The commodity markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators and government regulation and intervention. In addition, U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as “daily price fluctuation limits” and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a “limit price.” Once the limit price has been reached in a particular contract, no trades may be made at a different price. Limit prices have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices. These circumstances could adversely affect the level of the Commodity Index and, therefore, the value of CDs that are linked to the Commodity Index. The CDs will not be regulated by the Commodity Futures Trading Commission. The net proceeds to be received by us from the sale of the CDs will not be used to purchase or sell any commodity futures contracts or options on futures contracts for your benefit. An investment in the CDs thus does not constitute either an investment in futures contracts, options on futures contracts or in a collective investment vehicle that trades in these futures contracts (i.e., the CDs will not constitute a direct or indirect investment by you in commodity futures or options contracts), and you will not benefit from the regulatory protections of the Commodity Futures Trading Commission, commonly referred to as the “CFTC.” We are not registered with the CFTC as a futures commission merchant and you will not benefit from the CFTC’s or any other non U.S. regulatory authority’s regulatory protections afforded to persons who trade in futures contracts on a regulated futures exchange through a registered futures commission merchant. Unlike an investment in the CDs, an investment in a collective investment vehicle that invests in commodity futures contracts on behalf of its participants may be subject to regulation as a commodity pool and its operator may be required to be registered with and regulated by the CFTC as a commodity pool operator, or qualify for an exemption from the registration requirement. Because the CDs will not be interests in a commodity pool, the CDs will not be regulated by the CFTC as a commodity pool, we will not be registered with the CFTC as a commodity pool operator, and you will not benefit from the CFTC’s or any non U.S. regulatory authority’s regulatory protections afforded to persons who invest in regulated commodity pools. Index calculation disruption events may require an adjustment to the calculation of the Commodity Index. At any time during the term of the CDs, the daily calculation of the Commodity Index may be adjusted in the event that UBS Securities LLC (“UBS”) determines that any of the following events (each, an “index calculation disruption event”) exists: the termination or suspension of, or material limitation or disruption in the trading of, any futures contract used in the calculation of the Commodity Index on that day; the 29
settlement price of any futures contract used in the calculation of the Commodity Index reflects the maximum permitted price change from the previous day’s settlement price; the failure of an exchange to publish official settlement prices for any futures contract used in the calculation of the Commodity Index; or, with respect to any futures contract used in the calculation of the Commodity Index that trades on the London Metal Exchange (the “LME”), a business day on which the LME is not open for trading. Any such index calculation disruption event may have an adverse impact on the level of the Commodity Index or the manner in which it is calculated and, therefore, the value of your CDs. See “The Dow Jones-UBS Commodity IndexSM — Index Calculation Disruption Events.” UBS may be required to replace a designated contract underlying the Commodity Index if the existing futures contract is terminated or replaced. A futures contract known as a “Designated Contract” has been selected as the reference contract for most of the commodities included in the Commodity Index. Data concerning this Designated Contract will be used to calculate the Commodity Index. The termination or replacement of a futures contract on an established exchange occurs infrequently; if a Designated Contract were to be terminated or replaced by an exchange, a comparable futures contract, if available, would be selected by the Dow Jones-UBS Commodity Index Supervisory Committee to replace that Designated Contract. The termination or replacement of any Designated Contract may have an adverse impact on the level of the Commodity Index and, therefore, the value of your CDs. In addition, the commodity markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators and government regulation and intervention. In addition, U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as “daily price fluctuation limits” and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a “limit price.” Once the limit price has been reached in a particular contract, no trades may be made at a different price. Limit prices have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices. These circumstances could adversely affect the level of the Commodity Index, and therefore, the value of your CDs. Commodity prices may change unpredictably, affecting the Basket Return and the value of your CDs in unforeseeable ways. Trading in futures contracts associated with Index Commodities is speculative and can be extremely volatile. A decrease in the price of any of the commodities upon which the futures contracts that compose a Commodity Index are based may have a material adverse effect on the value of the CDs and your return on an investment in the CDs. Market prices of Index Commodities may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships; governmental programs and policies, national and international political and economic events, changes in interest and exchange rates, speculation and trading activities in commodities and related contracts, general weather conditions, and trade, fiscal, monetary and exchange control policies; agriculture; trade; disease; and technological developments. Many commodities are also highly cyclical. These factors, some of which are specific to the market for each such commodity may cause the value of the different commodities upon which the futures contracts that compose a Commodity Index are based, as well as the futures contracts themselves, to move in inconsistent directions at inconsistent rates. This, in turn, will affect the value of the CDs linked to the Basket. It is not possible to predict the aggregate effect of all or any combination of these factors. The Dow Jones — UBS Commodity IndexSM is not the same as the Dow Jones-UBS Commodity Index Total ReturnSM. The Dow Jones — UBS Commodity IndexSM reflects the returns that are potentially available through an unleveraged investment in the futures contracts on physical commodities constituting the Dow Jones — UBS Commodity IndexSM. In contrast, the Dow Jones-UBS Commodity Index Total ReturnSM is a total return index which, in addition to reflecting such returns, also reflects interest that could be earned on 30
cash collateral invested in 3-month U.S. Treasury bills. The Dow Jones — UBS Commodity IndexSM, does not include the total return feature of the Dow Jones-UBS Commodity Index Total ReturnSM. Risks associated with the Commodity Index may adversely affect the market price of the CDs. If the Basket includes the Commodity Index, the Basket will reflect the return on exchange-traded futures contracts on nineteen different physical commodities, and it will be less diversified than other funds or investment portfolios investing in a broader range of products and, therefore, could experience greater volatility. Additionally, the annual composition of the Commodity Index will be calculated in reliance upon historical price, liquidity and production data that are subject to potential errors in data sources or errors that may affect the weighting of components of the Commodity Index. Any discrepancies that require revision are not applied retroactively but will be reflected in the weighting calculations of the Commodity Index for the following year. However, Dow Jones and UBS may not discover every discrepancy. Furthermore, the annual weightings for the Commodity Index are determined each year in June or July and announced in July or August by UBS under the supervision of the Dow Jones — UBS Commodity IndexSM Supervisory Committee, which has a significant degree of discretion in exercising its supervisory duties with respect to the Commodity Index and has no obligation to take the needs of any parties to transactions involving Commodity Index into consideration when reweighting or making any other changes to the Commodity Index. Finally, subject to the minimum/maximum diversification limits described in “The Dow Jones — UBS Commodity IndexSM—Diversification Rules,” the Index Commodities underlying the exchange-traded futures contracts included in the Commodity Index from time to time are concentrated in a limited number of sectors, particularly energy and agriculture. If the Basket includes the Commodity Index, an investment in the CDs may therefore carry risks similar to a concentrated securities investment in a limited number of industries or sectors. Higher future prices of the commodity futures contracts constituting the Commodity Index relative to their current prices may decrease the amount payable at maturity. Commodity Indices are composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for delivery of the underlying physical commodity. As the exchange-traded futures contracts that compose a Commodity Index approach expiration, they are replaced by contracts that have a later expiration. Thus, for example, a contract purchased and held in August may specify an October expiration. As time passes, the contract expiring in October is replaced by a contract for delivery in November. This process is referred to as “rolling.” If the market for these contracts is (putting aside other considerations) in “backwardation,” where the prices are lower in the distant delivery months than in the nearer delivery months, the sale of the October contract would take place at a price that is higher than the price of the November contract, thereby creating a “roll yield.” While many commodities futures contracts have historically exhibited consistent periods of backwardation, backwardation will most likely not exist at all times. Moreover, certain commodities, such as gold, have historically traded in “contango” markets. Contango markets are those in which the prices of contracts are higher in the distant delivery months than in the nearer delivery months. The presence of contango in the commodity markets could result in negative “roll yields,” which could adversely affect the level of a Commodity Index and, therefore, the value of your CDs. Trading and other transactions by us or our affiliates in the commodities underlying the Commodity Index, futures, options, exchange-traded funds or other derivative products on commodities underlying the Commodity Index, may impair the market value of the CDs. As described below under “Fees and Discounts; Hedging,” we or our affiliates may hedge our obligations under the CDs by purchasing commodities underlying a Commodity Index, futures, or options on commodities underlying such Commodity Index, or exchange-traded funds or other derivative instruments with returns linked or related to changes in the performance of commodities underlying such Commodity Index, and we may adjust these hedges by, among other things, purchasing or selling commodities underlying such Commodity Index, futures, options or exchange-traded funds or other derivative instruments at any time. Although they are not expected to, any of these hedging activities or other hedging and investment activities of ours may adversely affect the market price of commodities 31
underlying such Commodity Index and the level of the Commodity Index and, therefore, the market value of the CDs. It is possible that we and our affiliates could receive substantial returns from these hedging activities while the market value of the CDs declines. The Commodity Index will likely underperform a cash purchase of the underlying commodities, potentially by a significant amount. Because the Dow Jones-UBS Commodity IndexSM is made up of futures contracts, there will be a cost to “rolling” the contracts forward as the Dow Jones-UBS Commodity IndexSM sells the current contracts and then adds the next month’s contracts. As the underlyings tend to have positively sloping forward curves, commonly known as “contango,” the Dow Jones-UBS Commodity IndexSM’s return experiences a negative drag when the Dow Jones-UBS Commodity IndexSM sells cheaper contracts and purchases more expensive contracts. As a result, we expect the Dow Jones-UBS Commodity IndexSM to likely underperform a direct investment in a similarly weighted basket of index commodities over the life of the CDs. Trading and other transactions by UBS and Dow Jones in the futures contracts constituting the Commodity Index and the underlying commodities may affect the level of the Commodity Index. UBS and its affiliates actively trade futures contracts and options on futures contracts on the Index Commodities. UBS and its affiliates also actively enter into or trade market securities, swaps, options, derivatives, and related instruments that are linked to the performance of the Commodity Index, the futures contracts underlying the Commodity Index or the Index Commodities. Certain of UBS’s affiliates may underwrite or issue other securities or financial instruments indexed to the Commodity Index and related indices, and Dow Jones and UBS and certain of their affiliates may license the Commodity Index for publication or for use by unaffiliated third parties. These activities could present conflicts of interest and could affect the level of the Commodity Index. For instance, a market maker in a financial instrument linked to the performance of the Commodity Index may expect to hedge some or all of its position in that financial instrument. Purchase (or selling) activity in the underlying the Commodity Index components in order to hedge the market maker’s position in the financial instrument may affect the market price of the futures contracts included in the Commodity Index, which in turn may affect the level of the Commodity Index and, therefore, the value of your CDs. With respect to any of the activities described above, none of UBS, Dow Jones or their respective affiliates has any obligation to take the needs of any buyers, sellers or holders of the CDs into consideration at any time. Changes that affect the calculation of the Commodity Index will affect the market value of the CDs and the amount you will receive at maturity. The policies of Dow Jones and UBS concerning the methodology and calculation of the Commodity Index, additions, deletions or substitutions of the Index Commodities or exchange-traded futures contracts on the Index Commodities could affect the Commodity Index and, therefore, could affect the amount payable on the CDs at maturity and the market value of the CDs prior to maturity. The amount payable on the CDs and their market value could also be affected if Dow Jones and UBS, in their sole discretion, change these policies, for example, by changing the methodology for compiling and calculating the Commodity Index, or if Dow Jones and UBS discontinue or suspend calculation or publication of the Commodity Index, in which case it may become difficult to determine the market value of the CDs. If events such as these occur, or if either the DJ-UBS Starting Level or the DJ-UBS Ending Level is not available because of a market disruption event or for any other reason, the calculation agent – which will be JPMSI, an affiliate of ours – will make a good faith estimate in its sole discretion of the Commodity Index level that would have prevailed in the absence of the market disruption event. If the calculation agent determines that the market disruption event is due to the fact that the publication of the Commodity Index is discontinued and that there is no successor index on the date when the DJ-UBS Starting Level or the Commodity Index closing level on an Averaging Date, if applicable, is required to be determined, the calculation agent will instead make a good faith estimate in its sole discretion of the DJ-UBS Ending Level or the Commodity Index closing level on an Averaging Date, if applicable, by reference to a group of 32
commodities or indexes and a computation methodology that the calculation agent determines will as closely as reasonably possible replicate the Commodity Index. For more information, see the section below called “General Terms of the CDs — Discontinuation of an Equity Index or a Commodity Index; Alteration of Method of Calculation.” The commodity futures contracts underlying the Commodity Index are subject to legal and regulatory regimes that may change in ways that could affect our ability to hedge our obligations under the CDs, and/or could lead to the early determination of the Additional Amount for your CDs, either of which would impact the value of your payment at maturity. Futures contracts and options on futures contracts markets, including those future contracts related to the Commodity Index, are subject to extensive statutes, regulations, and margin requirements. The CFTC and the exchanges on which such futures contracts trade, are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily limits and the suspension of trading. Furthermore, certain exchanges have regulations that limit the amount of fluctuations in futures contract prices which may occur during a single five minute trading period. These limits could adversely affect the market prices of relevant futures contracts and forward contracts. The regulation of commodity transactions in the U.S. is subject to ongoing modification by government and judicial action. In addition, various national governments have expressed concern regarding the disruptive effects of speculative trading in the commodity markets and the need to regulate the derivative markets in general. The effects of any future regulatory change on the value of the CDs is impossible to predict, but could be substantial and adverse to the interests of holders of the CDs For example, the CFTC has recently announced that it is considering imposing position limits on certain commodities (such as energy commodities) and the manner in which current exemptions for bona fide hedging transactions or positions are implemented in order to protect against excessive speculation, which could result in regulatory changes that may affect our ability to hedge our obligations under the CDs. Upon the occurrence of legal or regulatory changes that the calculation agent determines have interfered with our or our affiliates’ ability to hedge our obligations under the CDs, or if for any other reason we or our affiliates are unable to enter into or maintain hedge positions the calculation agent deems necessary to hedge our obligations under the CDs, the calculation agent may, in its sole and absolute discretion, determine that a commodity hedging disruption event has occurred and we will then have the right, but not the obligation, to adjust your payment at maturity based on further determinations by the calculation agent. In making such adjustment, the calculation agent will determine the Option Value of your CDs on the commodity hedging disruption date in good faith and in a commercially reasonable manner; however, all amounts payable per $1,000 principal amount CD will be due and payable only at maturity. At maturity, we will pay you, instead of the amount specified under “Description of the CDs—Payment at Maturity,” an amount described under “General Terms of the CDs— Consequences of a Commodity Hedging Disruption Event,” which will not be less than $1,000 for each $1,000 principal amount CD. If a commodity hedging disruption event occurs and we decide to exercise our right to have the calculation agent determine the Option Value of your CDs on the commodity hedging disruption date, the amount due and payable on your CDs will be due and payable only at maturity. The amount you receive at maturity will not reflect any further appreciation or depreciation of the Commodity Index after the commodity hedging disruption date. Furthermore, you will not receive any amounts (related to the Option Value or otherwise) until maturity. Additionally, if a commodity hedging disruption event ceases to exist, the amounts determined on the commodity hedging disruption date will not be revised after such commodity hedging disruption date. See “General Terms of the CDs—Consequences of a Commodity Hedging Disruption Event.” Some of the commodities underlying the Commodity Index will be subject to pronounced risks of pricing volatility. As a general matter, the risk of low liquidity or volatile pricing around the maturity date of a commodity futures contract is greater than in the case of other futures contracts because (among other factors) a 33
number of market participants take physical delivery of the underlying commodities. Many commodities, like those in the energy and industrial metals sectors, have liquid futures contracts that expire every month. Therefore, in the calculation of the Commodity Index these contracts are rolled forward every month. Contracts based on certain other commodities, most notably agricultural and livestock products, tend to have only a few contract months each year that trade with substantial liquidity. Thus, these commodities, with related futures contracts that expire infrequently, roll forward less frequently than every month in the calculation of the Commodity Index, and can have further pronounced pricing volatility during extended periods of low liquidity. Risks Relating to the Shares of the ETF The anti-dilution protection is limited. The calculation agent will make adjustments to the Share Adjustment Factor, which will initially be set at 1.0, for certain events affecting shares of the ETF. See “General Terms of CDs — Anti-Dilution Adjustments.” The calculation agent is not required, however, to make such adjustments in response to all events that could affect the ETF. If an event occurs that does not require the calculation agent to make an adjustment, the value of the CDs may be materially and adversely affected. You will have no shareholder rights with respect to the ETF or the equity securities underlying the ETF or included in the MSCI EAFE® Index. As a holder of the CDs, you will not have voting rights or rights to receive dividends or other distributions or other rights with respect to the ETF or the equity securities underlying the ETF or included in the MSCI EAFE® Index. There are risks associated with the iShares® MSCI EAFE Index Fund. Although the iShares® MSCI EAFE Index Fund’s shares are listed for trading on NYSE Arca, Inc. (“NYSE Arca”) and a number of similar products have been traded on NYSE Arca for varying periods of time, there is no assurance that an active trading market will continue for the shares of the iShares® MSCI EAFE Index Fund or that there will be liquidity in the trading market. In addition, Barclays Global Fund Advisors, which we refer to as BGFA, is currently the iShares® MSCI EAFE Index Fund’s investment adviser. The iShares® MSCI EAFE Index Fund is subject to management risk, which is the risk that the BGFA’s investment strategy, the implementation of which is subject to a number of constraints (as outlined under “The iShares® MSCI EAFE Index Fund — Investment Objective and Strategy”), may not produce the intended results. For example, the iShares® MSCI EAFE Index Fund’s investment advisor may invest up to 10% of the iShares® MSCI EAFE Index Fund’s assets in securities not included in the MSCI EAFE® Index but which the investment adviser believes will help the iShares® MSCI EAFE Index Fund track the MSCI EAFE® Index, as well as in certain futures, options, swap contracts and other derivatives, cash and cash equivalents or money market instruments, such as repurchase agreements and money market funds (including affiliated money market funds). The performance of the iShares® MSCI EAFE Index Fund may not correlate with the performance of the MSCI EAFE® Index. The iShares® MSCI EAFE Index Fund uses a representative sampling strategy (as described under “The iShares® MSCI EAFE Index Fund — Representative Sampling”) to attempt to track the performance of the MSCI EAFE® Index. The iShares® MSCI EAFE Index Fund invests in a representative sample of equity securities included in the MSCI EAFE® Index; however, the iShares® MSCI EAFE Index Fund may not hold all or substantially all of the equity securities included in the MSCI EAFE® Index. Therefore, while the performance of the iShares® MSCI EAFE Index Fund is linked principally to the performance of the MSCI EAFE® Index, the performance of the iShares® MSCI EAFE Index Fund is also generally linked in part to shares of other exchange-traded funds because the investment adviser for the iShares® MSCI EAFE Index Fund may invest up to 10% of the iShares® MSCI EAFE Index Fund’s assets in other 34
iShares® funds that seek to track the performance of equity securities of constituent countries of the MSCI EAFE® Index. In addition, the performance of the iShares® MSCI EAFE Index Fund will reflect additional transaction costs and fees that are not included in the calculation of the MSCI EAFE® Index. Also, corporate actions with respect to the sample of equity securities (such as mergers and spin-offs) may impact the variance between the iShares® MSCI EAFE Index Fund and the MSCI EAFE® Index. Finally, because the shares of the iShares® MSCI EAFE Index Fund are traded on the NYSE and are subject to market supply and investor demand, the market value of one share of the iShares® MSCI EAFE Index Fund may differ from the net asset value per share of the iShares® MSCI EAFE Index Fund. For all of the foregoing reasons, the performance of the iShares® MSCI EAFE Index Fund may not correlate with the performance of the MSCI EAFE® Index. Consequently, the return on the CDs will not be the same as investing directly in the iShares® MSCI EAFE Index Fund or in the MSCI EAFE® Index or in the equity securities held by the iShares® MSCI EAFE Index Fund or included in the MSCI EAFE® Index, and will not be the same as investing in a CD with a payment at maturity linked to the performance of the MSCI EAFE® Index. The policies of MSCI and of the investment adviser for the iShares® MSCI EAFE Index Fund could affect the value and the amount payable on the CDs. The policies of the investment adviser for the iShares® MSCI EAFE Index Fund concerning the calculation of the iShares® MSCI EAFE Index Fund’s net asset value, additions, deletions or substitutions of equity securities held by the iShares® MSCI EAFE Index Fund and manner in which changes affecting the MSCI EAFE® Index are reflected in the iShares® MSCI EAFE Index Fund could affect the market price of the shares of the iShares® MSCI EAFE Index Fund and, therefore, affect the amount payable on the CDs upon early redemption or at maturity, and the value of the CDs before maturity. The amount payable on the CDs and its value could also be affected if the investment adviser changes these policies, for example, by changing the manner in which it calculates the iShares® MSCI EAFE Index Fund’s net asset value, or if the investment adviser discontinues or suspends calculation or publication of the iShares® MSCI EAFE Index Fund’s net asset value, in which case it may become difficult to determine the value of the CD. In addition, MSCI Inc. (“MSCI”) owns the MSCI EAFE® Index and is responsible for the design and maintenance of the MSCI EAFE® Index. The policies of MSCI concerning the calculation of the MSCI EAFE® Index, including decisions regarding the addition, deletion or substitution of the equity securities included in the MSCI EAFE® Index, could affect the level of the MSCI EAFE® Index and consequently could affect the market prices of the shares of the iShares® MSCI EAFE Index Fund.
35
GENERAL TERMS OF THE CDs Calculation Agent J.P. Morgan Securities Inc. (“JPMSI”), one of our affiliates, will act as the calculation agent. The calculation agent will determine, among other things, the closing level or closing price of a single Component and each Component in the Basket, whether a Knock-Out Event has occurred (for CDs with a Knock-Out feature) as specified in the relevant term sheet, and Basket Closing Level, if applicable, on the pricing date and the relevant Observation Dates, the Basket Return, each Component Return, including the Starting Index Level and Ending Index Level (or Initial ETF Share Price and Final ETF Share Price, if applicable), the Share Adjustment Factor and anti-dilution adjustments, if any, related to the ETF and the Additional Amount, if any, in cash we will pay you at maturity of the CDs. In addition, the calculation agent will determine whether a market disruption event has occurred or whether any of the Components have been discontinued calculating, if applicable, the Option Value of your CDs on the commodity hedging disruption date in the event of a commodity hedging disruption event, and whether there has been a material change in the method of calculating the Component or any of the Components, as well as which exchange-traded fund will be substituted for the ETF (or relevant successor ETF, if applicable) if the ETF (or relevant successor ETF, if applicable) is de-listed, liquidated or otherwise terminated; whether the index underlying the ETF (or the index underlying relevant successor ETF, if applicable) has been changed in a material respect and whether the ETF (or relevant successor ETF, if applicable) has been modified so that the ETF (or relevant successor ETF, if applicable) does not, in the opinion of the calculation agent, fairly represent the price of the ETF (or relevant successor ETF, if applicable) had those modifications not been made. In performing these duties, JPMSI may have interests adverse to the interests of the holders of the CDs, which may affect your return on the CDs, particularly where JPMSI, as the calculation agent, is entitled to exercise discretion. All determinations made by the calculation agent will be at the sole discretion of the calculation agent and will, in the absence of manifest error, be conclusive for all purposes and binding on you and on us. We may appoint a different calculation agent from time to time after the date of the relevant term sheet without your consent and without notifying you. All calculations with respect to the Ending Index Level, the Index Return, the Final ETF Share Price, the ETF Share Return, or, if applicable, the Basket Closing Level and Basket Return (including each Component Return) will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded upward (e.g., .876545 would be rounded to .87655); all dollar amounts related to the determination of the Additional Amount payable at maturity, if any, per $1,000 CD will be rounded to the nearest ten-thousandth, with five one hundred-thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and all dollar amounts paid on the aggregate principal amount of CDs per holder will be rounded to the nearest cent, with one-half cent rounded upward. Market Disruption Events Certain events may prevent the calculation agent from calculating the closing level of the Equity Index, the Bond Index, the Commodity Index or the closing price of shares of the ETF, as applicable, on any Observation Date and consequently the Component Return or Basket Return, as the case may be, and the Additional Amount, if any, that we will pay to you at maturity. These events may include disruptions or suspensions of trading on the markets as a whole. In addition, certain events may prevent us or our affiliates from hedging our obligations under the CDs including, but not limited to, changes in laws or regulations applicable to the commodity futures contracts underlying the Commodity Index. In the case of such an event we have the right, but not the obligation, to determine the Option Value of your CDs on the commodity hedging disruption date and the value of the Additional Amount payable at maturity as described below under “General Terms of the CDs — Consequences of a Commodity Hedging Disruption Event.” We refer to each of these events individually as a “market disruption event.” Market Disruption Events related to an Equity Index With respect to an Equity Index (or any relevant successor index), a “market disruption event” means: 36
a suspension, absence or material limitation of trading of stocks then constituting 20 percent or more of the level of the Equity Index (or the relevant successor index) on the relevant exchanges (as defined below) for such securities for more than two hours of trading during, or during the one hour period preceding the close of, the principal trading session on such relevant exchange; or
a breakdown or failure in the price and trade reporting systems of any relevant exchange as a result of which the reported trading prices for stocks then constituting 20 percent or more of the level of the Equity Index (or the relevant successor index) during the one hour preceding the close of the principal trading session on such relevant exchange are materially inaccurate; or
the suspension, absence or material limitation of trading on any major securities market for trading in futures or options contracts related to the Equity Index (or the relevant successor index) for more than two hours of or during the one hour period preceding the close of, the principal trading session on such market; or
a decision to permanently discontinue trading in the relevant futures or options contracts,
in each case as determined by the calculation agent in its sole discretion; and
a determination by the calculation agent in its sole discretion that the event described above materially interfered with its ability or the ability of any of our affiliates to adjust or unwind all or a material portion of any hedge with respect to the CDs.
For the purpose of determining whether a market disruption event with respect to the Equity Index (or relevant successor index) exists at any time, if trading in a security included in the Equity Index (or the relevant successor index) is materially suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the Equity Index (or relevant successor index) shall be based on a comparison of:
the portion of the level of an Equity Index (or the relevant successor index) attributable to that security relative to
the overall level of an Equity Index (or the relevant successor index),
in each case immediately before that suspension or limitation. For purposes of determining whether a market disruption event with respect to the Equity Index (or the relevant successor index) has occurred, unless otherwise specified in the relevant term sheet:
a limitation on the hours or number of days of trading will not constitute a market disruption event if it results from an announced change in the regular business hours of the relevant exchange, or the primary exchange or market for trading in futures or options contracts related to the Equity Index (or the relevant successor index);
limitations pursuant to the rules of any relevant exchange similar to New York Stock Exchange (“NYSE”) Rule 80B (or any applicable rule or regulation enacted or promulgated by any other self-regulatory organization or any government agency of scope similar to NYSE Rule 80B as determined by the calculation agent) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading;
a suspension of trading in futures or options contracts on an the Equity Index (or the relevant successor index) by the primary securities market trading in such contracts by reason of
a price change exceeding limits set by such exchange or market,
an imbalance of orders relating to such contracts, or 37
a disparity in bid and ask quotes relating to such contracts
will, in each such case, constitute a suspension, absence or material limitation of trading in futures or options contracts related to an Equity Index (or the relevant successor index); and
a “suspension, absence or material limitation of trading” on any relevant exchange or on the primary market on which futures or options contracts related to an Equity Index (or the relevant successor index) are traded will not include any time when such market is itself closed for trading under ordinary circumstances.
“Relevant exchange” means, with respect to an Equity Index or the relevant successor index, the primary exchange or market of trading for any security (or any combination thereof) then included in an Equity Index, or successor index, as applicable. Market Disruption Events related to the Commodity Index With respect to the Commodity Index or any relevant successor index, a “market disruption event,” unless otherwise specified in the relevant term sheet, means: (1) the termination or suspension of, or material limitation or disruption in the trading of any exchange-traded commodity futures contract then underlying the Commodity Index (or the relevant successor index); or (2) the price at any time of any exchange-traded commodity futures contract then underlying the Commodity Index (or the relevant successor index) has increased or decreased by an amount equal to the maximum permitted price change set by the relevant exchange; or (3) the failure of the sponsor or calculation agent, as the case may be, for the Commodity Index (or the sponsor or calculation agent, as the case may be, for the relevant successor index) to calculate and publish the U.S. dollar level for the Commodity Index (or the relevant successor index); or (4) the settlement price is not published for any exchange-traded commodity futures contract then underlying the Index (or the relevant successor index); or (5) the occurrence of a material change in the formula for or the method of calculating the relevant settlement price of the exchange-traded commodity futures contracts then underlying the Commodity Index (or the relevant successor index); or (6) the occurrence of a material change in the content, composition or constitution of the exchange-traded commodity futures contracts then underlying the Commodity Index (or the relevant successor index); or (7) a commodity hedging disruption event, in each case as determined by the calculation agent in its sole discretion; and
in the case of an event described in clause (1), (2), (3), (4), (5) or (6) above, a determination by the calculation agent in its sole discretion that the applicable event described above materially interfered with our ability or the ability of any of our affiliates to adjust or unwind all or a material portion of any hedge with respect to the CDs.
A limitation on the hours or number of days of trading will not constitute a market disruption event with respect to the Index and any relevant successor index if the limitation results from an announced change in the regular business hours of the relevant exchange. A “commodity hedging disruption event” means that: (a) due to (i) the adoption of, or any change in, any applicable law, regulation, rule or order (including, without limitation, any tax law); or (ii) the promulgation of, or any change in, the 38
interpretation, application, exercise or operation by any court, tribunal, regulatory authority, exchange or trading facility or any other relevant entity with competent jurisdiction of any applicable law, rule, regulation, order, decision or determination (including, without limitation, as implemented by the U.S. Commodities Futures Trading Commission or any exchange or trading facility), in each case occurring on or after the pricing date, the calculation agent determines in good faith that it is contrary (or upon adoption, it will be contrary) to such law, rule, regulation, order, decision or determination for us to purchase, sell, enter into, maintain, hold, acquire or dispose of our or our affiliates’ (A) positions or contracts in securities, options, futures, derivatives or foreign exchange or (B) other instruments or arrangements, in each case, in order to hedge our obligations under the CDs (in the aggregate on a portfolio basis or incrementally on a trade by trade basis) (“hedge positions”), including (without limitation) if such hedge positions (in whole or in part) are (or, but for the consequent disposal thereof, would otherwise be) in excess of any allowable position limit(s) in relation to any commodity traded on any exchange(s) or other trading facility (it being within the sole and absolute discretion of the calculation agent to determine which of the hedge positions are counted towards such limit); or (b) for any reason, we or our affiliates are unable, after using commercially reasonable efforts, to (i) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transaction(s) or asset(s) the calculation agent deems necessary to hedge the risk of entering into and performing our commodity-related obligations with respect to the CDs, or (ii) realize, recover or remit the proceeds of any such transaction(s) or asset(s). Please see the risk factor entitled “The commodity futures contracts underlying the Commodity Index are subject to legal and regulatory regimes that may change in ways that could affect our ability to hedge our obligations under the CDs, and/or could lead to the early determination of the Additional Amount for your CDs, either of which would impact the value of your payment at maturity” for more information. “Relevant Exchange” means, with respect to the Commodity Index or any relevant successor index, the primary exchange or market of trading for any futures contract then included in the Commodity Index or such successor index, as applicable. Market Disruption Events related to the Bond Index With respect to the Bond Index, a “market disruption event,” unless otherwise specified in the relevant term sheet, means:
the termination or suspension of, or material limitation or disruption in the trading of any government bonds included in the Bond Index; or
the Bond Index is not published; or
the method of calculating the Bond Index, or the level thereof, is changed in a material respect, or if the Bond Index is in any other way modified so that the Bond Index does not, in the opinion of the calculation agent, fairly represent the level of the Bond Index had such changes or modifications not been made,
in each case as determined by the calculation agent in its sole discretion; and
a determination by the calculation agent in its sole discretion that the applicable event described above materially interfered with its ability or the ability of any of our affiliates to adjust or unwind all or a material portion of any hedge with respect to the CDs.
Market Disruption Events related to the ETF With respect to the ETF (or any successor ETF or other security for which a closing price must be determined), a “market disruption event,” unless otherwise specified in the relevant terms sheet, means: 39
the occurrence or existence of a suspension, absence or material limitation of trading of the shares of the ETF (or such successor ETF or such other security) on the relevant exchange for more than two hours of trading during, or during the one-half hour period preceding the close of, the principal trading session on such relevant exchange; or
a breakdown or failure in the price and trade reporting systems of the relevant exchange for the shares of the ETF (or such successor ETF or such other security) as a result of which the reported trading prices for shares of the ETF (or such successor ETF or such other security) during the last one-half hour preceding the close of the principal trading session on such relevant exchange are materially inaccurate; or
the occurrence or existence of a suspension, absence or material limitation of trading on the primary exchange or market for trading in futures or options contracts related to the shares of the ETF (or such successor ETF or such other security), if available, during the one-half hour period preceding the close of the principal trading session in the applicable exchange or market; or
the occurrence or existence of a suspension, absence or material limitation of trading of equity securities then constituting 20% or more of the level of the underlying index (or the underlying index related to the successor ETF) on the relevant exchanges for such securities for more than two hours of trading during, or during the one-half hour period preceding the close of, the principal trading session on such relevant exchange, in each case as determined by the calculation agent in its sole discretion; or
the occurrence or existence of a suspension, absence or material limitation of trading on the primary exchange or market for trading in futures or options contracts related to the underlying index (or the underlying index related to the successor ETF) or the shares of the ETF (or such successor ETF or such other security) for more than two hours of trading during, or during the one-half hour period preceding the close of, the principal trading session on such applicable exchange or market,
in each case as determined by the calculation agent in its sole discretion; and
a determination by the calculation agent in its sole discretion that the applicable event described above materially interfered with our ability or the ability of any of our affiliates to unwind or adjust all or a material portion of the hedge position with respect to the CDs.
For the purpose of determining whether a market disruption event with respect to the ETF (or the successor ETF) exists at any time, if trading in a security included in the underlying index (or the underlying index related to the successor ETF) is materially suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the underlying index (or the underlying index related to the successor ETF) will be based on a comparison of (x) the portion of the level of the underlying index (or the underlying index related to the successor ETF) attributable to that security relative to (y) the overall level of the underlying index (or the underlying index related to the successor ETF), in each case immediately before that suspension or limitation. For the purpose of determining whether a market disruption event with respect to the ETF (or the successor ETF or such other security) has occurred, unless otherwise specified in the relevant term sheet:
a limitation on the hours or number of days of trading will not constitute a market disruption event if it results from an announced change in the regular business hours of the relevant exchange or the primary exchange or market for trading in futures or options contracts related to the shares of the ETF (or such successor ETF or such other security);
a decision to permanently discontinue trading in the relevant futures or options contract or exchange-traded fund will not constitute a market disruption event; 40
limitations pursuant to the rules of any relevant exchange similar to NYSE Rule 80B (or any applicable rule or regulation enacted or promulgated by any other self-regulatory organization or any government agency of scope similar to NYSE Rule 80B as determined by the calculation agent) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading;
a suspension of trading in futures or options contracts on the underlying index (or the underlying index related to the successor ETF) or the shares of the ETF (or such successor ETF or such other security) by the primary exchange or market for trading in such contracts by reason of (a) a price change exceeding limits set by such exchange or market, (b) an imbalance of orders relating to such contracts, or (c) a disparity in bid and ask quotes relating to such contracts, will constitute a suspension, absence or material limitation of trading in futures or options contracts related to the underlying index (or the underlying index related to such successor ETF) or the shares of the ETF (or such successor ETF or such other security); and
a suspension, absence or material limitation of trading on any relevant exchange or on the primary exchange or market on which futures or options contracts related to the underlying index (or the underlying index related to the successor ETF) or one share of the ETF (or such successor ETF or such other security) are traded will not include any time when such exchange or market is itself closed for trading under ordinary circumstances.
“Relevant exchange” means, with respect to the shares of the ETF or any successor ETF, the primary exchange or market of trading for the shares of the ETF, or the shares of such successor ETF, as applicable, or, with respect to the underlying index or any underlying index related to such successor ETF, as applicable, the primary exchange or market of trading for any security (or any combination thereof) then included in the underlying index or any underlying index related to such successor ETF, as applicable. Consequences of a Commodity Hedging Disruption Event If a commodity hedging disruption event occurs, we will have the right, but not the obligation, to adjust your payment at maturity based on determinations made by the calculation agent described below. If we choose to exercise this right, in making such adjustment, on the date on which the calculation agent determines that a commodity hedging disruption event has occurred (such date, a “commodity hedging disruption date”), the calculation agent will determine, in good faith and in a commercially reasonable manner, the forward price of the embedded option representing the Additional Amount payable on the CDs at maturity (the “Option Value”). The commodity hedging disruption event may occur prior to the final Observation Date. We will provide, or cause the calculation agent to provide, written notice of our election to exercise such right to DTC. We (or the calculation agent) will deliver this notice as promptly as possible and in no event later than the fifth (5th) business day immediately following the commodity hedging disruption date. Additionally, we will specify in such notice the Option Value as determined on the commodity hedging disruption date. If a commodity hedging disruption event occurs and we decide to exercise our right to adjust your payment at maturity and, in doing so, cause the calculation agent to determine the Option Value of your CDs, such Option Value will be a fixed amount representing the Additional Amount payable at maturity; provided that such Additional Amount will not be less than zero (or, if applicable, the Minimum Return). Notwithstanding the foregoing, the amount due and payable per $1,000 principal amount CD will not be less than $1,000 for each $1,000 principal amount deposited and will be due and payable only at 41
maturity. If we choose to exercise our right to determine the Option Value, for each $1,000 principal amount CD, we will pay you at maturity, instead of the amounts set forth under “Description of the CDs— Payment at Maturity,” an amount equal to: (1) an Additional Amount equal to the Option Value; provided that such Additional Amount will not be less than zero (or, if applicable, the Minimum Return); plus (2) $1,000. For the avoidance of doubt, the determination set forth above is only applicable to the amount due at maturity with respect to an early determination of the Additional Amount as a result of a commodity hedging disruption event. Discontinuation of an Equity Index or a Commodity Index; Alteration of Method of Calculation If the Index Sponsor of an Equity Index or Commodity Index discontinues publication of such Equity Index or Commodity Index and such Index Sponsor or another entity publishes a successor or substitute index that the calculation agent determines, in its sole discretion, to be comparable to the discontinued Equity Index or Commodity Index (such index being referred to herein as a “successor index”), then the closing level for such Equity Index or Commodity Index on any relevant Averaging Date, Observation Date or other relevant date on which the closing level for such Equity Index or Commodity Index is to be determined will be determined by reference to the level of such successor index at the close of trading on the relevant exchange for such successor index on such day. Upon any selection by the calculation agent of a successor index, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the CDs. If the Index Sponsor for an Equity Index or Commodity Index discontinues publication of such Equity Index or Commodity Index prior to, and such discontinuation is continuing on, any Averaging Date, Observation Date or any other relevant date on which the closing level for such Equity Index or Commodity Index is to be determined, and the calculation agent determines, in its sole discretion, that no successor index for such Equity Index or Commodity Index is available at such time, or the calculation agent has previously selected a successor index and publication of such successor index is discontinued prior to, and such discontinuation is continuing on, such Averaging Date, Observation Date or other relevant date, then the calculation agent will determine the closing level for such Equity Index or Commodity Index on such date. The closing level for such Equity Index or Commodity Index will be computed by the calculation agent in accordance with the formula for and method of calculating such Equity Index or Commodity Index or successor index, as applicable, last in effect prior to such discontinuation, using the closing price (or, if trading in the relevant securities has been materially suspended or materially limited, the calculation agent’s good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each security most recently composing such Equity Index or Commodity Index or successor index, as applicable. Notwithstanding these alternative arrangements, discontinuation of the publication of an Equity Index or Commodity Index or its successor index, as applicable, may adversely affect the value of the CDs. If at any time the method of calculating the Equity Index or Commodity Index, as applicable, or a successor index, or the level thereof, is changed in a material respect, or if the Equity Index or Commodity Index or a successor index is in any other way modified so that such Equity Index or Commodity Index or such successor index does not, in the opinion of the calculation agent, fairly represent the level of such Equity Index or Commodity Index or such successor index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the closing level for such Equity Index or Commodity Index is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of an index comparable to such Equity Index or Commodity Index or such successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the closing level for such Equity Index or Commodity Index with reference to such Equity Index or Commodity Index or such successor index, as adjusted. Accordingly, if the method of calculating such Equity Index or Commodity Index or such successor index is modified so that the level of such Equity Index or Commodity Index or such successor index is a fraction of what it would have been if there had been no such modification (e.g., due to a split in such Equity Index or 42
Commodity Index), then the calculation agent will adjust its calculation of such Equity Index or Commodity Index or such successor index in order to arrive at a level of such Equity Index or Commodity Index or such successor index as if there had been no such modification (e.g., as if such split had not occurred). Information relating to the discontinuation of the Bond Index and alteration of method of calculation of the Bond Index is described under “The JPMorgan GBI Global Bond Total Return Index – Discontinuation of the GBI Total Return Index; Alteration of Method of Calculation” Discontinuation of the Shares of the ETF; Alternate Calculation of Closing Price If the shares of the ETF (or the successor ETF shares (as defined herein)) are de-listed from the relevant exchange for the shares of the ETF (or such successor ETF shares), liquidated or otherwise terminated, the calculation agent will substitute the shares of another exchange-traded fund that the calculation agent determines, in its sole discretion, is comparable to the discontinued shares of the ETF (or such successor ETF shares) (such substitute shares of the ETF being referred to herein as the “successor ETF shares”). If the shares of the ETF (or successor ETF shares) are de-listed, liquidated or otherwise terminated and the calculation agent determines that no successor ETF shares are available, then the calculation agent will, in its sole discretion, calculate the appropriate closing price per share of the ETF by a computation methodology that the calculation agent determines will as closely as reasonably possible replicate the shares of the ETF. If successor ETF shares are selected or the calculation agent calculates the closing prices by a computation methodology that the calculation determines will as closely as reasonably possible replicate the shares of the ETF, those successor ETF shares or that closing price will be substituted for the shares of the ETF (or such successor ETF shares) for all purposes of the CDs. Upon any selection by the calculation agent of the successor ETF shares, the calculation agent will cause written notice thereof to be promptly furnished to the trustee, to us and to the holders of the CDs. If at any time, the underlying index related to the shares of the ETF (or the underlying index related to the successor ETF shares) is changed in a material respect, or the shares of the ETF or the successor ETF shares in any other way is modified so that it does not, in the opinion of the calculation agent, fairly represent the price of the shares of the ETF (or such successor ETF shares) had those changes or modifications not been made, then the calculation agent will, at the close of business in New York City on each date on which the closing price per share of the ETF or such successor ETF shares, is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a closing price of one share of an exchange-traded fund comparable to one share of the ETF (or such successor ETF shares) as if those changes or modifications had not been made, and calculate the closing price with reference to the shares of the ETF (or such successor ETF shares), as adjusted. The calculation agent may also determine that no adjustment is required by the modification of the method of calculation. The calculation agent will be solely responsible for the method of calculating the closing price per share of the ETF share (or any successor ETF shares) and of any related determinations and calculations, and its determinations and calculations with respect thereto will be conclusive in the absence of manifest error. The calculation agent will provide information as to the method of calculating the closing price of the shares of the ETF upon written request by any investor in the CDs. Anti-Dilution Adjustments The Share Adjustment Factor is subject to adjustment by the calculation agent as a result of the anti dilution adjustments described in this section. No adjustments to the Share Adjustment Factor will be required unless the Share Adjustment Factor adjustment would require a change of at least 0.1% in the Share Adjustment Factor then in effect. The Share Adjustment Factor resulting from any of the adjustments specified in this section will be rounded to the nearest one ten thousandth with five one hundred thousandths being rounded upward. The 43
calculation agent will not be required to make any adjustments to the Share Adjustment Factor after the close of business on the business day immediately preceding the maturity date. No adjustments to the Share Adjustment Factor will be required other than those specified below. The required adjustments specified in this section do not cover all events that could affect the closing price per share of the ETF (or the relevant successor ETF shares) on any trading day during the term of the CDs. With respect to the shares of the ETF (or the relevant successor ETF), anti dilution adjustments will be calculated as follows: Share Splits and Reverse Share Splits If the shares of the ETF (or such successor ETF) are subject to a share split or reverse share split, then once such split has become effective, the Share Adjustment Factor will be adjusted so that the new Share Adjustment Factor will equal the product of:
the prior Share Adjustment Factor, and
the number of shares that a holder of the shares of the ETF (or such successor ETF shares) before the effective date of the share split or reverse share split would have owned or been entitled to receive immediately following the applicable effective date.
Share Dividends or Distributions If the shares of the ETF (or such successor ETF) is subject to (i) a share dividend, i.e., an issuance of additional shares of the ETF (or such successor ETF) that is given ratably to all or substantially all holders of the shares of the ETF (or such successor ETF) or (ii) a distribution of the shares of the ETF (or such successor ETF) as a result of the triggering of any provision of the corporate charter of the ETF (or such successor ETF), then, once the dividend or distribution has become effective and the shares of the ETF (or such successor ETF) are trading ex dividend, the Share Adjustment Factor will be adjusted so that the new Share Adjustment Factor shall equal the prior Share Adjustment Factor plus the product of:
the prior Share Adjustment Factor, and
the number of additional shares issued in the share dividend or distribution with respect to the shares of the ETF (or such successor ETF shares).
Non Cash Distributions If the ETF (or such successor ETF) distribute shares of capital stock, evidences of indebtedness or other assets or property of the ETF (or such successor ETF) to all or substantially all holders of the shares of the ETF (or such successor ETF) (other than (i) share dividends or distributions referred to under “— Share Dividends or Distributions” above and (ii) cash dividends referred under “— Cash Dividends or Distributions” below), then, once the distribution has become effective and the shares of the ETF (or such successor ETF) are trading ex dividend, the Share Adjustment Factor will be adjusted so that the new Share Adjustment Factor shall equal the product of:
the prior Share Adjustment Factor, and
a fraction, the numerator of which is the Current Market Price per share of the ETF (or such successor ETF shares) and the denominator of which is the amount by which such Current Market Price exceeds the Fair Market Value of such distribution.
The “Current Market Price” of the shares of the ETF (or such successor ETF shares) means the closing price of per share of the ETF (or such successor ETF shares) on the trading day immediately 44
preceding the ex dividend date of the dividend or distribution requiring an adjustment to the Share Adjustment Factor. “Ex dividend date,” with respect to a dividend or other distribution for the shares of the ETF (or such successor ETF), will mean the first trading day on which transactions in the shares of the ETF (or such successor ETF) trade on the relevant exchange without the right to receive that dividend or other distribution. The “Fair Market Value” of any such distribution means the value of such distribution on the ex dividend date for such distribution, as determined by the calculation agent. If such distribution consists of property traded on the ex dividend date on a U.S. national securities exchange, the Fair Market Value will equal the closing price of such distributed property on such ex dividend date. Cash Dividends or Distributions If the issuer of the shares of the ETF (or such successor ETF shares) pays dividends or makes other distributions consisting exclusively of cash to all or substantially all holders of the shares of the ETF (or such successor ETF shares) during any dividend period during the term of the CDs, in an aggregate amount that, together with other such cash dividends or distributions made previously during such dividend period with respect to which an adjustment to the Share Adjustment Factor has not previously been made under this “—Cash Dividends or Distributions” section, exceeds the Dividend Threshold, then, once the dividend or distribution has become effective and the shares of the ETF (or such successor ETF shares) are trading ex dividend, the Share Adjustment Factor will be adjusted so that the new Share Adjustment Factor will equal the product of:
the prior Share Adjustment Factor, and
a fraction, the numerator of which is the Current Market Price per share of the ETF (or such successor ETF shares) and the denominator of which is the amount by which such Current Market Price exceeds the aggregate amount in cash per share of the ETF (or such successor ETF shares) distributes in such cash dividend or distribution together with any cash dividends or distributions made previously during such dividend period with respect to which an adjustment to the Share Adjustment Factor has not previously been made under this “—Cash Dividends or Distributions” section to holders of the shares of the ETF in excess of the Dividend Threshold.
For the avoidance of doubt, the Share Adjustment Factor may be adjusted more than once in any particular dividend period because of cash dividends or distributions that exceed the Dividend Threshold. If the Share Adjustment Factor has been previously adjusted in a particular dividend period because of cash dividends or distributions that exceed the Dividend Threshold, subsequent adjustments will be made if the ETF (or such successor ETF) pay cash dividends or makes other distributions during such dividend period in an aggregate amount that, together with other such cash dividends or distributions since the last adjustment to the Share Adjustment Factor (because of cash dividends or distributions that exceed the Dividend Threshold) exceeds the Dividend Threshold. Such subsequent adjustments to the Share Adjustment Factor will only take into account the cash dividends or distributions during such dividend period made since the last adjustment to the Share Adjustment Factor because of cash dividends or distributions that exceed the Dividend Threshold. The “Dividend Threshold” is equal to the sum of (x) the immediately preceding cash dividend(s) or other cash distribution(s) paid in the preceding dividend period, if any, per share of the ETF (or such successor ETF shares) plus (y) 10% of the closing price per share of the ETF (or such successor ETF shares) on the trading day immediately preceding the ex dividend date, unless otherwise specified in the relevant term sheet. The “dividend period” means any period during the term of the CDs for which dividends are paid on a regular and consistent basis to shareholders of the shares of the ETF (or such successor ETF shares). 45
The calculation agent will be solely responsible for the determination and calculation of any adjustments to the Share Adjustment Factor and of any related determinations and calculations, and its determinations and calculations with respect thereto will be conclusive in the absence of manifest error. The calculation agent will provide information as to any adjustments to the Share Adjustment Factor upon written request by any investor in the CDs. Governing Law The CDs will be governed by and interpreted in accordance with the laws of the State of New York. Brokered CDs The CDs may be offered and sold by JPMSI and other dealers in the primary market. A dealer offering the CDs to its customers is doing so pursuant to an arrangement between such dealer and JPMSI. Such dealer makes no representation or warranties about the accuracy of this disclosure and makes no guarantee in any way about the financial condition of the Bank. Early Call at Our Option If a CD is designated as a callable CD in the applicable term sheet (a “Callable CD”), the Callable CD generally will be callable at our option during the periods or on the specific dates specified in the applicable term sheet, on written notice given as provided in the applicable term sheet. Unless otherwise provided in the applicable term sheet, any such call will be effected in increments of $1,000 per Callable CD, at the call price or prices specified in the applicable term sheet (each, a “Call Price”). If any Callable CDs are called by us prior to the scheduled maturity date, you will be entitled to receive only the relevant Call Price and, unless the applicable term sheet specifies otherwise, you will not receive any interest. If we do not call a Callable CD prior to the stated maturity date, the principal amount plus the interest, if any, that you receive on the scheduled maturity date may be less than any of the Call Prices. In the event we were to fail between the time a call notice is given and the time you receive the Call Price, the amount of the Call Price in excess of the principal amount deposited would not be insured. Additions and Withdrawals General When you purchase a CD, you agree with us to keep your funds on deposit for the term of the CD. Accordingly, no additions are permitted to be made to any CD, and no withdrawals are permitted to be made from any CD, except that withdrawal will be permitted in the event of the death of the beneficial owner of a CD, which right we refer to as the “Survivor’s Option,” or in the event of the adjudication of incompetence of the beneficial owner of the CDs by a court or other administrative body of competent jurisdiction. In such event, and unless otherwise specified in “—Survivor’s Option” with respect to the death of the owner of a CD, provided that prior written notice of such proposed withdrawal has been given to your broker and the Bank, together with appropriate documentation to support such request, the Bank will permit withdrawal of all CDs held by such beneficial owner (no partial withdrawals will be permitted). The amount payable by the Bank on any CDs upon such withdrawal will equal the principal amount of the withdrawn CDs. For information about the amount payable by the Bank upon early withdrawal after the death of the beneficial owner of a CD and the procedures and limitations on such early withdrawals of the CDs, please see “—Survivor’s Option” below. If the relevant term sheet provides for an election for early redemptions or withdrawals for any other reason other than the death or adjudication of incompetence of a depositor, such term sheet will set forth the method for calculating the early redemption amount you will be entitled to receive. Upon early 46
redemption or withdrawal of a CD, the amount you receive may be less, and possibly significantly less, than the principal amount of your CD. In the event we were to fail between an early redemption date (as defined and specified in the relevant term sheet) and the time you receive the early redemption amount (as defined and specified in the relevant term sheet), the early redemption amount in excess of the principal amount of the CD, if any, may not be FDIC insured. Survivor’s Option A holder of CDs will have the right to require us to repay such CDs prior to the maturity date, if requested by the authorized representative of the beneficial owner of such CDs following the death of the beneficial owner of such CDs. To exercise the Survivor’s Option, the CDs must have been acquired by the deceased beneficial owner at least six months prior to the date of exercise of the Survivor’s Option. Upon valid exercise of the Survivor’s Option and the proper tender of CDs for repayment, and subject to the conditions set forth herein, we will repay such CDs, in whole but not in part, at a price equal to 100% of the principal amount of the deceased beneficial owner’s beneficial interest in such CDs so tendered. For purposes of this section, a beneficial owner of a CD is a person who has the right, immediately prior to such person’s death, to receive the proceeds from the disposition of that CD, as well as the right to receive payment of the principal of the CD at maturity. To be valid, within one year of the date of death of the deceased beneficial owner, the Survivor’s Option must be exercised by, or on behalf of, the person who has authority to act on behalf of the deceased beneficial owner of the applicable CDs (including, without limitation, the personal representative or executor of the estate of the deceased beneficial owner, or the surviving joint owner with the deceased beneficial owner) under the laws of the applicable jurisdiction. The death of a person holding a beneficial ownership interest in a CD: (a) with any person in a joint tenancy with right of survivorship; or (b) with his or her spouse in tenancy by the entirety, tenancy in common, as community property or in any other joint ownership arrangement, will be deemed the death of a beneficial owner of that CD, and the entire principal amount of the CD held in this manner will be subject to repayment by us upon request as described in this section. However, the death of a person holding a beneficial ownership interest in a CD as tenant in common with a person other than his or her spouse will be deemed the death of a beneficial owner only with respect to such deceased person’s interests in the CD, and only the deceased beneficial owner’s percentage interest in the principal amount of the CD will be subject to repayment upon a valid exercise of the Survivor’s Option. If the ownership interest in a CD is held by a nominee for a beneficial owner or by a custodian under a Uniform Gifts to Minors Act or Uniform Transfer to Minors Act, or by a trustee of a trust that is wholly revocable by its beneficial owner, or by a guardian or committee for a beneficial owner, the death of such beneficial owner will be deemed the death of a beneficial owner for purposes of the Survivor’s Option, if the beneficial ownership interest can be established to our satisfaction. In any of these cases, the death or dissolution of the nominee, custodian, trustee, guardian or committee will not be deemed the death of the beneficial owner of the CD for purposes of the Survivor’s Option. For purposes of clarification, trustees of trusts originally established as irrevocable trusts are not eligible to exercise the Survivor’s Option nor may the Survivor’s Option be exercised where CDs have been transferred from the estate of the deceased owner by operation of a transfer on death. A valid election to exercise the Survivor’s Option may not be withdrawn. Tenders of CDs pursuant to an exercise of the Survivor’s Option will be processed in the order received by us. CDs accepted for repayment pursuant to exercise of the Survivor’s Option will be repaid on the 20th calendar day after the date of exercise of the Survivor’s Option. Tendered CDs that are not accepted due to the limitations described in the preceding paragraph will be deemed tendered in the next following calendar year in the order in which all such CDs were originally tendered. If a CD tendered through a valid exercise of the Survivor’s Option is not accepted, we will deliver a notice to the authorized representative of the beneficial owner stating the reason that CD has not been accepted for repayment. 47
Because the CDs will be evidenced by one or more master certificates issued by us and held by or on behalf of DTC, DTC or its nominee will be treated as the holder of the CDs, will be the only entity that receives notices from the trustee and, on behalf of the deceased beneficial owner’s authorized representative, will be the only entity that can exercise the Survivor’s Option for the CDs. Accordingly, to properly tender a CD for repayment pursuant to exercise of the Survivor’s Option, the deceased beneficial owner’s authorized representative must provide the following documentation and evidence to the broker or other DTC participant through which the beneficial interest in the CD is held by the deceased beneficial owner:
appropriate evidence satisfactory to us that: (1) the deceased was the beneficial owner of the CD at the time of death and his or her interest in the CD was acquired by the deceased beneficial owner at least six months prior to the tender of the CD for repayment pursuant to the Survivor’s Option, (2) the death of the beneficial owner has occurred and the date of death, and (3) the representative has authority to act on behalf of the deceased beneficial owner;
if the beneficial interest in the CD is held by a nominee or trustee of, custodian for, or other person in a similar capacity to, the deceased beneficial owner, evidence satisfactory to the us from the nominee, trustee, custodian or similar person attesting to the deceased’s beneficial ownership of the tendered CD;
a written request for repayment pursuant to the Survivor’s Option signed by the authorized representative of the deceased beneficial owner with the signature guaranteed by a firm that is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchanges Medallion Signature Program or the Stock Exchange Medallion Program (generally a member of a registered national securities exchange, a member of the FINRA or a commercial bank or trust company having an office in the United States);
tax waivers and any other instruments or documents that we reasonably require in order to establish the validity of the beneficial ownership of the CD and the claimant’s entitlement to payment; and
any additional information we may require to evidence satisfaction of any conditions to the exercise of the Survivor’s Option or to document beneficial ownership or authority to make the election and to cause the repayment of the CD.
We expect that the broker or other DTC participant will deliver in turn these documents and evidence, through the appropriate DTC participant, if applicable, and the facilities of DTC, to us and will certify to us that the broker or other DTC participant represents the deceased beneficial owner. The broker or other DTC participant will be responsible for disbursing payments received from us, through the facilities of DTC, to the authorized representative. All questions regarding the eligibility or validity of any exercise of the Survivor’s Option generally will be determined by us, in our sole discretion, which determination will be final and binding on all parties. Hypothetical Returns on your CDs The relevant term sheet may include a table, chart or graph showing various hypothetical returns on your CD based on a range of hypothetical closing levels of the Component or Components, as applicable, in each case assuming the CD is held from the issue date until the scheduled maturity date. Any table, chart or graph showing hypothetical returns will be provided for purposes of illustration only. It should not be viewed as an indication or prediction of future investment results. Rather, it is intended merely to illustrate the impact that various hypothetical market values of the Index or Basket on 48
the scheduled Observation Date(s) could have on the hypothetical returns on your CD, if held to the scheduled maturity date, calculated in the manner described in the relevant terms sheet and assuming all other variables remained constant. Any payments at maturity listed in the relevant term sheet will be entirely hypothetical. They will be based on closing levels of the Component or Components on any day during the term of the CD that may vary and on assumptions that may prove to be erroneous. The return on your CD may bear little relation to, and may be much less than, the return that you might achieve were you to invest in the Component or Components directly. Among other things, the return on the Component or Components and an investment in the Component or Components is likely to have tax consequences that are different from an investment in your CD. We describe various risk factors that may affect the market value of your CD, and the unpredictable nature of that market value, under “Risk Factors” above. EVIDENCE OF THE CDs The CDs will be evidenced by one or more master certificates issued by us, each representing a number of individual CDs. These master certificates will be held by or on behalf of The Depository Trust Company (“DTC”), a sub-custodian which is in the business of performing such custodial services. No evidence of ownership, such as a passbook or a certificate, will be provided to you. Your broker, as custodian, keeps records of the ownership of each CD and will provide you with a written confirmation (the “Confirmation”) of your purchase. If applicable, the term sheet will set forth the proposed stated maturity date, the Component or the Components, as applicable, the Participation Rate, if any, upon which the Additional Amount on your CD may be calculated and the terms of any withdrawal feature. The Confirmation will also state the original principal amount of your CD, from which you can determine how much premium, if any, you paid for the CD. You should retain the Confirmation and the account statement(s) for your records. Because you will not be provided with a certificate evidencing your CD, the purchase of a CD is not recommended for persons who wish to take physical possession of a certificate. Payments on the CDs will be remitted by us to DTC when due. Upon receipt in full of such amounts by DTC, we will be discharged from any further obligation with regard to such payments. Such payments will be credited through DTC’s procedures to participant firms and thereafter will be remitted to your broker, so long as such broker acts as your nominee, authorized representative, agent or custodian, and credited to your account with such broker. Each CD constitutes a direct obligation of us and is not, either directly or indirectly, an obligation of any broker. You will have the ability to enforce your rights in a CD directly against us. No deposit relationship shall be deemed to exist prior to the receipt and acceptance of your funds by us. If you choose to remove your broker as your agent with respect to your CD, you may (i) transfer your CD to another agent; provided that the agent is a member of DTC (most major brokerage firms are members; many FDIC-insured depositories are not) or (ii) request that your ownership of the CD be evidenced directly on the books of JPMorgan Chase Bank, N.A., subject to applicable law and our terms and conditions, including those related to the manner of evidencing CD ownership. WHERE YOU CAN FIND OUT MORE ABOUT US This disclosure statement incorporates by reference the following documents, which have been filed previously (or may be filed in the future) with the SEC, into this disclosure statement and we encourage you to review them. SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document filed with the SEC at the SEC’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
49
Because we are incorporating by reference future filings with the SEC, this disclosure statement is continually updated and those future filings may modify or supersede some of the information included or incorporated in this disclosure statement. This disclosure statement incorporates by reference the documents below and any future filings made by JPMorgan Chase & Co. (“JPMorgan Chase”), which is the parent company of the Bank, with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) until we complete our offering of the CDs or, if later, the date on which any of our affiliates cease offering and selling the CDs:
The annual report of JPMorgan Chase on Form 10-K for the year ended December 31, 2008 (filed on March 2, 2009);
The quarterly reports of JPMorgan Chase on Form 10-Q for the quarters ended March 31, 2009 (filed on May 7, 2009), June 30, 2009 (filed on August 10, 2009) and September 30, 2009 (filed on November 9, 2009);
The current reports of JPMorgan Chase on Form 8-K filed on January 7, 2009, January 15, 2009, January 16, 2009, January 23, 2009, February 24, 2009, February 27, 2009, March 3, 2009, March 30, 2009, April 15, 2009, April 15, 2009, April 17, 2009, May 8, 2009, May 20, 2009, May 29, 2009, June 2, 2009, June 19, 2009, July 16, 2009, July 17, 2009, September 1, 2009, October 14, 2009, October 15, 2009, October 27, 2009, November 6, 2009, November 20, 2009, December 8, 2009, December 16, 2009, December 22, 2009, January 15, 2010, January 19, 2010 and January 25, 2010 (other than, in each case, those documents or the portions of those documents not deemed to be filed).
In addition, this disclosure statement incorporates by reference the most recent quarterly Consolidated Reports of Condition and Income of the Bank filed with our primary federal regulator (the “Call Reports”), the Bank’s Call Reports for years ended December 31, 2008 and December 31, 2007, and any future Call Reports filed with our primary federal regulator until we complete our offering of the CDs, or if later, the date on which any of our affiliates ceases offering and selling the CDs. Call Reports are available at the FDIC’s website at http://www.fdic.gov. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished, pursuant to Section 13(a) or Section 15(d) of the Exchange Act, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the SEC. You may also request, at no cost to you, a written copy of these documents and any documents incorporated by reference herein, including the most recent quarterly Call Report (other than exhibits to such documents) by writing or telephoning JPMorgan Chase at: Office of the Secretary, JPMorgan Chase, 270 Park Avenue, New York, NY 10017-2070 (Telephone: 212-270-4040).
50
JPMORGAN CHASE BANK, N.A. JPMorgan Chase Bank, N.A. (“JPMorgan Chase Bank”) is a wholly owned bank subsidiary of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”). JPMorgan Chase is incorporated in the State of Delaware in the United States and is headquartered in New York, New York. JPMorgan Chase Bank is chartered by the Office of the Comptroller of the Currency, a bureau of the United States Department of the Treasury. JPMorgan Chase Bank’s main office is located in Columbus, Ohio. JPMorgan Chase Bank had been organized in the legal form of a banking corporation organized under the laws of the State of New York in 1968 for an unlimited duration. On November 13, 2004, JPMorgan Chase Bank converted from a New York State banking corporation to a national banking association. JPMorgan Chase Bank is a commercial bank offering a wide range of banking services to its customers both domestically and internationally. Chase Manhattan Bank USA, National Association is a principal bank subsidiary of JPMorgan Chase and serves as its credit card-issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., the Firm’s U.S. investment banking firm. JPMorgan Chase Bank’s business is subject to examination and regulation by Office of the Comptroller of the Currency. We are a member of the Federal Reserve System and our deposits are insured by the Federal Deposit Insurance Corporation. Our Federal Reserve Bank Identification Number is 852218. Business Activities Principal Activities The business activities of JPMorgan Chase Bank are organized, for management reporting purposes, into six business segments, as well as corporate / private equity. JPMorgan Chase’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. JPMorgan Chase’s consumer businesses comprise of Retail Finance Services and Card Services segments. A description of these business segments, and the products and services they provide to their respective client bases, follows. INVESTMENT BANK JPMorgan Chase is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The Investment Bank’s (“IB”) clients are corporations, financial institutions, governments and institutional investors. JPMorgan Chase offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage and research. The IB also selectively commits JPMorgan Chase’s own capital to principal investing and trading activities. RETAIL FINANCIAL SERVICES Retail Financial Services (“RFS”), which includes Regional Banking and Consumer Lending reporting segments, serves consumers and businesses through personal services at bank branches, and through ATMs, online banking and telephone banking as well as through auto dealerships and school financial aid offices. CARD SERVICES Card Services is one of the largest issuers of credit cards in the United States. JPMorgan Chase has a market leadership position in building loyalty and rewards programs with many of the world’s most respected brands and through its proprietary products, which include the Chase Freedom program. Through its merchant acquiring business, Chase Paymentech Solutions, JPMorgan Chase is one of the leading processors of MasterCard and Visa payments. 51
COMMERCIAL BANKING Commercial Banking (“CB”) serves a variety of corporations, municipalities, financial institutions and not-for-profit entities. CB delivers extensive industry knowledge, local expertise and a dedicated service model. In partnership with JPMorgan Chase’s other businesses, CB provides comprehensive solutions including lending, treasury services, investment banking and asset management to meet its clients’ U.S. and international financial needs. TREASURY & SECURITIES SERVICES Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services. TSS is one of the world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and liquidity products and services to small and midsized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. Worldwide Securities Services (“WSS”) holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally. ASSET & WEALTH MANAGEMENT Asset Management (“AM”) is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including money market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios. CORPORATE / PRIVATE EQUITY The Corporate/Private Equity sector comprises Private Equity, Treasury, corporate staff units and expense that is centrally managed. Treasury manages capital, liquidity, interest rate and foreign exchange risk and the investment portfolio for JPMorgan Chase. The corporate staff units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General Services, Risk Management, Corporate Responsibility and Strategy & Development. Other centrally managed expense includes JPMorgan Chase’s occupancy and pension-related expense, net of allocations to the business. The delivery of this disclosure statement shall not create any implication that there has been no change in our affairs since the date of this disclosure statement and the information with respect to us may only be accurate on the date of this document. DEPOSIT INSURANCE The CDs are protected by federal deposit insurance provided by the Deposit Insurance Fund (the “DIF”), which is administered by the FDIC and backed by the full faith and credit of the U.S. Government, up to a maximum amount for all deposits held in the same legal capacity per depository institution (the “Maximum Insured Amount”). Pursuant to the Emergency Economic Stabilization Act of 2008 (the “Economic Stabilization Act”), which was enacted on October 3, 2008, the Maximum Insured Amount was temporarily raised from $100,000 to $250,000 for all deposits held in the same ownership capacity per depository institution until December 31, 2009. On May 20, 2009, the Emergency Economic Stabilization Act was amended by the Helping Families Save Their Homes Act, extending the increased limit until December 31, 2013. The maximum amount of deposit insurance available in the case of deposits in certain retirement accounts (the “Maximum Retirement Account Amount”) as described below under “Retirement Plans and Accounts – General,” was not adjusted by the Economic Stabilization Act and, since April 1, 2006, has been $250,000 per participant per insured depository institution. 52
Accordingly, under the Economic Stabilization Act, as amended by the Helping Families Save Their Homes Act, until December 31, 2013, the Maximum Insured Amount and the Maximum Retirement Account Amount are both $250,000. After December 31, 2013, unless the increased limits instituted by the Economic Stabilization Act are extended by law or regulation, the Maximum Insured Amount will revert to $100,000 per account, while the Maximum Retirement Account Amount will continue to be $250,000. The Maximum Insured Amount and the Maximum Retirement Account Amount may be adjusted for inflation beginning April 1, 2010 and each fifth year thereafter. Any accounts or deposits a holder maintains directly with the JPMorgan Chase Bank, N.A. (the “Bank”) in the same legal capacity as such holder maintains its CDs would be aggregated with such CDs for purposes of the Maximum Insured Amount or the Maximum Retirement Account Amount, as applicable. Although FDIC insurance coverage includes both principal and accrued interest (subject to the applicable limit), if the FDIC was appointed conservator or receiver of the Bank prior to the maturity of the CDs, the FDIC likely would take the position that the Additional Amount payable at maturity was not insured because the return is not calculated until the relevant determination date and would not be reflected as accrued interest on the books of the Bank at the time of such appointment. Accordingly, any Additional Amount would not be insured by the FDIC prior to the final Observation Date. In addition, depending on the structure of the Minimum Return, if applicable, that amount also may not be subject to FDIC insurance prior to the final Observation Date. Any secondary market premium you pay for the CDs also will not be insured by the FDIC. Each holder is responsible for monitoring the total amount of its deposits in order to determine the extent of deposit insurance coverage available to it on such deposits, including the CDs. In circumstances in which FDIC insurance coverage is needed, (a) the uninsured portion of the CDs or any other deposits will constitute unsecured claims on the receivership or conservatorship and (b) neither the Bank nor any broker will be responsible for any insured or uninsured portion of the CDs or any other deposits. Persons considering the purchase, ownership or disposition of a CD should consult their legal advisors concerning the availability of FDIC insurance. The summary of FDIC deposit insurance regulations contained in this disclosure statement is not intended to be a full restatement of applicable FDIC regulations and interpretations, which may change from time to time and in certain instances additional terms and conditions may apply which are not described herein. Accordingly, the discussion in this document is qualified in its entirety by such rules, and the holder is urged to discuss with its attorney the insurance coverage afforded to any CD that it may purchase. Holders may also write to the following address: FDIC Office of Consumer Affairs, 550 17th Street, N.W., Washington, D.C. 20429. If the CDs or other deposits of a holder at the Bank are assumed by another depository institution pursuant to a merger or consolidation, such CDs or deposits will continue to be separately insured from the deposits that such holder might have established with the acquirer until (a) the maturity date of the CDs or other time deposit which were assumed or (b) with respect to deposits which are not time deposits, the expiration of a six-month period from the date of the acquisition. Thereafter any assumed deposits will be aggregated with the existing deposits with the acquirer held in the same legal capacity for purposes of federal deposit insurance. Any deposit opened at the acquired institution after the acquisition will be aggregated with deposits established with the acquirer for purposes of federal deposit insurance. The application of the federal deposit insurance limitation per depository institution in certain common factual situations is illustrated below: Individual Customer Accounts. Funds owned by an individual and held in an account in the name of an agent or nominee of such individual (such as the CDs held in a brokerage account) are not treated as owned by the agent or nominee, but are added to other deposits of such individual held in the same legal capacity and are insured up to the Maximum Insured Amount in the aggregate.
53
Custodial Accounts. Funds in accounts held by a custodian, guardian or conservator (for example, under the Uniform Gifts to Minors Act) are not treated as owned by the custodian, but are added to other deposits of the minor or other beneficiary held in the same legal capacity and are insured up to the Maximum Insured Amount in the aggregate. Joint Accounts. The interests of co-owners in funds in an account held under any form of joint ownership valid under applicable state law may be insured up to the Maximum Insured Amount in the aggregate, separately and in addition to the Maximum Insured Amount allowed on other deposits individually owned by any of the co-owners of such account (hereinafter referred to as a “Joint Account”). Joint Accounts will be insured separately from such individually owned accounts only if each of the co-owners is an individual person and has a right of withdrawal on the same basis as the other coowners. If the Joint Account meets the foregoing criteria then it will be deemed to be jointly owned; as long as the account records of the Bank are clear and unambiguous as to the ownership of the account. However, if the account records are ambiguous or unclear as to the manner in which the account is owned, then the FDIC may consider evidence other than such account records to determine ownership. The names of two or more persons on a Deposit Account will be conclusive evidence that the account is a Joint Account unless the deposit records as a whole are ambiguous and some other evidence indicates that there is a contrary ownership capacity. In the event an individual has an interest in more than one Joint Account and different co-owners are involved, his interest in all of such Joint Accounts (subject to the limitation that such individual’s insurable interest in any one account may not exceed the Maximum Insured Amount divided by the number of owners of such account) is then added together and insured up to the Maximum Insured Amount in the aggregate, with the result that no individual’s insured interest in the joint account category can exceed the Maximum Insured Amount. For deposit insurance purposes, the co-owners of any Joint Account are deemed to have equal interests in the Joint Account unless otherwise stated in the Bank’s records. Entity Accounts. The deposit accounts of any corporation, partnership or unincorporated association that is operated primarily for some purpose other than to increase deposit insurance are added together and insured up to the Maximum Insured Amount in the aggregate per depository institution. Revocable Trust Accounts. Funds owned by an individual and deposited into a deposit account with respect to which the individual evidences an intention that upon his/her death the funds will belong to his or her spouse, children, grandchildren, parents, or siblings (each, a “Qualifying Beneficiary”) are insured up to the Maximum Insured Amount as to each Qualifying Beneficiary, separately from any other deposit accounts of the owner or any other Qualifying Beneficiary. The owner’s intention must be manifested in the title of the account, by using such terms as “in trust for” or “payable upon death to,” and the Qualifying Beneficiaries must be named in the deposit account records of the depository institution. A revocable trust account established by a husband and wife that names the husband and wife as sole beneficiaries will be treated as a joint account and insured as described above under “Joint Accounts.” Irrevocable Trust Accounts. Funds in an account for an irrevocable trust (as determined under applicable state law) will be insured for up to the Maximum Insured Amount for the interest of each beneficiary, provided that the beneficiary’s interest in the account is non-contingent (i.e., capable of determination without evaluation of contingencies) and certain other criteria are met. The FDIC treats Coverdell education savings accounts as irrevocable trust accounts for deposit insurance purposes. The deposit insurance of each beneficiary’s interest is separate from the coverage provided for other accounts maintained by the beneficiary, the grantor, the trustee or beneficiaries. The interests of a beneficiary in all irrevocable trust accounts at the Bank created by the same grantor will be aggregated and insured up to the Maximum Insured Amount. When a bankruptcy trustee commingles the funds of two or more bankruptcy estates in the same trust account, the funds of each bankruptcy estate will receive separate pass-through coverage for up to the Maximum Insured Amount. Retirement and Employee Benefit Plans and Accounts - Generally. You may have interests in various retirement and employee benefit plans and accounts that are holding deposits of the Bank. The amount of deposit insurance you will be entitled to will vary depending on the type of plan or account and 54
on whether deposits held by the plan or account will be treated separately or aggregated with the deposits of the Bank held by other plans or accounts. It is therefore important to understand the type of plan or account holding the CD. The following sections entitled “Pass-Through Deposit Insurance for Retirement and Employee Benefit Plan Deposits” and “Aggregation of Retirement and Employee Benefit Plans and Accounts” generally discuss the rules that apply to deposits of retirement and employee benefit plans and accounts. Pass-Through Deposit Insurance for Retirement and Employee Benefit Plan Deposits. Subject to the limitations discussed below, under FDIC regulations, an individual’s non-contingent interest in the deposits of one depository institution held by certain types of employee benefit plans are eligible for insurance on a “pass-through” basis up to the applicable deposit insurance limits for that type of plan. This means that, instead of an employee benefit plan's deposits at one depository institution being entitled to deposit insurance based on its aggregated deposits in the Bank, each participant in the employee benefit plan is entitled to insurance of his or her interest in the employee benefit plan's deposits of up to the applicable deposit insurance limits per institution (subject to the aggregation of the participant's interests in different plans, as discussed below). The pass-through insurance provided to an individual as an employee benefit plan participant is in addition to the deposit insurance allowed on other deposits held by the individual at the issuing institution. However, pass-through insurance is aggregated across certain types of accounts. See the section entitled “Aggregation of Retirement and Employee Benefit Plans and Accounts.” A deposit held by an employee benefit plan that is eligible for pass-through insurance is not insured for an amount equal to the number of plan participants multiplied by the applicable deposit insurance limits. For example, assume an employee benefit plan that is a Qualified Retirement Account (defined below), i.e., a plan that is eligible for deposit insurance coverage up to the Maximum Retirement Account Amount per qualified beneficiary, owns $500,000 in deposits at one institution and the plan has two participants, one with a vested non-contingent interest of $350,000 and one with a vested non-contingent interest of $150,000. In this case, the individual with the $350,000 interest would be insured up to the $250,000 Maximum Retirement Account Amount limit, and the individual with the $150,000 interest would be insured up to the full value of such interest. Moreover, the contingent interests of employees in an employee benefit plan and overfunded amounts attributed to any employee defined benefit plan are not insured on a pass-through basis. Any interests of an employee in an employee benefit plan deposit which are not capable of evaluation in accordance with FDIC rules (i.e., contingent interests) will be aggregated with the contingent interests of other participants and insured up to the applicable deposit insurance limits. Similarly, overfunded amounts are insured, in the aggregate for all participants, up to the applicable deposit insurance limits separately from the insurance provided for any other funds owned by or attributable to the employer or an employee benefit plan participant. Aggregation of Retirement and Employee Benefit Plans and Accounts. Self-Directed Retirement Accounts. The principal amount of deposits held in Qualified Retirement Accounts, plus accrued but unpaid interest, if any, are protected by FDIC insurance up to a maximum of the Maximum Retirement Account Amount for all such deposits held by you at the issuing depository institution. “Qualified Retirement Accounts” consist of (i) any individual retirement account (“IRA”), (ii) any eligible deferred compensation plan described in section 457 of the Code, (iii) any individual account plan described in section 3(34) of ERISA, to the extent the participants and beneficiaries under such plans have the right to direct the investment of assets held in the accounts and (iv) any plan described in section 401(d) of the Code, to the extent the participants and beneficiaries under such plans have the right to direct the investment of assets held in the accounts. The FDIC sometimes generically refers to this group of accounts as “self-directed retirement accounts.” Supplementary FDIC materials indicate that Roth IRAs, self-directed Keogh Accounts, Simplified Employee Pension plans, Savings Incentive Match Plans for Employees and self-directed defined contribution plans (such as 401(k) plans) are intended to be included within this group of Qualified Retirement Accounts. Coverdell education savings accounts, Health Savings Accounts, Medical Savings Accounts, accounts established under section 403(b) of the 55
Code and defined-benefit plans are NOT Qualified Retirement Accounts and do NOT receive the Maximum Retirement Account Amount of federal deposit insurance. Other Employee Benefit Plans. Any employee benefit plan, as defined in Section 3(3) of ERISA, plan described in Section 401(d) of the Code, or eligible deferred compensation plan under section 457 of the Code, that does not constitute a Qualified Retirement Account – for example, certain employer-sponsored profit sharing plans -- can still satisfy the requirements for pass-through insurance with respect to noncontingent interests of individual plan participants, provided that FDIC requirements for recordkeeping and account titling are met (“Non-Qualifying Benefit Plans”). Defined contribution plan accounts and Keogh accounts that are not “self-directed” also generally would be treated as Non-Qualifying Benefit Plans. For Non-Qualifying Benefit Plans, the amount subject to federal deposit insurance is the Maximum Insured Amount. Under FDIC regulations, an individual’s interests in Non-Qualifying Benefit Plans maintained by the same employer or employee organization (e.g., a union) which are holding deposits at the same institution will be insured up to the Maximum Insured Amount in the aggregate, separate from other accounts held at the same depository institution in other ownership capacities. This general rule regarding pass-though insurance is subject to the following limitations and exceptions:
Total Coverage Might Not Equal the Maximum Retirement Account Amount Times the Number of Participants. Each deposit held by an Employee Benefit Plan may not necessarily be insured for an amount equal to the number of participants multiplied by the Maximum Retirement Account Amount. For example, suppose an Employee Benefit Plan owns $500,000 in CDs at one institution. Suppose, further, that the Employee Benefit Plan has two participants, one with a vested non-contingent interest of $300,000 and one with a vested non-contingent interest of $200,000. The individual with the $300,000 interest would be insured up to the $250,000 Maximum Retirement Account Amount limit and the individual with the $200,000 interest would be insured up to the full value of such interest.
Aggregation. An individual’s non-contingent interests in funds deposited with the same depository institution by different Employee Benefit Plans of the same employer or employee organization are aggregated for purposes of applying this pass-through Maximum Retirement Account Amount per participant deposit insurance limit, and are insured in aggregate only up to the Maximum Retirement Account Amount per participant.
Contingent Interests/Overfunding. Any portion of an Employee Benefit Plan’s deposits that is not attributable to the non-contingent interests of Employee Benefit Plan participants is not eligible for pass-through deposit insurance coverage, and is insured, in aggregate, only up to the Maximum Insured Amount.
To the extent that a CD purchaser expects its beneficial interest in the CDs to be fully covered by FDIC insurance, such purchaser, by purchasing a CD, is deemed to represent to the Bank and its broker that its beneficial interest (or if it is an agent, nominee, custodian or other person who is purchasing a CD for its beneficial owners, that each beneficial owner’s beneficial interest) in other deposits in the Bank, when aggregated with the beneficial interest in the CD so purchased, to the extent that aggregation is required in determining insurance of accounts under the federal deposit insurance regulations, does not exceed the Maximum Insured Amount (or the Maximum Retirement Account Amount per participant in the case of certain retirement accounts as described above). No broker will be obligated to any holder for amounts not covered by deposit insurance. Neither the Bank nor any broker will be obligated to make any payments to any holder in satisfaction of any loss such holder might incur, including losses that result from (a) a delay in insurance payouts applicable to its CD, (b) its receipt of a decreased rate of return on the reinvestment of the proceeds received as a result of a payment on a CD prior to its scheduled maturity, (c) payment in cash of the CD principal prior to maturity in connection with the liquidation of an insured institution or the assumption of all or a portion of its deposit
56
liabilities at a lower interest rate or (d) its receipt of a decreased rate of return as compared to the Additional Amount. Insurance of Certificates of Deposits Issued By Bank One, National Association If you already own certificates of deposit issued by Bank One, National Association (“Bank One CDs”), which merged into the Bank on November 13, 2004, those Bank One CDs will continue to be separately insured from the CDs until (i) the earliest maturity date after the expiration of a six-month period from the date of the bank merger if the Bank One CD matures after the expiration of such sixmonth time period or if the Bank One CD matures prior to the expiration of such six-month time period and is renewed at the same dollar amount and for the same term as the original Bank One CD or (ii) the expiration of a six-month period from the date of the merger if the Bank One CD matures prior to the expiration of such six-month time period and is renewed on any other basis. Insurance of Certificates of Deposits Issued By Washington Mutual Bank If you already own certificates of deposit issued by Washington Mutual Bank (“WaMu CDs”), substantially all of the assets of which were purchased by JPMorgan Chase from the FDIC on September 25, 2008, those WaMu CDs were separately insured from JPMorgan Chase Bank, N.A. accounts until March 24, 2009. Insurance for WaMu CDs existing on September 25, 2008 may be extended to WaMu CDs maturing before March 24, 2009 that roll over without any changes (such as amount, term, or title). In addition, WaMu CDs maturing after March 24, 2009, will be separately insured until their first maturity date after March 24, 2009. WaMu CDs opened on or after September 26, 2008, will be combined with all other JPMorgan Chase Bank, N.A. accounts of the same depositor to determine FDIC insurance coverage. Preference in Right of Payment Federal legislation adopted in 1993 provides for a preference in right of payment of certain claims made in the liquidation or other resolution of any FDIC-insured depository institution. The statute requires claims to be paid in the following order:
first, administrative expenses of the receiver;
second, any deposit liability of the institution;
third, any other general or senior liability of the institution not described below;
fourth, any obligation subordinated to depositors or general creditors not described below;
fifth, any obligation to shareholders or members (including any depository institution holding company or any shareholder or creditor of such company).
For purposes of the statute, deposit liabilities include any deposit payable at an office of the insured depository institution in the United States. They do not include international banking facility deposits or deposits payable at an office of the insured depository institution outside the United States. In addition, in the view of the FDIC, any obligation of an FDIC-insured depository institution that is contingent at the time of the insolvency of the institution may not provide a basis for a claim against the FDIC as receiver for the insolvent institution. For the CDs described in this disclosure statement, this limitation on claims against the FDIC only affects the Additional Amount, if any, payable on these instruments.
57
DISCOUNTS AND SECONDARY MARKET Unless otherwise disclosed in the applicable term sheet, we will sell the CDs to brokers at discounts ranging from 1% of the principal amount of such CDs to a higher percentage provided in the applicable term sheet. Each broker, though not obligated to do so, may maintain a secondary market in the CDs. Secondary market transactions may be expected to be effected at prices which reflect then-current interest rates, supply and demand, time remaining until maturity, and general market conditions. The foregoing means that secondary market transactions may be effected at prices greater or less than $1,000 per $1,000 principal amount CD, and the yield to maturity on a CD purchased in the secondary market may differ from the yield at the time of original issuance. The prices at which CDs may trade in secondary markets may fluctuate more than ordinary interest-bearing CDs. Each broker may purchase and sell CDs for its own account, as well as for the accounts of customers. Accordingly, a broker may realize profits from mark-ups on transactions for its own account, and may charge customers commissions in brokerage transactions, which mark-ups or commissions will affect the yield to maturity of such CDs. Any commission on a brokered secondary market transaction may be reflected in a holder’s Confirmation. Each broker may at any time, without notice, discontinue participation in secondary market transactions in CDs. Accordingly, a holder should not rely on the possible existence of a secondary market for any benefits, including liquidity, achieving trading profits, limiting trading or other losses, or realizing income prior to maturity.
58
HEDGING The original issue price of the CDs includes the compensation paid to J.P. Morgan Securities Inc. with respect to the CDs and the cost of hedging our obligations under the CDs. We may have hedged our obligations under the CDs through certain affiliates or unaffiliated counterparties. The cost of hedging includes the projected profit that our affiliates or others expect to realize in consideration for assuming the risks inherent in hedging our obligations under the CDs. Because hedging our obligations entails risk and may be influenced by market forces beyond our control, such hedging may result in a profit that is more or less than expected, or it may result in a loss. On or prior to the date we sell the CDs, we, through our affiliates or others, may hedge some or all of our anticipated exposure in connection with the CDs by taking positions in the applicable Component or Components, the stocks underlying an Equity Index, the government bonds underlying the Bond Index, the futures contracts underlying the Commodity Index, the financial instruments underlying the ETF, the Index Commodities or instruments whose value is derived from the applicable Component or Basket Components or their underlying stocks, government bonds, futures contracts or Index Commodities. While we cannot predict an outcome, such hedging activity, coupled with our other hedging activity, could potentially increase the level or price of the applicable Component or Components, and therefore effectively establish a higher level or price that the applicable Component or Components must achieve for you to receive at maturity of the CDs more than the applicable principal amount of your CDs plus the minimum return, if any. From time to time, prior to the maturity of the CDs, we may pursue a dynamic hedging strategy which may involve taking long or short positions in the applicable Component or Components, the stocks underlying the Equity Index, the government bonds underlying the Bond Index, the futures contracts underlying the Commodity Index, the financial instruments underlying the ETF, the Index Commodities or instruments whose value is derived from the applicable Component or Components or their underlying stocks, government bonds, futures contracts or Index Commodities. Although we have no reason to believe that any of these activities will have a material impact on the level or price of the applicable Component or Components or the value of the CDs, we cannot assure you that these activities will not have such an effect. We have no obligation to engage in any manner of hedging activity and will do so solely at our discretion and for our own account. No holder of CDs shall have any rights or interest in our hedging activity or any positions we or any unaffiliated counterparties may take in connection with our hedging activity. BENEFIT PLAN INVESTOR CONSIDERATIONS A fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including entities such as collective investment funds, partnerships and separate accounts whose underlying assets include the assets of such plans (collectively, “ERISA Plans”) should consider the fiduciary standards of ERISA in the context of the ERISA Plans’ particular circumstances before authorizing an investment in the CDs. Among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the ERISA Plan. Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans, as well as individual retirement accounts and Keogh plans subject to Section 4975 of the Code (together with ERISA Plans, “Plans”), from engaging in certain transactions involving the “plan assets” with persons who are “parties in interest” under ERISA or “disqualified persons” under the Code (“Parties in Interest”) with respect to such Plans. As a result of our business, we are a Party in Interest with respect to many Plans. Where we are a Party in Interest with respect to a Plan (either directly or by reason of ownership of our subsidiaries), the purchase and holding of the CDs by or on behalf of the Plan would be a prohibited transaction under Section 406 of ERISA and Section 4975 of the Code, unless exemptive relief were available under an applicable exemption (as described below). 59
Accordingly, the CDs may not be purchased or held by any Plan or any person investing “plan assets” of any Plan, unless such purchaser or holder is eligible for the exemptive relief available under the following Prohibited Transaction Class Exemptions (“PTCE”): (A) the in-house asset manager exemption (PTCE 96-23), (B) the insurance company general account exemption (PTCE 95-60), (C) the bank collective investment fund exemption (PTCE 91-38), (D) the insurance company pooled separate account exemption (PTCE 90-1) and (E) the qualified professional asset manager exemption (PTCE 84-14) or there is some other basis on which the purchase and holding of the CDs is not prohibited. In addition, ERISA Section 408(b)(17) and Section 4975(d)(20) of the Code provide a limited exemption for the purchase and sale of securities and related lending transactions, provided that neither the issuer of the securities nor any of its affiliates have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any Plan involved in the transaction and provided further that the Plan pays no more than adequate consideration in connection with the transaction (the so-called “service provider exemption”). There can be no assurance that any of these statutory or class exemptions will be available with respect to transactions involving the CDs. Each purchaser or holder of the CDs or any interest therein will be deemed to have represented by its purchase of the CDs that (a) its purchase and holding of the CDs is not made on behalf of or with “plan assets” of any Plan or (b) its purchase and holding of the CDs will not result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. Employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and non-U.S. plans (as described in Section 4(b)(4) of ERISA) are not subject to these “prohibited transaction” rules of ERISA or Section 4975 of the Code, but may be subject to similar rules under other applicable laws or documents (“Similar Laws”). Accordingly, each purchaser or holder of the CDs shall be required to represent (and deemed to constitute a representation) that such purchase and holding is not prohibited under applicable Similar Laws. Due to the complexity of the applicable rules, it is particularly important that fiduciaries or other persons considering purchasing the CDs on behalf of or with “plan assets” of any Plan or plan subject to Similar Laws consult with their counsel regarding the relevant provisions of ERISA, the Code or any Similar Laws and the availability of exemptive relief. Each purchaser and holder of the CDs has exclusive responsibility for ensuring that its purchase and holding of the CDs does not violate the fiduciary or prohibited transaction rules of ERISA, the Code or any Similar Laws. The sale of any CDs to any Plan or plan subject to Similar Laws is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by such plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan.
60
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
No Reliance This summary is limited to the federal tax issues addressed herein. It does not address all aspects of the U.S. federal income and estate taxation of the CDs that may be relevant to you in light of your particular circumstances. This summary was written in connection with the marketing of the CDs, and it cannot be used by you for the purpose of avoiding penalties that may be asserted against you under the Code. You should seek advice based on your particular circumstances from an independent tax adviser. Introduction The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of the CDs. This summary applies to you if you are an initial holder of a CD purchasing the CD at its issue price for cash and if you hold the CD as a capital asset within the meaning of Section 1221 of the Code. This summary does not address all aspects of U.S. federal income and estate taxation that may be relevant to you in light of your particular circumstances or if you are a holder of a CD who is subject to special treatment under the U.S. federal income tax laws, such as:
one of certain financial institutions; a “regulated investment company” as defined in Code Section 851; a “real estate investment trust” as defined in Code Section 856; a tax-exempt entity, including an “individual retirement account” or “Roth IRA” as defined in Code Section 408 or 408A, respectively; a dealer in securities; a person holding a CD as part of a hedging transaction, “straddle,” conversion transaction or integrated transaction, or who has entered into a “constructive sale” with respect to a CD; a U.S. Holder (as defined below) whose functional currency is not the U.S. dollar; a trader in securities who elects to apply a mark-to-market method of tax accounting; or a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
This summary is based on the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations as of the date of this disclosure statement, changes to any of which, subsequent to the date of this disclosure statement, may affect the tax consequences described herein. As the law applicable to the U.S. federal income taxation of instruments such as the CDs is technical and complex, the discussion below necessarily represents only a general summary. Moreover, the effects of any applicable state, local or foreign tax laws are not discussed. You should consult your tax adviser concerning the application of U.S. federal income and estate tax laws to your particular situation, as well as any tax consequences arising under the laws of any state, local or foreign jurisdictions. Tax Treatment of the CDs The CDs will be treated as debt instruments for U.S. federal income tax purposes. In addition, in the case of CDs with a term of more than one year (including either the issue date or the last possible date that the CDs could be outstanding, but not both), although the tax treatment of these CDs will depend upon the facts at the time of the relevant offering, we generally expect that these CDs will be treated as “contingent payment debt instruments” for U.S. federal income tax purposes, and the remainder of this discussion so assumes. The relevant term sheet will describe our or counsel’s level of comfort on this issue and/or alternative treatments.
61
Tax Consequences to U.S. Holders You are a “U.S. Holder” if for U.S. federal income tax purposes you are a beneficial owner of a CD that is:
a citizen or resident of the United States; a corporation created or organized in or under the laws of the United States or any political subdivision thereof; or an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
CDs with a Term of Not More than One Year If the term of the CDs (including either the issue date or the last possible date that the CDs could be outstanding, but not both) is not more than one year, the following discussion applies. No statutory, judicial or administrative authority directly addresses the treatment of these CDs or instruments similar thereto for U.S. federal income tax purposes, and no ruling will be requested from the IRS with respect to the CDs. As a result, certain aspects of the U.S. federal income tax consequences of an investment in these CDs are uncertain. Tax Treatment Prior to Maturity Because the term of these CDs is not more than one year, they will be treated as short-term debt obligations. A short-term debt obligation is treated for U.S. federal income tax purposes as issued at a discount equal to the difference between the payments due thereon and the instrument’s issue price. In general, this discount is treated as interest income when received or accrued, in accordance with the holder’s method of tax accounting. However, because the amount of discount that will be paid on the CDs is uncertain, several aspects of the tax treatment of the CDs are not clear. If you are a cash-method holder, you will not be required to recognize income with respect to the CDs prior to maturity, other than pursuant to a sale or exchange, as described below. However, you may elect to accrue discount into income on a current basis, in which case you would generally be treated as an accrual-method holder, as described below. In addition, you could be required to defer deductions with respect to any interest paid on indebtedness incurred to purchase or carry your CDs, to the extent of accrued discount that you have not yet included in income, until you dispose of the CDs in a taxable transaction. You should consult your tax adviser regarding these issues. Although accrual-method holders and certain other holders (including electing cash-method holders) are generally required to accrue into income discount on short-term indebtedness on a straight-line basis, the amount of discount that must ultimately be accrued with respect to the CDs is uncertain, and it is therefore not clear how these accruals should be determined. If the amount of discount that will be received has become fixed (or the likelihood of this amount not being a fixed amount has become “remote”) prior to maturity, it is likely that the amount of discount to be accrued will be determined based on the fixed amount. You should consult your tax adviser regarding the application of these rules with respect to your CDs. Sale, Exchange or Redemption of a CD Upon a sale or exchange of a short-term CD (including early redemption or redemption at maturity), you should recognize gain or loss in an amount equal to the difference between the amount you receive and your adjusted basis in the CD. Your adjusted basis in the CD should equal the issue price of the CD, increased by any discount that you have previously included in income. The amount of any resulting loss will be treated as a capital loss, which may be subject to special reporting requirements if the loss exceeds certain thresholds. Gain resulting from redemption at maturity should be treated as ordinary interest income. It is not clear, however, whether or to what extent gain from a sale or exchange prior to maturity should be treated as capital gain or ordinary interest income. If the amount of discount that will 62
be received at maturity has become fixed (or the likelihood of this amount not being a fixed amount has become “remote”) prior to sale or exchange, it is likely that the portion of gain on the sale or exchange that should be treated as accrued discount (and, therefore, taxed as ordinary income) will be determined based on the fixed amount. You should consult your tax adviser regarding the proper treatment of any gain or loss recognized upon a sale or exchange of a CD. CDs with a Term of More than One Year If the term of the CDs (including either the issue date or the last possible date that the CDs could be outstanding, but not both) is more than one year, we generally expect that the CDs will be treated as “contingent payment debt instruments” for U.S. federal income tax purposes, and the remainder of this discussion so assumes. These CDs will generally be subject to the original issue discount (“OID”) provisions of the Code and the Treasury regulations issued thereunder, and you will be required to accrue as interest income the OID on the CDs as described below. We are required to determine a “comparable yield” for the CDs. The “comparable yield” is the yield at which we could issue a fixed-rate debt instrument with terms similar to those of the CDs, including the level of subordination, term, timing of payments and general market conditions, but excluding any adjustments for the riskiness of the contingencies or the liquidity of the CDs. Solely for purposes of determining the amount of interest income that you will be required to accrue, we are also required to construct a “projected payment schedule” in respect of the CDs representing a payment at maturity that will produce a yield to maturity on the CDs equal to the comparable yield. Unless otherwise provided in the relevant term sheet, we will provide, and you may obtain, the comparable yield for a particular offering of CDs, and the related projected payment schedule, in the final disclosure supplement for these CDs. Neither the comparable yield nor the projected payment schedule constitutes a representation by us regarding the actual amount, if any, that we will pay on the CDs. For U.S. federal income tax purposes, you are required to use our determination of the comparable yield and projected payment schedule in determining interest accruals and adjustments in respect of your CDs, unless you timely disclose and justify the use of other estimates to the IRS. Regardless of your accounting method, you will be required to accrue as interest income OID on your CDs at the comparable yield, adjusted upward or downward to reflect the difference, if any, between the actual and the projected amount of the contingent payment on the CDs. Upon a sale or exchange of a CD (including early redemption or redemption at maturity), you generally will recognize taxable income or loss equal to the difference between the amount received from the sale, exchange or redemption and your adjusted basis in the CD. Your adjusted basis in the CD will equal the cost thereof, increased by the amount of interest income previously accrued by you in respect of the CD. You generally must treat any income as interest income and any loss as ordinary loss to the extent of previous interest inclusions, and the balance as capital loss. These losses are not subject to the limitation imposed on miscellaneous itemized deductions under Section 67 of the Code. The deductibility of capital losses, however, is subject to limitations. Additionally, if you recognize a loss above certain thresholds, you may be required to file a disclosure statement with the IRS. You should consult your tax adviser regarding these limitations and reporting obligations. In the case of CDs linked to a Commodity Index, if a commodity hedging disruption event occurs or in the case of CDs with a Knock-Out feature, if a Knock-Out Event occurs during the term of the CDs, your payment at maturity will become fixed, and special rules may apply. Under these rules, you would be required to account for the difference between the originally projected payment at maturity and the fixed payment at maturity in a reasonable manner over the period to which the difference relates. In addition, you would be required to make adjustments to, among other things, your accrual periods and your adjusted basis in your CDs. The character of any gain or loss on a sale or exchange of your CDs would also be affected. You should consult your tax adviser concerning the application of these special rules. 63
Tax Consequences to Non-U.S. Holders You are a “Non-U.S. Holder” if for U.S. federal income tax purposes you are a beneficial owner of a CD that is:
a nonresident alien individual; a foreign corporation; or a nonresident alien fiduciary of a foreign estate or trust.
You are not a “Non-U.S. Holder” for purposes of this discussion if you are an individual present in the United States for 183 days or more in the taxable year of disposition. In this case, you should consult your tax adviser regarding the U.S. federal income tax consequences of the sale or exchange of a CD (including early redemption or redemption at maturity). Income and gain from a CD will be exempt from U.S. federal income tax (including withholding tax) provided, generally, that these amounts are not effectively connected with your conduct of a U.S. trade or business. If you are engaged in a U.S. trade or business and if the income or gain from a CD is effectively connected with your conduct of that trade or business, although exempt from the withholding tax referred to above, you generally will be subject to U.S. income tax on this income or gain in the same manner as if you were a U.S. Holder. If this paragraph applies to you, you should consult your tax adviser with respect to other U.S. tax consequences of the ownership and disposition of CDs, including the possible imposition of a 30% branch profits tax if you are a corporation. If you are an individual, your CDs will not be included in your estate for U.S. federal estate tax purposes, provided that your income from the CDs is not then effectively connected with your conduct of a U.S. trade or business. Backup Withholding and Information Reporting Interest (including OID) accrued or paid on your CDs and the proceeds received from a sale or exchange of your CDs (including early redemption or redemption at maturity) will be subject to information reporting if you are not an “exempt recipient” (such as a domestic corporation) and may also be subject to backup withholding at the rates specified in the Code if you fail to provide certain identifying information (such as an accurate taxpayer identification number, if you are a U.S. Holder) or meet certain other conditions. However, if you are a Non-U.S. Holder, you will generally be exempt from backup withholding if you certify that you are not a United States person and meet certain other conditions or otherwise establish an exemption from those rules. Amounts withheld under the backup withholding rules are not additional taxes and may be refunded or credited against your U.S. federal income tax liability, provided the required information is furnished to the IRS.
64
THE MSCI WORLD INDEXSM We have derived all information regarding the MSCI World IndexSM contained in this disclosure statement, including, without limitation, its make up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by MSCI. We make no representation or warranty as to the accuracy or completeness of such information. MSCI has no obligation to continue to publish, and may discontinue publication of, the MSCI World IndexSM. MSCI World IndexSM Calculation The MSCI World IndexSM (“MXWO”) is published by MSCI and is intended to measure the equity market performance of certain developed equity markets. The MSCI World IndexSM is calculated daily in U.S. dollars and published in real time every 15 seconds during market trading hours. The MSCI World IndexSM is published by Bloomberg under the index symbol “MXWO.” As of January 31, 2010, the MSCI World IndexSM consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Effective May 2010, Israel will be reclassified as a developed market and will be included in the MSCI World IndexSM. MSCI recently completed previously announced changes to the methodology used in its MSCI International Equity Indices, which includes the MSCI World IndexSM. MSCI enhanced its Standard Index methodology by moving from a sampled multi cap approach to an approach targeting exhaustive coverage with non overlapping size and style segments. On May 30, 2008, the MSCI Standard Indices (which include the MSCI World IndexSM) and the MSCI Small Cap Indices, along with the other MSCI equity indices based on them, transitioned to the Global Investable Market Indices methodology described below. The enhanced MSCI Standard Indices are now composed of the MSCI Large Cap and Mid Cap Indices. The former MSCI Small Cap Index transitioned to the MSCI Small Cap Index resulting from the Global Investable Market Indices methodology. Together, the relevant MSCI Large Cap, Mid Cap and Small Cap Indices make up the MSCI Investable Market Index for each country, composite, sector, and style index that MSCI offers. Constructing the MSCI World IndexSM MSCI undertakes an index construction process, which involves: (i) defining the Equity Universe; (ii) determining the Market Investable Equity Universe for each market; (iii) determining market capitalization size segments for each market; (iv) applying Index Continuity Rules for the MSCI Standard Index; (v) creating style segments within each size segment within each market; and (vi) classifying securities under the Global Industry Classification Standard (the “GICS”). Defining the Equity Universe (i) Identifying Eligible Equity Securities: The Equity Universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as either Developed Markets (“DM”) or Emerging Markets (“EM”). All listed equity securities, or listed securities that exhibit characteristics of equity securities, except mutual funds, ETFs, equity derivatives, limited partnerships, and most investment trusts, are eligible for inclusion in the Equity Universe. Real Estate Investment Trusts (“REITs”) in some countries and certain income trusts in Canada are also eligible for inclusion. (ii) Country Classification of Eligible Securities: Each company and its securities (i.e., share classes) are classified in one and only one country, which allows for a distinctive sorting of each company by its respective country.
65
Determining the Market Investable Equity Universes A Market Investable Equity Universe for a market is derived by applying investability screens to individual companies and securities in the Equity Universe that are classified in that market. A market is equivalent to a single country, except in DM Europe, where all DM countries in Europe are aggregated into a single market for index construction purposes. Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the Global Investable Market Indices methodology. The investability screens used to determine the Investable Equity Universe in each market are: (i)
Equity Universe Minimum Size Requirement: This investability screen is applied at the company level. In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization.
(ii)
Equity Universe Minimum Float−Adjusted Market Capitalization Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have a free float−adjusted market capitalization equal to or higher than 50% of the Equity Universe Minimum Size Requirement.
(iii)
DM and EM Minimum Liquidity Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have adequate liquidity. The Annualized Traded Value Ratio (“ATVR”), a measure that offers the advantage of screening out extreme daily trading volumes and taking into account the free float−adjusted market capitalization size of securities, is used to measure liquidity. In the calculation of the ATVR, the trading volumes in depository receipts associated with that security, such as ADRs or GDRs, are also considered. A minimum liquidity level of 20% ATVR is required for inclusion of a security in a Market Investable Equity Universe of a Developed Market, and a minimum liquidity level of 15% ATVR is required for inclusion of a security in a Market Investable Equity Universe of an Emerging Market.
(iv)
Global Minimum Foreign Inclusion Factor Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a Market Investable Equity Universe.
(v)
Minimum Length of Trading Requirement: This investability screen is applied at the individual security level. For an initial public offering (“IPO”) to be eligible for inclusion in a Market Investable Equity Universe, the new issue must have started trading at least four months before the implementation of the initial construction of the index or at least three months before the implementation of a Semi−Annual Index Review. This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the Minimum Length of Trading Requirement and may be included in a Market Investable Equity Universe and the Standard Index outside of a Quarterly or Semi−Annual Index Review.
Defining Market Capitalization Size Segments for Each Market Once a Market Investable Equity Universe is defined, it is segmented into the following size−based indices:
Investable Market Index (Large + Mid + Small)
Standard Index (Large + Mid) 66
Large Cap Index
Mid Cap Index
Small Cap Index
Creating the Size Segment Indices in each market involves the following steps: (i) defining the Market Coverage Target Range for each size segment; (ii) determining the Global Minimum Size Range for each size segment; (iii) determining the Market Size−Segment Cutoffs and associated Segment Number of Companies; (iv) assigning companies to the size segments; and (v) applying final size−segment investability requirements. Index Continuity Rules for the Standard Indices In order to achieve index continuity, as well as provide some basic level of diversification within a market index, notwithstanding the effect of other index construction rules, a minimum number of five constituents will be maintained for a DM Standard Index and a minimum number of three constituents will be maintained for an EM Standard Index. If after the application of the index construction methodology, a Standard Index contains fewer than five securities in a Developed Market or three securities in an Emerging Market, then the largest securities by free float adjusted market capitalization are added to the Standard Index in order to reach five constituents in that Developed Market or three in that Emerging Market. At subsequent Index Reviews, if the free float adjusted market capitalization of a non index constituent is at least 1.50 times the free float adjusted market capitalization of the smallest existing constituent after rebalancing, the larger free float adjusted market capitalization security replaces the smaller one. Creating Style Indices within Each Size Segment All securities in the investable equity universe are classified into Value or Growth segments using the MSCI Global Value and Growth methodology. Classifying Securities under the Global Industry Classification Standard All securities in the Global Investable Equity Universe are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with S&P, the Global Industry Classification Standard. Under the GICS, each company is assigned uniquely to one sub−industry according to its principal business activity. Therefore, a company can belong to only one industry grouping at each of the four levels of the GICS. Maintenance of the MSCI World IndexSM The MSCI Global Investable Market Indices are maintained with the objective of reflecting the evolution of the underlying equity markets and segments on a timely basis, while seeking to achieve index continuity, continuous investability of constituents and replicability of the indices, and index stability and low index turnover. In particular, index maintenance involves: (i)
Semi−Annual Index Reviews (“SAIRs”) in May and November of the Size Segment and Global Value and Growth Indices which include:
Updating the indices on the basis of a fully refreshed Equity Universe.
Taking buffer rules into consideration for migration of securities across size and style segments.
Updating FIFs and Number of Shares (“NOS”). 67
The objective of the SAIRs is to systematically reassess the various dimensions of the Equity Universe for all markets on a fixed semi annual timetable. A SAIR involves a comprehensive review of the Size Segment and Global Value and Growth Indices. (ii)
(iii)
Quarterly Index Reviews (“QIRs”) in February and August of the Size Segment Indices aimed at:
Including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the index.
Allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR.
Reflecting the impact of significant market events on FIFs and updating NOS. Ongoing event−related changes. Ongoing event related changes to the indices are the result of mergers, acquisitions, spin offs, bankruptcies, reorganizations and other similar corporate events. They can also result from capital reorganizations in the form of rights issues, bonus issues, public placements and other similar corporate actions that take place on a continuing basis. These changes generally are reflected in the indices at the time of the event. Significantly large IPOs are included in the indices after the close of the company’s tenth day of trading.
The MSCI World IndexSM Is Subject to Currency Exchange Risk Because the closing prices of the Component Securities are converted into U.S. dollars for purposes of calculating the value of the MSCI World IndexSM, investors in the CDs will be exposed to currency exchange rate risk with respect to each of the currencies in which the Component Securities trade. Exposure to currency changes will depend on the extent to which such currencies strengthen or weaken against the U.S. dollar and the relative weight of the Component Securities in the MSCI World IndexSM denominated in each such currency. The devaluation of the U.S. dollar against the currencies in which the Component Securities trade will result in an increase in the value of the MSCI World IndexSM. Conversely, if the U.S. dollar strengthens against such currencies, the value of the MSCI World IndexSM will be adversely affected and may reduce or eliminate the payment at maturity, if any, on the CDs. Fluctuations in currency exchange rates can have a continuing impact on the value of the MSCI World IndexSM, and any negative currency impact on the MSCI World IndexSM may significantly decrease the value of the CDs. The return on an index composed of the Component Securities where the closing price is not converted into U.S. dollars can be significantly different from the return on the MSCI World IndexSM, which is converted into U.S. dollars. License Agreement with MSCI MSCI and J.P. Morgan Securities Inc. have entered into a nonexclusive license agreement providing for the sublicense to us, and certain of our affiliated or subsidiary companies, in exchange for a fee, of the right to use the MSCI World IndexSM, which is owned and published by MSCI, in connection with certain securities, including the CDs. The CDs are not sponsored, endorsed, sold or promoted by MSCI. MSCI makes no representation or warranty, express or implied, to the owners of the CDs or any member of the public regarding the advisability of investing in securities generally or in the CDs particularly, or the ability of the MSCI World IndexSM to track general stock market performance. MSCI’s only relationship to JPMorgan Chase & Co. is the licensing of certain trademarks and trade names of MSCI without regard to JPMorgan Chase & Co. or the CDs. MSCI has no obligation to take the needs of JPMorgan Chase & Co. or the holders of the CDs into consideration in determining, composing or calculating the MSCI World IndexSM. MSCI is not responsible for and has not participated in the determination of the timing, price or quantity of the CDs to be issued or in the determination or calculation of the amount due at maturity of the CDs. MSCI has no obligation or liability in connection with the administration, marketing or trading of the CDs. 68
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI WORLD INDEXSM FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE’S CUSTOMERS OR COUNTERPARTIES, OWNERS OF THE PRODUCTS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. FURTHER, NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDICES AND ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH THE INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. No purchaser, seller or holder of the CDs, or any other person or entity, should use or refer to MSCI’s trade name, trade mark or service mark rights to the designations “Morgan Stanley Capital International®,” “MSCI®,” “Morgan Stanley Capital International Perspective®,” to sponsor, endorse, market or promote the CDs without first contacting MSCI to determined whether MSCI’s permission is required. Under no circumstances may any person or entity claim affiliation with MSCI without the prior written permission of MSCI.
69
THE S&P 500® INDEX We have derived all information contained in this disclosure statement regarding the S&P 500® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, Standard & Poor’s, a division of the McGraw-Hill Companies, Inc. (“S&P”). The S&P 500® Index was developed by S&P and is calculated, maintained and published by S&P. We make no representation or warranty as to the accuracy or completeness of such information. The S&P 500® Index is reported by Bloomberg L.P. under the ticker symbol “SPX.” The S&P 500® Index is intended to provide a performance benchmark for the U.S. equity markets. The calculation of the level of the S&P 500® Index (discussed below in further detail) is based on the relative value of the aggregate Market Value (as defined below) of the common stocks of 500 companies (the “S&P Component Stocks”) as of a particular time as compared to the aggregate average Market Value of the common stocks of 500 similar companies during the base period of the years 1941 through 1943. Historically, the “Market Value” of any S&P Component Stock was calculated as the product of the market price per share and the number of the then-outstanding shares of such S&P Component Stock. As discussed below, on March 21, 2005, S&P began to use a new methodology to calculate the Market Value of the S&P Component Stocks and on September 16, 2005, S&P completed its transition to the new calculation methodology. The 500 companies are not the 500 largest companies listed on the NYSE and not all 500 companies are listed on such exchange. S&P chooses companies for inclusion in the S&P 500® Index with the objective of achieving a distribution by broad industry groupings that approximates the distribution of these groupings in the common stock population of the U.S. equity market. S&P may from time to time, in its sole discretion, add companies to, or delete companies from, the S&P 500® Index to achieve the objectives stated above. Relevant criteria employed by S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the company’s common stock is widely-held and the Market Value and trading activity of the common stock of that company. On March 21, 2005, S&P began to calculate the S&P 500® Index based on a half float-adjusted formula, and on September 16, 2005, the S&P 500® Index became fully float-adjusted. S&P’s criteria for selecting stocks for the S&P 500® Index was not changed by the shift to float adjustment. However, the adjustment affects each company’s weight in the S&P 500® Index (i.e., its Market Value). Under float adjustment, the share counts used in calculating the S&P 500® Index reflect only those shares that are available to investors, not all of a company’s outstanding shares. S&P defines three groups of shareholders whose holdings are subject to float adjustment:
holdings by other publicly traded corporations, venture capital firms, private equity firms, strategic partners, or leveraged buyout groups; holdings by government entities, including all levels of government in the United States or foreign countries; and holdings by current or former officers and directors of the company, founders of the company, or family trusts of officers, directors, or founders, as well as holdings of trusts, foundations, pension funds, employee stock ownership plans, or other investment vehicles associated with and controlled by the company.
However, treasury stock, stock options, restricted shares, equity participation units, warrants, preferred stock, convertible stock, and rights are not part of the float. In cases where holdings in a group exceed 10% of the outstanding shares of a company, the holdings of that group will be excluded from the float-adjusted count of shares to be used in the S&P 500® Index calculation. Mutual funds, investment advisory firms, pension funds, or foundations not associated with the company and investment funds in insurance companies, shares of a United States company traded in Canada as “exchangeable shares,” shares that trust beneficiaries may buy or sell without difficulty or significant additional expense beyond typical brokerage fees, and, if a company has multiple classes of stock outstanding, shares in an unlisted 70
or non-traded class if such shares are convertible by shareholders without undue delay and cost, are also part of the float. For each stock, an investable weight factor (“IWF”) is calculated by dividing the available float shares, defined as the total shares outstanding less shares held in one or more of the three groups listed above where the group holdings exceed 10% of the outstanding shares, by the total shares outstanding. (On March 21, 2005, the S&P 500® Index moved halfway to float adjustment, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P 500® Index between March 21, 2005 and September 16, 2005 was 0.90. On September 16, 2005, S&P began to calculate the S&P 500® Index on a fully floatadjusted basis, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P 500® Index on and after September 16, 2005 is 0.80.) The float-adjusted S&P 500® Index is calculated by dividing the sum of the IWF multiplied by both the price and the total shares outstanding for each stock by the index divisor. For companies with multiple classes of stock, S&P calculates the weighted average IWF for each stock using the proportion of the total company market capitalization of each share class as weights. As of the date of this disclosure statement, the S&P 500® Index is calculated using a base-weighted aggregate methodology: the level of the S&P 500® Index reflects the total Market Value of all 500 S&P Component Stocks relative to the S&P 500® Index’s base period of 1941–43 (the “Base Period”). An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time. The actual total Market Value of the S&P Component Stocks during the Base Period has been set equal to an indexed value of 10. This is often indicated by the notation 1941–43=10. In practice, the daily calculation of the S&P 500® Index is computed by dividing the total Market Value of the S&P Component Stocks by a number called the “Index Divisor.” By itself, the Index Divisor is an arbitrary number. However, in the context of the calculation of the S&P 500® Index, it is the only link to the original Base Period level of the S&P 500® Index. The Index Divisor keeps the Index comparable over time and is the manipulation point for all adjustments to the Index (“Index Maintenance”). Index Maintenance includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price adjustments due to company restructurings or spinoffs. To prevent the level of the S&P 500® Index from changing due to corporate actions, all corporate actions which affect the total Market Value of the S&P 500® Index require an Index Divisor adjustment. By adjusting the Index Divisor for the change in total Market Value, the level of the S&P 500® Index remains constant. This helps maintain the level of the S&P 500® Index as an accurate barometer of stock market performance and ensures that the movement of the S&P 500® Index does not reflect the corporate actions of individual companies in the S&P 500® Index. All Index Divisor adjustments are made after the close of trading and after the calculation of the S&P 500® Index closing level. Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the S&P 500® Index and do not require Index Divisor adjustments. The table below summarizes the types of Index maintenance adjustments and indicates whether or not an Index Divisor adjustment is required. Type of Corporate Action Company added/ deleted
Comments Net change in market value determines divisor adjustment.
71
Divisor Adjustment Yes
Change in shares outstanding
Any combination of secondary issuance, share repurchase or buy back – share counts revised to reflect change.
Yes
Stock split
Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting.
No
Spin-off
If spun-off company is not being added to the index, the divisor adjustment reflects the decline in index market value (i.e., the value of the spun-off unit).
Yes
Spin-off
Spun-off company added to the index, another company removed to keep number of names fixed. Divisor adjustment reflects deletion.
Yes
Change in IWF due to a corporate action or a purchase or sale by an inside holder.
Increasing (decreasing) the IWF increases (decreases) the total market value of the index. The divisor change reflects the change in market value caused by the change to an IWF.
Yes
Special dividend
When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in index market value.
Yes
Rights offering
Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price. The calculation assumes that the offering is fully subscribed. Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price paid.
Yes
Stock splits and stock dividends do not affect the Index Divisor, because following a split or dividend, both the stock price and number of shares outstanding are adjusted by S&P so that there is no change in
72
the Market Value of the S&P Component Stock. All stock split and dividend adjustments are made after the close of trading on the day before the ex-date. Each of the corporate events exemplified in the table requiring an adjustment to the Index Divisor has the effect of altering the Market Value of the S&P Component Stock and consequently of altering the aggregate Market Value of the S&P Component Stocks (the “Post-Event Aggregate Market Value”). In order that the level of the S&P 500® Index (the “Pre-Event Index Value”) not be affected by the altered Market Value (whether increase or decrease) of the affected S&P Component Stock, a new Index Divisor (“New Divisor”) is derived as follows: Post-Event Aggregate Market Value New Divisor New Divisor
=
=
Pre-Event Index Value
Post-Event Aggregate Market Value Pre-Event Index Value
A large part of the S&P 500® Index maintenance process involves tracking the changes in the number of shares outstanding of each of the S&P 500® Index companies. Four times a year, on a Friday close to the end of each calendar quarter, the share totals of companies in the S&P 500® Index are updated as required by any changes in the number of shares outstanding. After the totals are updated, the Index Divisor is adjusted to compensate for the net change in the total Market Value of the S&P 500® Index. In addition, any changes over 5% in the current common shares outstanding for the S&P 500® Index companies are carefully reviewed on a weekly basis, and when appropriate, an immediate adjustment is made to the Index Divisor. License Agreement with S&P S&P and J.P. Morgan Securities Inc. have entered into a non-exclusive license agreement providing for the sub-license to us, and certain of our affiliated or subsidiary companies, in exchange for a fee, of the right to use the S&P 500® Index, which is owned and published by S&P, in connection with certain financial products, including the CDs. The CDs are not sponsored, endorsed, sold or promoted by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., which, as above, we refer to as S&P. S&P makes no representation or warranty, express or implied, to the owners of the CDs or any member of the public regarding the advisability of investing in securities generally or in the CDs particularly, or the ability of the S&P 500® Index to track general stock market performance. S&P’s only relationship to JPMorgan Chase Bank, N.A. is the licensing of certain trademarks and trade names of S&P without regard to JPMorgan Chase Bank, N.A. or the CDs. S&P has no obligation to take the needs of JPMorgan Chase Bank, N.A. or the holders of the CDs into consideration in determining, composing or calculating the S&P 500® Index. S&P is not responsible for and has not participated in the determination of the timing, price or quantity of the CDs to be issued or in the determination or calculation of the amount due at maturity of the CDs. S&P has no obligation or liability in connection with the administration, marketing or trading of the CDs. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500® INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY JPMORGAN CHASE & CO., HOLDERS OF THE CDs, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500® INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500® INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 73
“STANDARD & POOR’S,” “S&P,” “S&P 500” AND “500” ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND HAVE BEEN LICENSED FOR USE BY J.P. MORGAN SECURITIES INC. AND SUB-LICENSED FOR USE BY JPMORGAN CHASE & CO. THIS TRANSACTION IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P AND S&P MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF PURCHASING ANY OF THE CDs.
74
THE S&P 500® RISK CONTROL 10% EXCESS RETURN INDEX We have derived all information contained in this disclosure statement regarding the S&P 500® Risk Control 10% Excess Return Index (the “SPX Risk Control Index” or the “Index”), including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, Standard & Poor’s Financial Services LLC (“S&P”). The SPX Risk Control Index was developed by S&P and J.P. Morgan Securities Inc. and is calculated, maintained and published by S&P. We make no representation or warranty as to the accuracy or completeness of such information. The SPX Risk Control Index is reported by Bloomberg L.P. under the ticker symbol “SPXT10UE.” The SPX Risk Control Index is intended to provide a performance benchmark for the U.S. equity markets while seeking greater stability and a reduction in the overall risk level of the S&P 500® Total Return Index (the “Underlying Index”). The SPX Risk Control Index utilizes the existing S&P 500® methodology, plus an overlying mathematical algorithm designed to control the level of risk of the S&P 500® Index by establishing a specific volatility target and dynamically adjusting the exposure to the S&P 500® Index based on its observed historical volatility. If the risk level reaches a threshold that is too high, the cash level is increased in order to maintain the target volatility. If the risk level is too low, then the Index will employ leverage to maintain the target volatility. The SPX Risk Control Index tracks the return of the Underlying Index over and above a short-term money market investment. In other words, the SPX Risk Control Index calculates the return on an investment in the Underlying Index where the investment was made through the use of borrowed funds. Thus the return of the SPX Risk Control Index will be equal to that of the Underlying Index less the associated borrowing costs. The SPX Risk Control Index represents a portfolio consisting of the Underlying Index and a borrowing cost component accruing interest based on U.S. overnight LIBOR. The SPX Risk Control Index is rebalanced and reweighted between the Underlying Index and a borrowing cost component daily, in order to seek to maintain the target volatility of 10%. There are no guarantees that the Index will achieve its stated targets. For information related to the criterion for inclusion in the Underlying Index and information on how the Underlying Index is calculated, please refer to “The S&P 500® Total Return Index” below. The return of the Index consists of two components: (1) the return on the position in the Underlying Index and (2) the associated borrowing costs of the investment funds, depending upon whether the position is leveraged or deleveraged. For example, if the exposure to the Underlying Index is 80%, the remaining 20% will not accumulate borrowing costs in the Index. If the Leverage Factor is greater than 100%, the full exposure will be charged borrowing costs, which are deducted from the Index. As an excess return index, the SPX Risk Control Index represents an unfunded position in the Underlying Index. The borrowing rate is generally based on the overnight U.S. LIBOR rate. S&P may use other successor interest rates if the overnight U.S. LIBOR rate could not be obtained. A 360-day year is assumed for the interest calculations in accordance with U.S. banking practices. The Index is dynamically adjusted to target a 10% level of volatility. Volatility is calculated as a function of historical returns that uses exponential weightings to give more significance to recent observations. Short and long term measures of volatility are used to cause the Index to deleverage quickly, but increase exposure more gradually on a relative basis. The short-term and long-term decay factors, which are numbers greater than zero and less than one that determine the weight of each daily return in the calculation of historical variance, are 0.94 (94%) and 0.97 (97%), respectively. If the risk level reaches a threshold that is too high, the cash level is increased in order to maintain the target volatility. If the risk level is too low, then the Index will employ leverage to maintain the targeted level of volatility. 75
The Index includes a leverage factor that changes based on realized historical volatility. A leverage factor greater than 1 represents a leveraged position and a leverage factor less than 1 represents a deleveraged position. The maximum leverage factor the Index may have is 1.50 (150%).
Calculation of Index Return The formula for calculating the return of the Index (the “Risk Control Index Return”) is as follows:
The Risk Control Index Value at time t can then be calculated as:
Substituting the first equation above into the second equation and expanding yields:
where: Interest Ratet-1 = the interest rate set for the Index. The interest rate is the overnight U.S. LIBOR rate. A 360-day year is assumed for the interest calculations in accordance with U.S. banking practices. Dt-1, t = the number of calendar days between day t-1 and day t rb = the last Index rebalancing date Kt = the leverage factor, calculated as: Min(Max K, Target Volatility/Realized Volatilityrb-d) Underlying Indext = the level of the Underlying Index on day t Underlying Indexrb = the level of the Underlying Index as of the previous rebalancing date. Max K = the maximum leverage factor allowed in the Index (150%). Target Volatility = the target level of volatility set for the Index (10%). Realized Volatilityrb-d = The historical realized volatility of the Underlying Index as of the close of d trading days prior to the previous rebalancing date rb, where a trading day is defined as a day on which the Underlying Index is calculated.
76
Realized Volatilityt = The historical realized volatility of the Underlying Index. The realized volatility measure used for the Index is an exponentially weighted moving average historical volatility measure. d =
The number of days between when volatility is observed and the rebalancing date. For example, if d = 2, the historical volatility of the Underlying Index as of the close two days prior to the rebalancing date will be used to calculate the leverage factor Kt.
Calculation of Volatility The realized volatility is calculated as the maximum of two exponentially weighted moving averages, one measuring short-term and one measuring long-term volatility. Realized Volatilityt = Max (Realized VolatilityS,t, Realized VolatilityL,t) where: S,t = The short-term volatility measure, calculated as:
L,t = The long-term volatility measure, calculated as:
where: T0 = the start date for the Risk Control Index n =
the number of days inherent in the return calculation used for determining volatility. If n = 1 daily returns are used, while if n = 2 two day returns are used, and so forth.
m =
the Nth trading date prior to T0
77
N =
the number of trading days observed for calculating initial variance as of the start date of the Index.
λS =
The short-term decay factor used for exponential weighting. The decay factor is a number greater than zero and less than one that determines the weight of each daily return in the calculation of historical variance. The short-term decay factor for the Index is 94%.
λL =
The long-term decay factor used for exponential weighting. The decay factor is a number greater than zero and less than one that determines the weight of each daily return in the calculation of historical variance. The long-term decay factor for the Index is 97%.
αS,m,i = Weight of date t in the short-term volatility calculation, as calculated based on the following formula:
Weight of date t in the long-term volatility calculation, as calculated based αL,m,i = on the following formula:
The interest rate, maximum leverage, target volatility and the lambda decay factors are defined in relation to the Index and are generally held constant throughout the life of the Index. The leverage position changes at each rebalancing based on changes in realized volatility. There is a two-day lag between the calculation of the leverage factor, based on the ratio of target volatility to realized volatility, and the implementation of that leverage factor in the Index. The S&P 500® Total Return Index The S&P 500® Total Return Index represents the total return earned in a portfolio that tracks the S&P 500 Index and reinvests dividend income in the S&P 500® Index, not in the specific stock paying the dividend. In the S&P 500® Index changes in the index level reflect changes in stock prices. In the S&P 500® Total Return Index changes in the index level reflect both movements in stock prices and the reinvestment of dividend income. ®
The S&P 500® Total Return Index is calculated from the S&P 500® Index and daily total dividend returns. The first step is to calculate the total dividend paid on a given day and convert this figure into points of the S&P 500® Index:
Where Dividend is the dividend per share paid for stock i and Shares are the shares of the stocks composing the S&P 500® Index. This is done for each trading day. Dividendi is generally zero except for four times a year when it goes ex-dividend for the quarterly dividend payment. Some stocks do not pay a 78
dividend and Dividend is always zero. TotalDailyDividend is measured in dollars. This is converted to index points by dividing by the divisor for the S&P 500® Index.:
The next step is to apply the usual definition of a total return from a financial instrument to the S&P 500® Index. The first equation below gives the definition. The second equation below applies it to the S&P 500® Index:
Where the TotalReturn and the daily total return for the index (DTR) is stated as a decimal. The DTR is used to update the S&P 500® Total Return Index from one day to the next:
The S&P 500® Total Return Index reflects both ordinary and special dividends. Ordinary cash dividends are applied on the ex-date in calculating the S&P 500® Total Return Index. Special dividends are those dividends that are outside of the normal payment pattern established historically by the issuer of the stocks composing the S&P 500® Index. These may be described by the issuer as “special,” “extra,” “year-end,” or “return of capital.” Whether a dividend is funded from operating earnings or from other sources of cash does not affect the determination of whether it is ordinary or special. Special dividends are treated as corporate actions with offsetting price and divisor adjustments. For information and additional retails regarding the S&P 500® Index, please see “The S&P 500® Index” in this Disclosure Statement. License Agreement with S&P S&P and J.P. Morgan Securities Inc. intend to enter into a license agreement providing for the sublicense to us, and certain of our affiliated or subsidiary companies, in exchange for a fee, of the right to use the SPX Risk Control Index, which is owned and published by S&P, in connection with certain financial products, including the CDs. The CDs are not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the owners of the CDs or any member of the public regarding the advisability of investing in securities generally or in the CDs particularly, or the ability of the S&P 500® Index or SPX Risk Control Index to track general stock market performance or to achieve stated targets. S&P’s only relationship to JPMorgan Chase Bank, N.A. is the licensing of certain trademarks and trade names of S&P without regard to JPMorgan Chase Bank, N.A. or the CDs. S&P has no obligation to take the needs of JPMorgan Chase Bank, N.A. or the holders of the CDs into consideration in determining, composing or calculating the S&P 500® Index or the SPX Risk Control Index. S&P is not responsible for and has not participated in the determination of the timing, price or quantity of the CDs to be issued or in 79
the determination or calculation of the amount due at maturity of the CDs. S&P has no obligation or liability in connection with the administration, marketing or trading of the CDs. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500® INDEX, THE S&P 500® RISK CONTROL 10% EXCESS RETURN INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY JPMORGAN CHASE & CO., HOLDERS OF THE CDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500® INDEX, THE S&P 500® RISK CONTROL 10% EXCESS RETURN INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500® INDEX, THE S&P 500® RISK CONTROL 10% EXCESS RETURN INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. “STANDARD & POOR’S®,” “S&P®,” “S&P 500®,” “500” AND “S&P 500® RISK CONTROL 10%” ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND HAVE BEEN LICENSED FOR USE BY J.P. MORGAN SECURITIES INC. AND SUB-LICENSED FOR USE BY JPMORGAN CHASE BANK, N.A. THIS TRANSACTION IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P, AND S&P MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF PURCHASING ANY OF THE CDS.
80
THE DOW JONES EURO STOXX 50® INDEX We have derived all information contained in this disclosure statement regarding the Dow Jones EURO STOXX 50® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, STOXX Limited. The Dow Jones EURO STOXX 50® Index is calculated, maintained and published by STOXX Limited. We make no representation or warranty as to the accuracy or completeness of such information. The Dow Jones EURO STOXX 50® Index is reported by Bloomberg L.P. under the ticker symbol “SX5E.” The Dow Jones EURO STOXX 50® Index was created by STOXX Limited, a joint venture between Deutsche Börse AG, Dow Jones & Company (“Dow Jones”) and SWX Swiss Exchange. Publication of the Dow Jones EURO STOXX 50® Index began on February 26, 1998, based on an initial Dow Jones EURO STOXX 50® Index value of 1,000 at December 31, 1991. The Dow Jones EURO STOXX 50® Index is published in The Wall Street Journal and disseminated on the STOXX Limited website: http://www.stoxx.com, which sets forth, among other things, the country and industrial sector weightings of the securities included in the Dow Jones EURO STOXX 50® Index and updates these weightings at the end of each quarter. Information contained in the STOXX Limited website is not incorporated by reference in, and should not be considered a part of, this disclosure statement. Dow Jones EURO STOXX 50® Index Composition and Maintenance The Dow Jones EURO STOXX 50® Index is composed of 50 component stocks of market sector leaders from within the 18 Dow Jones EURO STOXX® Supersector indices, which represent the Eurozone portion of the Dow Jones STOXX 600® Supersector indices. The Dow Jones STOXX 600® Supersector indices contain the 600 largest stocks traded on the major exchanges of 18 European countries. The component stocks have a high degree of liquidity and represent the largest companies across all market sectors defined by the Dow Jones Global Classification Standard. The composition of the Dow Jones EURO STOXX 50® Index is reviewed annually, based on the closing stock data on the last trading day in August. The component stocks are announced the first trading day in September. Changes to the component stocks are implemented on the third Friday in September and are effective the following trading day. Changes in the composition of the Dow Jones EURO STOXX 50® Index are made to ensure that the Dow Jones EURO STOXX 50® Index includes the 50 market sector leaders from within the Dow Jones EURO STOXX® Index. A current list of the issuers that comprise the Dow Jones EURO STOXX 50® Index is available on the STOXX Limited website: http://www.stoxx.com. Information contained in the STOXX Limited website is not incorporated by reference in, and should not be considered a part of, this disclosure statement or any term sheet. The free float factors for each component stock used to calculate the Dow Jones EURO STOXX 50® Index, as described below, are reviewed, calculated and implemented on a quarterly basis and are fixed until the next quarterly review. The Dow Jones EURO STOXX 50® Index is also reviewed on an ongoing basis. Corporate actions (including initial public offerings, mergers and takeovers, spin-offs, delistings and bankruptcy) that affect the Dow Jones EURO STOXX 50® Index composition are immediately reviewed. Any changes are announced, implemented and effective in line with the type of corporate action and the magnitude of the effect. Dow Jones EURO STOXX 50® Index Calculation The Dow Jones EURO STOXX 50® Index is calculated with the “Laspeyres formula,” which measures the aggregate price changes in the component stocks against a fixed base quantity weight. The formula for calculating the Dow Jones EURO STOXX 50® Index value can be expressed as follows: 81
Index =
Free Float Market Capitalization Of The Dow Jones Euro Stoxx 50® Index Adjusted Base Date Market Capitalization Of The Dow Jones Euro Stoxx 50® Index
x 1,000
The “free float market capitalization of the Dow Jones EURO STOXX 50® Index” is equal to the sum of the products of the closing price, market capitalization and free float factor for each component stock as of the time the Dow Jones EURO STOXX 50® Index is being calculated. The Dow Jones EURO STOXX 50® Index is also subject to a divisor, which is adjusted to maintain the continuity of Dow Jones EURO STOXX 50® Index values despite changes due to corporate actions. The following is a summary of the adjustments to any component stock made for corporate actions and the effect of such adjustment on the divisor, where shareholders of the component stock will receive “B” number of shares for every “A” share held (where applicable). (1) Split and reverse split:
(2) Rights offering:
Adjusted price = closing price * A/B
Adjusted price = (closing price * A + subscription price * B) / (A + B)
New number of shares = old number of shares * B/A Divisor: no change
New number of shares = old number of shares *(A + B)/ A Divisor: increases
(3) Stock dividend:
(4) Stock dividend of another company:
Adjusted price = closing price * A / (A + B)
Adjusted price = (closing price * A - price of other company * B) / A
New number of shares = old number of shares * (A + B) / A Divisor: no change
Divisor: decreases
(5) Return of capital and share consideration:
(6) Repurchase shares / self tender:
Adjusted price = (closing price - dividend announced by company * (1withholding tax)) * A / B
Adjusted price = ((price before tender * old number of shares ) - (tender price * number of tendered shares)) / (old number of shares - number of tendered shares)
New number of shares = old number of shares * B/A Divisor: decreases
New number of shares = old number of shares number of tendered shares Divisor: decreases
(7) Spin-off: adjusted price = (closing price * A - price of spun-off shares * B) / A Divisor: decreases (8) Combination stock distribution (dividend or split) and rights offering: for this corporate action, the following additional assumptions apply: shareholders receive B new shares from the distribution and C new shares from the rights offering for every A share held. If A is not equal to one share, all the following “new number of shares” formulae need to be divided by A: - If rights are applicable after stock distribution (one action applicable to other):
- If stock distribution is applicable after rights (one action applicable to other): 82
Adjusted price = (closing price * A + subscription price * C * (1 + B / A)) / ((A + B) * ( 1 + C / A)) New number of shares = old number of shares * ((A + B) * (1 + C / A)) / A
Adjusted price = (closing price * A + subscription price * C) /((A + C) * (1 + B / A)) New number of shares = old number of shares * ((A + C) * (1 + B / A)) divisor: increases
Divisor: increases - Stock distribution and rights (neither action is applicable to the other): Adjusted price = (closing price * A + subscription price * C) / (A + B + C) New number of shares = old number of shares * (A + B + C) / A Divisor: increases License Agreement with STOXX Limited We have entered into an agreement with STOXX Limited providing us and certain of our affiliates or subsidiaries identified in that agreement with a non exclusive license and, for a fee, with the right to use the Dow Jones EURO STOXX 50® Index, which is owned and published by STOXX Limited, in connection with certain financial products, including the CDs. The CDs are not sponsored, endorsed, sold or promoted by STOXX Limited (including its affiliates) (collectively referred to as “STOXX Limited”). STOXX Limited has not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to the CDs. STOXX Limited makes no representation or warranty, express or implied to the owners of the CDs or any member of the public regarding the advisability of investing in securities generally or in the CDs particularly, or the ability of the Dow Jones EURO STOXX 50® Index to track general stock market performance. STOXX Limited and Dow Jones have no relationship to JPMorgan Chase & Co. other than the licensing of the Dow Jones EURO STOXX 50® Index and the related trademarks for use in connection with the CDs, which index is determined, composed and calculated by STOXX Limited without regard to JPMorgan Chase & Co. or the CDs. STOXX Limited and Dow Jones have no obligation to take the needs of JPMorgan Chase & Co. or the owners of the CDs into consideration in determining, composing or calculating the Dow Jones EURO STOXX 50® Index. STOXX Limited and Dow Jones are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the CDs to be issued or in the determination or calculation of the equation by which the CDs are to be converted into cash. STOXX Limited and Dow Jones have no liability in connection with the administration, marketing or trading of the CDs. STOXX LIMITED AND DOW JONES DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW JONES EURO STOXX 50® INDEX OR ANY DATA INCLUDED THEREIN AND STOXX LIMITED AND DOW JONES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. STOXX LIMITED AND DOW JONES MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY JPMORGAN CHASE & CO., HOLDERS OF THE CDs, OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE USE OF THE DOW JONES EURO STOXX 50® INDEX OR ANY DATA INCLUDED THEREIN. STOXX LIMITED AND DOW JONES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DOW JONES EURO STOXX 50® INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL STOXX LIMITED OR DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THE LICENSING AGREEMENT BETWEEN JPMORGAN CHASE & CO. AND STOXX LIMITED AND DOW JONES ARE SOLELY FOR THEIR BENEFIT AND NOT FOR THE BENEFIT OF THE OWNERS OF THE CDs OR ANY THIRD PARTIES.
83
“DOW JONES EURO STOXX 50®” AND “STOXX®” ARE SERVICE MARKS OF STOXX LIMITED AND DOW JONES AND HAVE BEEN LICENSED FOR CERTAIN PURPOSES BY JPMORGAN CHASE & CO. THE CDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STOXX LIMITED AND DOW JONES, AND STOXX LIMITED AND DOW JONES MAKES NO REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE CDS.
84
THE DOW JONES — UBS COMMODITY INDEXSM
Overview We have derived all information contained in this disclosure statement regarding the Dow Jones — UBS Commodity IndexSM, including, without limitation, its make-up, method of calculation and changes in its components from (i) publicly available sources and (ii) a summary of the Dow Jones — UBS Commodity Index Handbook (a document that is considered proprietary to Dow Jones & Company, Inc. (“Dow Jones”) and UBS Securities LLC (“UBS”) and is available to those persons who enter into a license agreement available at www.djindexes.com/ubs/index.cfm?go=handbook ). Such information reflects the policies of, and is subject to change by, Dow Jones and UBS. We have not independently verified this information. You, as an investor in the CDs, should make your own investigation into the Dow Jones — UBS Commodity IndexSM, UBS and Dow Jones. Dow Jones and UBS are not involved in the offer of the CDs in any way and have no obligation to consider your interests as a holder of the CDs. Dow Jones and UBS have no obligation to continue to publish the Dow Jones — UBS Commodity Index, and may discontinue publication of the Dow Jones — UBS Commodity Index at any time in their sole discretion. On May 6, 2009, UBS completed its acquisition of the commodity index business of AIG Financial Products Corp. (“AIG-FP”), including AIG-FP’s rights to the Dow Jones — AIG Commodity IndexSM. Effective on May 7, 2009, the Dow Jones — AIG Commodity Index is rebranded as “Dow Jones — UBS Commodity IndexSM.” The Dow Jones — UBS Commodity IndexSM is reported by Bloomberg, L.P. under the ticker symbol “DJUBS.” Overview The Dow Jones — UBS Commodity IndexSM was introduced in July of 1998 to provide a unique, diversified, economically rational and liquid benchmark for commodities as an asset class. The Dow Jones — UBS Commodity IndexSM currently is composed of the prices of nineteen exchange-traded futures contracts on physical commodities. A futures contract is a bilateral agreement providing for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. For a general description of the commodity futures markets, please see “The Commodity Futures Markets.” The commodities included in the Dow Jones — UBS Commodity Index for 2009 are as follows: aluminum, coffee, copper, corn, cotton, crude oil, gasoline, gold, heating oil, lean hogs, live cattle, natural gas, nickel, silver, soybean oil, soybeans, sugar, wheat and zinc. Futures contracts and options on futures contracts on the Dow Jones — UBS Commodity Index are currently listed for trading on the Chicago Board of Trade (“CBOT”). The Dow Jones — UBS Commodity IndexSM is a proprietary index that Dow Jones and UBS developed and that Dow Jones, in conjunction with UBS, calculates. The methodology for determining the composition and weighting of the Dow Jones — UBS Commodity IndexSM and for calculating its value is subject to modification by Dow Jones and UBS at any time. As of the date of this disclosure statement, Dow Jones disseminates the Dow Jones — UBS Commodity Index level approximately every fifteen (15) seconds (assuming the Dow Jones — UBS Commodity IndexSM level has changed within such fifteen-second interval) from 8:00 a.m. to 3:00 p.m. (New York time) and publishes the final Dow Jones — UBS Commodity Index level for each DJ-UBS Business Day (as defined below) at approximately 4:00 p.m. (New York time) on each such day on Reuters. Dow Jones — UBS Commodity IndexSM levels can also be obtained from the official websites of both Dow Jones and UBS and are also published in The Wall Street Journal. Dow Jones and UBS publish both a total return version and excess return version of the Dow Jones — UBS Commodity IndexSM. The total return version of the Dow Jones — UBS Commodity IndexSM is equivalent to the excess return version, except that the total return version also reflects interest that could be earned on funds committed to the trading of the underlying futures contracts. If the CDs are linked to 85
the Dow Jones — UBS Commodity IndexSM, the relevant term sheet will specify whether the Index is the Dow Jones — UBS Commodity Index Total Return or the Dow Jones — UBS Commodity Index Excess Return. A “DJ UBS Business Day” is a day on which the sum of the Commodity Index Percentages (as defined below in “Annual Reweightings and Rebalancings of the Dow Jones — UBS Commodity IndexSM”) for the Dow Jones-UBS Commodities that are open for trading is greater than 50%. For example, based on the weighting of the Dow Jones-UBS Commodities for 2009, if the CBOT and the New York Mercantile Exchange (“NYMEX”) are closed for trading on the same day, a DJ UBS Business Day will not exist. UBS and its affiliates actively trade futures contracts and options on futures contracts on the commodities that underlie the Dow Jones — UBS Commodity IndexSM, as well as commodities, including commodities included in the Dow Jones — UBS Commodity IndexSM. For information about how this trading may affect the value of the Dow Jones — UBS Commodity IndexSM, see “Risk Factors — If the Basket includes the Commodity Index, trading and other transactions by UBS and Dow Jones in the futures contracts constituting the Commodity Index and the underlying commodities may affect the level of the Commodity Index.” The Dow Jones — UBS Commodity IndexSM Supervisory and Advisory Committees Dow Jones and UBS have established the Dow Jones — UBS Commodity IndexSM Supervisory Committee and the Dow Jones — UBS Commodity IndexSM Advisory Committee to assist them in connection with the operation of the Dow Jones — UBS Commodity IndexSM. The Dow Jones — UBS Commodity IndexSM Supervisory Committee is comprised of three members, two of whom are appointed by UBS and one of whom is appointed by Dow Jones, and makes all final decisions related to the Dow Jones — UBS Commodity IndexSM, with advice and recommendations from the Advisory Committee. The Dow Jones — UBS Commodity IndexSM Advisory Committee includes six to twelve members drawn from the financial, academic and legal communities selected by UBS. Both the Supervisory and Advisory Committees meet annually to consider any changes to be made to the Dow Jones — UBS Commodity IndexSM for the coming year. These committees may also meet at such other times as may be necessary. As described in more detail below, the Dow Jones — UBS Commodity IndexSM is reweighted and rebalanced each year in January on a price percentage basis. The annual weightings for the Dow Jones — UBS Commodity IndexSM are determined each year in June or July by UBS under the supervision of the Dow Jones — UBS Commodity IndexSM Supervisory Committee following advice from the Dow Jones — UBS Commodity IndexSM Advisory Committee. After the Supervisory and Advisory Committees’ annual meetings in June or July, the annual weightings for the next calendar year are publicly announced. For example, the composition of the Dow Jones — UBS Commodity IndexSM for 2010 was approved by the Dow Jones-UBS Index Oversight Committee in October of 2009 and published on October 30, 2009. The January 2010 reweighting and rebalancing is based on the following percentages: The Dow Jones — UBS Commodity IndexSM 2010 Commodity Index Percentages COMMODITY Crude Oil Natural Gas Gold Soybeans Copper Corn Aluminum Wheat Heating Oil Live Cattle
WEIGHTING 14.3379660% 11.5521870% 9.1165550% 7.9124970% 7.6413770% 7.0924320% 5.7492810% 4.7046020% 3.5824070% 3.5537300% 86
Unleaded Gasoline Silver Zinc Soybean Oil Sugar Coffee Nickel Lean Hogs Cotton
3.5274400% 3.2869700% 3.0199730% 2.9955620% 2.8928600% 2.5646150% 2.3668280% 2.1027200% 2.0000000%
Information concerning the Dow Jones — UBS Commodity IndexSM, including weightings and composition, may be obtained at the Dow Jones web site (www.djindexes.com). Information contained in the Dow Jones web site is not incorporated by reference in, and should not be considered part of, this disclosure statement or any term sheet. Four Main Principles Guiding the Creation of the Dow Jones — UBS Commodity IndexSM The Dow Jones — UBS Commodity IndexSM was created using the following four main principles:
ECONOMIC SIGNIFICANCE. A commodity index should fairly represent the importance of a diversified group of commodities to the world economy. To achieve a fair representation, the Dow Jones — UBS Commodity IndexSM uses both liquidity data and dollar-weighted production data in determining the relative quantities of included commodities. The Dow Jones — UBS Commodity IndexSM primarily relies on liquidity data, or the relative amount of trading activity of a particular commodity, as an important indicator of the value placed on that commodity by financial and physical market participants. The Dow Jones — UBS Commodity IndexSM also relies on production data as a useful measure of the importance of a commodity to the world economy. Production data alone, however, may underestimate the economic significance of storable commodities (e.g., gold) relative to non storable commodities (e.g., live cattle). Production data alone also may underestimate the investment value that financial market participants place on certain commodities, and/or the amount of commercial activity that is centered around various commodities. Additionally, production statistics alone do not necessarily provide as accurate a blueprint of economic importance as the markets themselves. The Dow Jones — UBS Commodity IndexSM thus relies on data that is both endogenous to the futures market (liquidity) and exogenous to the futures market (production) in determining relative weightings.
DIVERSIFICATION. A second major goal of the Dow Jones — UBS Commodity IndexSM is to provide diversified exposure to commodities as an asset class. Disproportionate weightings of any particular commodity or sector increase volatility and negate the concept of a broad based commodity index. Instead of diversified commodities exposure, the investor is unduly subjected to micro economic shocks in one commodity or sector. As described further below, diversification rules have been established and are applied annually. Additionally, the Dow Jones — UBS Commodity IndexSM is re balanced annually on a price percentage basis in order to maintain diversified commodities exposure over time.
CONTINUITY. The third goal of the Dow Jones — UBS Commodity IndexSM is to be responsive to the changing nature of commodity markets in a manner that does not completely reshape the character of the Dow Jones — UBS Commodity IndexSM from year to year. The Dow Jones — UBS Commodity IndexSM is intended to provide a stable benchmark so that end users may be reasonably confident that historical performance data (including such diverse measures as correlation, spot yield, roll yield and volatility) is based on a structure that bears some resemblance to both the current and future composition of the Dow Jones — UBS Commodity IndexSM.
LIQUIDITY. Another goal of the Dow Jones — UBS Commodity IndexSM is to provide a highly liquid index. The explicit inclusion of liquidity as a weighting factor helps to ensure that the Dow 87
Jones — UBS Commodity IndexSM can accommodate substantial investment flows. The liquidity of an index affects transaction costs associated with current investments. It also may affect the reliability of historical price performance data. These four principles represent goals of the Dow Jones — UBS Commodity IndexSM and its creators, and there can be no assurance that these goals will be reached by either Dow Jones or UBS. Composition of the Dow Jones — UBS Commodity IndexSM — Commodities Available for Inclusion A number of commodities have been selected which are believed to be sufficiently significant to the world economy to merit consideration for inclusion in the Dow Jones — UBS Commodity IndexSM and which are the subject of a qualifying related futures contract. With the exception of several metals contracts (aluminum, lead, tin, nickel and zinc) that trade on the London Metal Exchange (“LME”), each of the potential commodities is the subject of a futures contract that trades on a U.S. exchange. As of the date of this disclosure statement, the 19 commodities available for inclusion in the Dow Jones — UBS Commodity IndexSM were aluminum, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, silver, soybean oil, soybeans, sugar, unleaded gasoline, wheat and zinc. Designated Contracts for Each Commodity A futures contract known as a Designated Contract is selected for each commodity available for inclusion in the Dow Jones — UBS Commodity IndexSM. With the exception of several LME contracts, where the Dow Jones — UBS Commodity IndexSM Supervisory Committee believes that there exists more than one futures contract with sufficient liquidity to be chosen as a Designated Contract for a commodity, the Dow Jones — UBS Commodity IndexSM Supervisory Committee selects the futures contract that is traded in the United States and denominated in dollars. If more than one such contract exists, the Dow Jones — UBS Commodity IndexSM Supervisory Committee selects the most actively traded contract. Data concerning each Designated Contract is used to calculate the Dow Jones — UBS Commodity IndexSM. The termination or replacement of a futures contract on an established exchange occurs infrequently; if a Designated Contract were to be terminated or replaced, a comparable futures contract, if available, would be selected to replace that Designated Contract. The Dow Jones — UBS Commodity IndexSM Supervisory Committee may, however, terminate, replace or otherwise change a Designated Contract, or make other changes to the Dow Jones — UBS Commodity IndexSM, pursuant to special meetings. Please see “Risk Factors – UBS Financial Products may be required to replace a designated contract if the existing futures contract is terminated or replaced.” The Designated Contracts for 2009 Dow Jones-UBS Commodities are as follows: Dow Jones-UBS Commodity IndexSM Breakdown by Commodity Commodity Aluminum Coffee Copper** Corn Cotton Crude Oil Gold Heating Oil
Designated Contract High Grade Primary Aluminum Coffee “C” High Grade Copper Corn Cotton Light, Sweet Crude Oil Gold Heating Oil
Exchange LME NYBOT* COMEX*** CBOT NYBOT NYMEX COMEX NYMEX
Lean Hogs Live Cattle Natural Gas
Lean Hogs Live Cattle Henry Hub Natural Gas
CMEˆ CME NYMEX 88
Units 25 metric tons 37,500 lbs 25,000 lbs 5,000 bushels 50,000 lbs 1,000 barrels 100 troy oz. 42,000 gallons 40,000 lbs 40,000 lbs 10,000 mmbtu
Price quote $/metric ton cents/pound cents/pound cents/bushel cents/pound $/barrel $/troy oz. cents/gallon cents/pound cents/pound $/mmbtu
Nickel Silver Soybean Oil Soybeans Sugar Unleaded Gasoline Wheat Zinc
Primary Nickel Silver Soybean Oil Soybeans World Sugar No. 1-I1 Reformulated Gasoline Blendstock for Oxygen Blending† Wheat Special High Grade Zinc
LME COMEX CBOT CBOT NYBOT NYMEX
6 metric tons 5,000 troy oz. 60,000 lbs 5,000 bushels 112,000 lbs 42,000 gal
$/metric ton cents/troy oz. cents/pound cents/bushel cents/pound cents/gallon
CBOT LME
5,000 bushels 25 metric tons
cents/bushel $/metric ton
*
The New York Board of Trade (“NYBOT”) located in New York City.
**
The Dow Jones — UBS Commodity IndexSM uses the High Grade Copper Contract traded on the COMEX division of the New York Mercantile Exchange for copper contract prices and LME volume data in determining the weighting for the Dow Jones — UBS Commodity IndexSM.
*** The New York Commodities Exchange (“COMEX”) located in New York City. ^
The Chicago Mercantile Exchange (“CME”) located in Chicago, Illinois.
†
Represents a replacement of the New York Harbor Unleaded Gasoline contract. This replacement occurred during the regularly scheduled roll of futures contracts comprising the Dow Jones — UBS Commodity IndexSM in April 2006.
In addition to the commodities set forth in the above table, cocoa, lead, platinum and tin also are considered annually for inclusion in the Dow Jones — UBS Commodity IndexSM. Commodity Groups For purposes of applying the diversification rules discussed above and below, the commodities available for inclusion in the Dow Jones — UBS Commodity IndexSM are assigned to Commodity Groups. The Commodity Groups, and the commodities currently included in each Commodity Group, are as follows: Commodity Group: Energy
Precious Metals
Industrial Metals
Commodities:
Commodity Group:
Commodities:
Crude Oil Heating Oil Natural Gas Unleaded Gasoline Gold Silver Platinum
Livestock Live Cattle
Lean Hogs
Grains Soybeans Soybean Oil
Corn
Aluminum Copper Lead Nickel Tin Zinc
Softs Coffee Cotton Sugar
Wheat Cocoa
Dow Jones-UBS Commodity IndexSM Breakdown by Commodity Group The Commodity Group Breakdown set forth below is based on the weightings and composition of the Dow Jones — UBS Commodity IndexSM set forth under “The Dow Jones — UBS Commodity IndexSM 2008 Commodity Index Percentages.” Energy
33.00% 89
Precious Metals Industrial Metals Livestock Grains Softs
10.80% 20.30% 6.70% 18.10% 8.3%
Annual Reweightings and Rebalancings of The Dow Jones — UBS Commodity IndexSM The Dow Jones — UBS Commodity IndexSM is reweighted and rebalanced each year in January on a price percentage basis. The annual weightings for the Dow Jones — UBS Commodity IndexSM are determined each year in June or July by UBS under the supervision of the Dow Jones — UBS Commodity IndexSM Supervisory Committee following advice from the Dow Jones — UBS Commodity IndexSM Advisory Committee. After the Supervisory and Advisory Committees’ annual meetings in June or July, the annual weightings for the next calendar year are publicly announced and implemented the following January. Determination of Relative Weightings The relative weightings of the Dow Jones-UBS Commodities are determined annually according to both liquidity and dollar adjusted production data in 2/3 and 1/3 shares, respectively. Each June, for each commodity designated for potential inclusion in the Dow Jones — UBS Commodity IndexSM, liquidity is measured by the Commodity Liquidity Percentage (“CLP”) and production by the Commodity Production Percentage (“CPP”). The CLP for each commodity is determined by taking a five year average of the product of trading volume and the historical dollar value of the Designated Contract for that commodity, and dividing the result by the sum of such products for all commodities which were designated for potential inclusion in the Dow Jones — UBS Commodity IndexSM. The CPP is determined for each commodity by taking a five year average of annual world production figures, adjusted by the historical dollar value of the Designated Contract, and dividing the result by the sum of such production figures for all the commodities which were designated for potential inclusion in the Dow Jones — UBS Commodity IndexSM. The CLP and the CPP are then combined (using a ratio of 2:1) to establish the Commodity Index Percentage (“CIP”) for each commodity. This CIP is then adjusted in accordance with certain diversification rules in order to determine the commodities which will be included in the Dow Jones — UBS Commodity IndexSM (the “Dow Jones-UBS Commodities”) and their respective percentage weights. Diversification Rules The Dow Jones — UBS Commodity IndexSM is designed to provide diversified exposure to commodities as an asset class. To ensure that no single commodity or commodity sector dominates the Dow Jones — UBS Commodity IndexSM, the following diversification rules are applied to the annual reweighting and rebalancing of the Dow Jones — UBS Commodity IndexSM as of January of each year:
No related group of commodities designated as a “Commodity Group” (e.g., energy, precious metals, livestock or grains) may constitute more than 33% of the Dow Jones — UBS Commodity IndexSM.
No single commodity may constitute more than 15% of the Dow Jones — UBS Commodity IndexSM.
No single commodity, together with its derivatives (e.g., crude oil, together with heating oil and unleaded gasoline), may constitute more than 25% of the Dow Jones — UBS Commodity IndexSM.
No single commodity included in the Dow Jones — UBS Commodity IndexSM may constitute less than 2% of the Dow Jones — UBS Commodity IndexSM.
Following the annual reweighting and rebalancing of the Dow Jones — UBS Commodity IndexSM in January, the percentage of any Index Commodity or Commodity Group at any time prior to the next 90
reweighting or rebalancing will fluctuate and may exceed or be less than the percentages established in January. Commodity Index Multipliers Following application of the diversification rules discussed above, CIPs are incorporated into the Dow Jones — UBS Commodity IndexSM by calculating the new unit weights for each Index Commodity. Near the beginning of each new calendar year (the “CIM Determination Date”), the CIPs, along with the settlement prices on that date for Designated Contracts included in the Dow Jones — UBS Commodity IndexSM, are used to determine a Commodity Index Multiplier (“CIM”) for each Index Commodity. This CIM is used to achieve the percentage weightings of the Dow Jones-UBS Commodities, in dollar terms, indicated by their respective CIPs. After the CIMs are calculated, they remain fixed throughout the year. As a result, the observed price percentage of each Index Commodity will float throughout the year, until the CIMs are reset the following year based on new CIPs. Calculations The Dow Jones — UBS Commodity IndexSM is calculated by Dow Jones, in conjunction with UBS, by applying the impact of the changes to the futures prices of commodities included in the Dow Jones — UBS Commodity IndexSM (based on their relative weightings). Once the CIMs are determined as discussed above, the calculation of the Dow Jones — UBS Commodity IndexSM is a mathematical process whereby the CIMs for the Dow Jones — UBS Commodities are multiplied by the prices in U.S. dollars for the applicable Designated Contracts. These products are then summed. The percentage change in this sum is then applied to the prior Dow Jones — UBS Commodity IndexSM level to calculate the new Dow Jones — UBS Commodity IndexSM level. Dow Jones disseminates the Dow Jones — UBS Commodity IndexSM level approximately every fifteen (15) seconds (assuming the Dow Jones — UBS Commodity IndexSM level has changed within such fifteen-second interval) from 8:00 a.m. to 3:00 p.m. (New York time), and publishes the final Dow Jones — UBS Commodity IndexSM level for each DJ-UBS Business Day at approximately 4:00 p.m. (New York time) on each such day on Reuters. Dow Jones — UBS Commodity IndexSM levels can also be obtained from the official websites of both Dow Jones and UBS and are also published in The Wall Street Journal. The Dow Jones — UBS Commodity IndexSM is a Rolling Index The Dow Jones — UBS Commodity IndexSM is composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying commodity. In order to avoid delivering the underlying physical commodities and to maintain exposure to the underlying physical commodities, periodically futures contracts on physical commodities specifying delivery on a nearby date must be sold and futures contracts on physical commodities that have not yet reached the delivery period must be purchased. The rollover for each contract occurs over a period of five DJ UBS Business Days each month according to a pre determined schedule. This process is known as “rolling” a futures position. The Dow Jones — UBS Commodity IndexSM is a “rolling index.” Dow Jones-UBS Commodity — IndexSM Calculation Disruption Events From time to time, disruptions can occur in trading futures contracts on various commodity exchanges. The daily calculation of the Dow Jones — UBS Commodity IndexSM will be adjusted in the event that UBS determines that any of the following index calculation disruption events exists: (a) the termination or suspension of, or material limitation or disruption in the trading of any futures contract used in the calculation of the Dow Jones — UBS Commodity IndexSM on that day; (b) the settlement price of any futures contract used in the calculation of the Dow Jones — UBS Commodity IndexSM reflects the maximum permitted price change from the previous day’s settlement price; 91
(c) the failure of an exchange to publish official settlement prices for any futures contract used in the calculation of the Dow Jones — UBS Commodity IndexSM; or (d) with respect to any futures contract used in the calculation of the Dow Jones — UBS Commodity IndexSM that trades on the LME, a business day on which the LME is not open for trading. License Agreement “Dow JonesSM,” “UBS®,” “Dow Jones-UBS Commodity IndexSM” and “DJ UBSCISM” are registered trademarks or service marks of Dow Jones & Company, Inc. and UBS Securities LLC, as the case may be, and have been licensed for use for certain purposes by JPMorgan Chase & Co. The CDs are not sponsored, endorsed, sold or promoted by Dow Jones, UBS or any of their respective subsidiaries or affiliates, and none of Dow Jones, UBS or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such products. Dow Jones, UBS and JPMorgan Chase & Co. have entered into a non exclusive license agreement providing for the license to JPMorgan Chase & Co., and certain of its affiliated or subsidiary companies, in exchange for a fee, of the right to use the Dow Jones — UBS Commodity IndexSM, which is published by Dow Jones and UBS, in connection with certain products, including the CDs. The CDs are not sponsored, endorsed, sold or promoted by Dow Jones, UBS or any of their respective subsidiaries or affiliates. None of Dow Jones, UBS or any of their affiliates makes any representation or warranty, express or implied, to the owners of or counterparts to the CDs or any member of the public regarding the advisability of investing in securities or commodities generally or in the CDs particularly. The only relationship of Dow Jones, UBS or any of their respective subsidiaries or affiliates to the Bank. in connection with the CDs is the licensing of certain trademarks, trade names and service marks and of the Dow Jones — UBS Commodity IndexSM, which is determined, composed and calculated by Dow Jones in conjunction with UBS without regard to the Bank or the CDs. Dow Jones and UBS have no obligation to take the needs of the Bank or the owners of the CDs into consideration in determining, composing or calculating the Dow Jones — UBS Commodity IndexSM. None of Dow Jones, UBS or any of their respective subsidiaries or affiliates is responsible for or has participated in the determination of the timing of, prices at, or quantities of the CDs to be issued or in the determination or calculation of the equation by which the CDs are to be converted into cash. None of Dow Jones, UBS or any of their respective subsidiaries or affiliates shall have any obligation or liability, including without limitation to CDs customers, in connection with the administration, marketing or trading of the CDs. Notwithstanding the foregoing, UBS and their respective subsidiaries or affiliates may independently issue and/or sponsor financial products unrelated to the CDs currently being issued by JPMorgan Chase & Co., but which may be similar to and competitive with the CDs. In addition, UBS and their respective subsidiaries or affiliates actively trade commodities, commodity indices and commodity futures (including the Dow Jones — UBS Commodity IndexSM and the Dow Jones-UBS Commodity Index Total ReturnSM), as well as swaps, options and derivatives which are linked to the performance of such commodities, commodity indices and commodity futures. It is possible that this trading activity will affect the value of the Dow Jones — UBS Commodity IndexSM and the CDs. This disclosure statement and the relevant term sheet relates only to the CDs and does not relate to the exchange traded physical commodities underlying any of the Dow Jones — UBS Commodity IndexSM components. Purchasers of the CDs should not conclude that the inclusion of a futures contract in the Dow Jones — UBS Commodity IndexSM is any form of investment recommendation of the futures contract or the underlying exchange traded physical commodity by Dow Jones, UBS or any of their respective subsidiaries or affiliates. The information in this disclosure statement regarding the Dow Jones — UBS Commodity IndexSM components has been derived solely from publicly available documents. None of Dow Jones, UBS or any of their respective subsidiaries or affiliates has made any due diligence inquiries with respect to the Dow Jones — UBS Commodity IndexSM components in connection with the CDs. None of Dow Jones, UBS or any of their respective subsidiaries or affiliates makes any representation that these publicly available documents or any other publicly available information regarding the Dow 92
Jones — UBS Commodity IndexSM components, including, without limitation, a description of factors that affect the prices of such Dow Jones-UBS Commodity IndexSM components, are accurate or complete. NONE OF DOW JONES, UBS OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW JONES — UBS COMMODITY INDEXSM OR ANY DATA INCLUDED THEREIN AND NONE OF DOW JONES, UBS OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. NONE OF DOW JONES, UBS OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY JPMORGAN CHASE & CO., OWNERS OF THE CDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE DOW JONES — UBS COMMODITY INDEXSM OR ANY DATA INCLUDED THEREIN. NONE OF DOW JONES, UBS OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE DOW JONES — UBS COMMODITY INDEXSM OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES, UBS OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR AFFILIATES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS AMONG DOW JONES, UBS AND JPMORGAN CHASE & CO., OTHER THAN UBS AND ITS AFFILIATES. The Commodity Futures Markets Contracts on physical commodities are traded on regulated futures exchanges, in the over the counter market and on various types of physical and electronic trading facilities and markets. As of the date of this disclosure statement, all of the contracts included in the Dow Jones — UBS Commodity IndexSM are exchange traded futures contracts. An exchange traded futures contract is a bilateral agreement providing for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities typically provides for the payment and receipt of a cash settlement based on the value of such commodities. A futures contract provides for a specified settlement month in which the commodity or financial instrument is to be delivered by the seller (whose position is described as “short”) and acquired by the purchaser (whose position is described as “long”) or in which the cash settlement amount is to be made. There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as “initial margin.” This amount varies based on the requirements imposed by the exchange clearing houses, but may be as low as 5% or less of the value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin in the most advantageous form (which may vary depending on the exchange, clearing house or broker involved), a market participant may be able to earn interest on its margin funds, thereby increasing the potential total return that may be realized from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent payments on a daily basis as the price of the futures contract fluctuates. These payments are called “variation margin” and make the existing positions in the futures contract more or less valuable, a process known as “marking to market.” Futures contracts are traded on organized exchanges, known as “contract markets” in the United States, through the facilities of a centralized clearing house and a brokerage firm which is a member of the clearing house. The clearing house guarantees the performance of each clearing member which is a party to the futures contract by, in effect, taking the opposite side of the transaction. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may 93
elect to close out its position by taking an opposite position on the exchange on which the trade obtained the position. This operates to terminate the position and fix the trader’s profit or loss. U.S. contract markets, as well as brokers and market participants, are subject to regulation by the Commodity Futures Trading Commission. Futures markets outside the United States are generally subject to regulation by comparable regulatory authorities. However, the structure and nature of trading on non U.S. exchanges may differ from the foregoing description. From its inception to the present, the Dow Jones — UBS Commodity IndexSM has been composed exclusively of futures contracts traded on regulated exchanges.
94
THE JPMORGAN GBI GLOBAL BOND TOTAL RETURN INDEX HEDGED INTO U.S. DOLLARS We have derived all information contained in this disclosure statement regarding the JPMorgan GBI Global Bond Total Return Index Hedged Into U.S. Dollars (the “GBI Total Return Index”), including, without limitation, its make-up, method of calculation and changes in its components, from information supplied by J.P. Morgan Securities Inc. (“JPMSI”). Such information reflects the policies of, and is subject to change by, JPMSI. The GBI Total Return Index was developed by JPMSI and is calculated, maintained and published by JPMSI. JPMSI has no obligation to continue to publish, and may discontinue the publication of, the GBI Total Return Index. The GBI Total Return Index is reported by Bloomberg L.P. under the ticker symbol “JHDCGBIG.” JPMorgan Government Bond Indices (“GBI”), of which the GBI Total Return Index is a subset, consist of regularly-traded, fixed-rate, domestic government bonds of countries with liquid government debt markets. GBI are constructed according to a specific country, liquidity and/or maturity sector criteria to accommodate specific objectives and constraints of individual portfolio managers. The GBI Total Return Index was launched in 1989. The following is a summary of the features of the GBI: Market Coverage Countries:
Government bond issues from 13 local markets
Instruments Excluded:
Floating rate notes, perpetuals, bonds with less than one year to maturity, bonds targeted at the domestic market for tax purposes, bonds with callable, puttable or convertible features
Liquidity:
Benchmark, actively traded and regularly traded bonds. Excludes less active and illiquid bonds
Maturity:
Minimum remaining maturity of 1 year
Indices By Type:
Total Return
By Liquidity:
Benchmark, Active, Traded
Maturity Sectors:
1-3, 3-5, 5-7, 7-10 and 10+ years
Hedged:
Based on one month rolling forward contracts
Statistics Yield, duration, convexity, remaining maturity, average coupon Calculation Characteristics Pricing:
Local market closing mid prices
FX rates:
4:00 p.m. London Time
Rebalancing:
Amounts outstanding updated at the beginning of the month only
Reinvestment:
Daily, fully invested index. Coupons reinvested
Security Weighting:
Individual securities weighted by current market capitalization 95
Calculating the hedged return The GBI Total Return Index is calculated using the value of the GBI Total Return Index hedged into U.S. dollars on a daily basis, rather than the value of the total return GBI on an unhedged basis. The GBI mirrors the activity of investors investing in assets of one currency and then converting returns from those assets into another currency. Daily currency returns calculated from foreign exchange spot rates are compounded onto the total return index value in local currency to capture the return in foreign currency on an unhedged basis and is calculated as follows:
tot_ret_index
index_i_foreign day_1_to_2
1 tot_ret_local day_1_to_2 * 1 ccy_ret day_1_to_2 1
where: fx_spot day_2 1 ccy_ret day_1_to_2 fx_spot day_1
Investors who hold bonds in foreign currency may protect their returns from foreign exchange risk using currency forward contracts which lock in the exchange rate between two currencies at some designated time in future. The GBI Total Return Index captures the return of the total return GBI on a hedged basis by 1) estimating the notional amount to be hedged and 2) calculating the hedged return as follows: (i) On the first business day of the month the notional amount to be hedged is determined based on an estimate of the return that will be achieved at the next rebalancing day. This estimate is based on the following assumptions:
That interest income will accrue at the average coupon rate of the portfolio being hedged
That principal return, or the monthly change in the ratio of par value to market value, will be zero
This is illustrated as follows:
(ii) The hedging calculation assumes that on rebalancing day, an investor purchases a forward contract to hedge the index value estimated for the end of the month. Then each day during the month, that forward contract is marked to market. The day to day return of the hedged index includes the following components:
the return from the forward contract;
the total return from the bonds which comprise the portfolio, in local currency; and
the currency return applied to each of the above
96
This continues until the process repeats again on the first day of the subsequent rebalance period (i.e., the hedge runs from rebalance day to rebalance day). This process is illustrated as follows:
Composition and Organization of GBI Total Return Index The GBI Total Return Index is composed of issues from 13 international bond markets actively traded by institutional investors. The constituent sovereign issuers were chosen based on their relatively liquid government debt markets with relative stability, active trading and scale. The calculation of the value of the GBI Total Return Index is intended to reflect actual changes in the value of a portfolio consisting of the same securities. In each market selected, the instruments included in the GBI Total Return Index must have fixed coupons, must be tradable and redeemable for cash and should not appeal exclusively to domestic investors for local tax or regulatory reasons. (a)
Organization by Country
GBI are organized by country. The GBI Total Return Index consists of 13 countries and has a base date of December 31, 1987. The composition of the GBI Total Return Index has been unchanged over time; however, the composition may change and we do not make any representation regarding changes to the GBI Total Return Index in the future. The following are the countries and respective weightings as of March 2, 2009: Australia
0.31%
Belgium
2.407%
Canada
1.789%
Denmark
0.665%
France
7.63%
Germany
8.687%
Italy
8.219%
Japan
33.926%
Netherlands
1.909%
Spain
3.111%
Sweden
0.442%
United Kingdom
5.397%
United States
25.507%
97
(b)
Organization by Liquidity Sector
The GBI are comprised only of liquid instruments, for which JPMSI has established and enforces liquidity criteria in the selection of referenced instruments. A certain issue of bonds may be illiquid even if it would otherwise meet the following liquidity criteria, for a variety of reasons, including that governments may restrict portions of a bond issue from trading publicly. The main liquidity criteria focus on ensuring that bonds are both investable and replicable. First, bonds must trade with enough frequency to prevent stale price quotations. Second, a two-way market must exist. Finally, investors should be able to replicate the index without incurring excessive transaction costs. The amount outstanding of a bond has no influence on the inclusion criteria, but generally for a market to exist the issue must be of a certain size, although this will vary from market to market. On a monthly basis, JPMSI local market representatives review the bond composition lists and assign each bond a liquidity according to the following criteria: (i) Benchmark issues are the most liquid issues, recognized as market indicators. They are usually recent sizable new issues or reopened issues. (ii) Active is the next level of liquidity, including all benchmark issues plus other issues with significant daily turnover usually including previous Benchmark issues. (iii) Traded is the broadest level of liquidity, including all Benchmark and Active issues plus any other issues that meet the liquidity criteria discussed above. JPMSI regularly monitors the liquidity criteria of a bond. If the liquidity of a bond changes, it will be reflected in the next rebalancing. (c)
Organization by Maturity Sector
The GBI can be broken down into maturity sectors. Standard sectors of 1-3, 3-5, 5-7, 7-10 and 10+ years are the most commonly used. GBI includes only bonds with a remaining maturity of greater than 12 months. Each bond is assigned to one or more sectors based on the bond’s remaining maturity at the start of the month. For example, a specific bond can be part of the 1-3 sector and the 1-5 sector. The composition of each maturity sector will remain unchanged until the next index rebalancing. As bonds mature, they will migrate from sector to sector, e.g., a 10 year bond will start in the 7-10 sector, and over time, will move to the 5-7 and then to the 3-5. At the rebalance date, bonds must have at least 12 months remaining for the whole of the following month to be included in the GBI. Calculations of Bonds Included in the GBI All calculations in respect of the bonds included in the GBI are according to local market convention, using parameters relevant to each specific bond (e.g., ex-dividend rules, settlement conventions etc.). GBI return calculations reflect the actual changes in the value of a portfolio consisting of the same securities. GBI are available on a next day basis. Each issue’s price, which includes accrued interest, is a mid-rate and is taken at close of business in the local JPMorgan office for all markets except Australia, Denmark, Ireland, New Zealand, Portugal and Sweden where a third-party source is used. All spot and forward rates are supplied by the WMCompany at 4:00 p.m. London time. Accrued interest is calculated according to the country-specific market conventions on a settlement day basis. GBI measures the changing value of an index portfolio by weighting the total return of each constituent bond by the market value on the previous day. Bond specific information is aggregated to the portfolio level using weights based on current daily market capitalization. To calculate bond weights in portfolios consisting of bonds of more than one currency, market capitalization must be converted to a common currency. Each weight is equal to the amount outstanding at the beginning of each month multiplied by the security’s net price plus accrued interest (gross price).
98
In addition to monitoring returns, GBI uses a variety of statistics to compare fixed income instruments, including yield to maturity (an estimate of the annualized total return that an investor will receive if a bond is held until maturity), duration and convexity (each a measure of a bond’s price sensitivity to small changes in interest rates). Like returns, each of these statistics is weighted based on current daily market capitalization. Individual bond statistics are calculated according to market convention. Daily bond price quotes include both clean prices, which are quoted in the market, and accrued interest. The daily return on a bond measures the change in price between two days. Total return is based on changes in both the clean price and accrued interest. Daily returns are always calculated between consistent portfolios. A new index value is determined by a return to the old index value: New Index = Old Index (1 + return) To calculate the total return on a GBI index, at initialization an index is given a base value of 100; and daily returns are then applied: Indext = Indext-1 x Total Returnt + Indext -1 where: Indext ,Indext-1 means the Index level on day t or day t-1, respectively GBI returns may be calculated on the basis of total return (which takes into account both interest and principal), principal return only or interest return only. Accrued interest is calculated according to market convention, on a settlement day basis. To mirror the activity of international investors, index returns are either calculated in local currency or may be calculated in a variety of foreign currencies on either an unhedged or a hedged basis. Reinvestment of Coupons GBI coupons are always fully reinvested. All coupons received are immediately invested back into the local market until the next index rebalancing. JPMSI captures this reinvestment in its calculations by adding the coupon value into return calculations on the coupon date. The exact calculation for the reinvestment of coupons will vary depending on the rules applicable in the country issuing the bond. Monthly Rebalancing GBI indices are rebalanced monthly at the close of business on the first business day of the month, at which time a forward rate is purchased and such forward rate is then marked to market each day throughout the month until the next rebalancing occurs. No changes are made to the composition of the GBI indices mid-month. As part of rebalancing, each bond is assigned to a maturity sector based upon its maturity as compared to the rebalance date. The maturity sector designations also remain fixed for the entire month until the next rebalancing. As bonds age, they migrate from sector to sector at rebalancing. Local market representatives monitor market activity and monthly specify appropriate changes to the GBI composition, which take effect on the next rebalancing date. Changes to bond composition reflect auctions of new issues and re-openings and buybacks of existing issues. In addition, local market representatives monitor trading activity and make changes to the liquidity designations of specific bonds. For example, if it observes that a bond is no longer the current benchmark, it will update that bond’s liquidity from benchmark to active. Discontinuation of the GBI Total Return Index; Alteration of Method of Calculation In the event that the GBI Total Return Index (i) is not calculated and published by JPMSI but is calculated and published by any other entity or (ii) is replaced by a GBI successor index using, in the 99
determination of the calculation agent, the same or a substantially similar formula for and method of calculation as used in the calculation of the GBI Total Return Index (such index being referred to herein as a “GBI successor index”) or (iii) is discontinued or otherwise ceases to exist, but the calculation agent considers there to be in existence at such time a GBI successor index which, if substituted for the GBI Total Return Index, would materially preserve the economic equivalent in the Reference Portfolios of the GBI Total Return Index immediately prior to such substitution, then the GBI Total Return Index will be deemed to be the index so calculated and published by such other entity or the GBI successor index, as the case may be, and any Index closing level for the GBI Total Return Index will be determined by reference to the level of such other index or such GBI successor index at the close of trading on the relevant Observation Date or other relevant date as set forth in the relevant term sheet. The calculation agent will cause written notice of a disruption event and any change in the entity calculating and publishing the index or in the index to be promptly furnished to us and to the holders of the CDs. If the GBI Total Return Index is discontinued or ceases to exist prior to, and such discontinuation and cessation is continuing on, any Observation Date(s) or other relevant date as set forth in the relevant term sheet, and the calculation agent determines, in its sole discretion, that no GBI successor index is available at such time, then the calculation agent will determine the Index closing level for the GBI Total Return Index for such date. The Index closing level will be computed by the calculation agent in accordance with the formula for and method of calculating the GBI Total Return Index last in effect prior to such discontinuation or cessation, using the closing price (or, if trading in the relevant government bonds has been materially suspended or materially limited, its good faith estimate of the closing price that would have prevailed but for such suspension or limitation) at the close of the principal trading session on such date of each government bond most recently constituting the GBI Total Return Index. Notwithstanding these alternative arrangements, discontinuation of the publication of the GBI Total Return Index on the relevant exchange may adversely affect the value of the CDs. If at any time the method of calculating the GBI Total Return Index or a GBI successor index, or the level thereof, is changed in a material respect, or if the GBI Total Return Index or a GBI successor index is in any other way modified so that the GBI Total Return Index or such GBI successor index does not, in the opinion of the calculation agent, fairly represent the level of the GBI Total Return Index or such GBI successor index had such changes or modifications not been made, then the calculation agent will, at the close of business in New York City on the Observation Date(s), make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a level of a government bond index comparable to the GBI Total Return Index or such GBI successor index, as the case may be, as if such changes or modifications had not been made, and the calculation agent will calculate the Index closing level for the GBI Total Return Index with reference to the GBI Total Return Index or such successor index, as adjusted. Accordingly, if the method of calculating the GBI Total Return Index or a GBI successor index is modified so that the level of GBI Total Return Index or such GBI successor index is a fraction of what it would have been if there had been no such modification, then the calculation agent will adjust its calculation of the GBI Total Return Index or such GBI successor index in order to arrive at a level of the GBI Total Return Index or such GBI successor index as if there had been no such modification, and from and after such time, the calculation agent will, at the close of business in New York City on each date on which the Index closing level is to be determined, make such calculations and adjustments.
100
THE iSHARES® MSCI EAFE INDEX FUND We have derived all information contained in this disclosure statement regarding the iShares® MSCI EAFE Index Fund, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, iShares®, Inc., BlackRock Institutional Trust Company, N.A. (“BTC”) and BlackRock Fund Advisors (“BFA”). The iShares® MSCI EAFE Index Fund is an investment portfolio maintained and managed by iShares® Trust. BFA is currently the investment adviser to the iShares® MSCI EAFE Index Fund. The iShares® MSCI EAFE Index Fund is an exchange traded fund (“ETF”) that trades on the NYSE Arca under the ticker symbol “EFA.” We make no representations or warranty as to the accuracy or completeness of the information derived from these public sources. iShares® Trust is a registered investment company that consists of numerous separate investment portfolios, including the iShares® MSCI EAFE Index Fund. Information provided to or filed with the SEC by iShares® Trust pursuant to the Securities Act of 1933 and the Investment Company Act of 1940 can be located by reference to SEC file numbers 333-92935 and 811-09729, respectively, through the SEC’s website at http://www.sec.gov. For additional information regarding iShares® Trust, BFA, the iShares® MSCI EAFE Index Fund, please see the Prospectus, dated December 1, 2009. In addition, information about iShares and the iShares® MSCI EAFE Index Fund may be obtained from other sources including, but not limited to, press releases, newspaper articles and other publicly disseminated documents and the iShares® website at www.ishares.com. We make no representation or warranty as to the accuracy or completeness of such information. Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this disclosure statement or any term sheet. Investment Objective and Strategy The iShares® MSCI EAFE Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in developed European, Australasian and Far Eastern markets, as measured by the MSCI EAFE® Index. The iShares® MSCI EAFE Index Fund holds equity securities traded primarily in certain developed markets. The MSCI EAFE® Index was developed by MSCI Inc. (“MSCI”) as an equity benchmark for international stock performance, and is designed to measure equity market performance in certain developed markets. As of September 30, 2009, the iShares® MSCI EAFE Index Fund holdings by country consisted of the following 25 countries: Australia, Austria, Belgium, Bermuda, China, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Jersey, Luxembourg, Mauritius, the Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. In addition, as of such date, the iShares® MSCI EAFE Index Fund’s three largest holdings by country were Japan, the United Kingdom and France. As of December 31, 2009, its three largest equity securities were HSBC Holdings PLC, BP PLC and Nestle SA-REG, and its three largest sectors were financials, industrials and materials. The iShares® MSCI EAFE Index Fund uses a representative sampling strategy (as described below under “— Representative Sampling”) to try to track the MSCI EAFE® Index. In addition, the iShares® MSCI EAFE Index Fund may invest up to 10% of its assets in securities not included in the MSCI EAFE® Index but which BFA believes will help the iShares® MSCI EAFE Index Fund track the MSCI EAFE® Index and in futures contracts, options on futures contracts, options and swaps as well as cash and cash equivalents, including shares of money market funds advised by BFA. Representative Sampling The iShares® MSCI EAFE Index Fund pursues a “representative sampling” strategy in attempting to track the performance of the MSCI EAFE® Index, and generally does not hold all of the equity securities included in the MSCI EAFE® Index. The iShares® MSCI EAFE Index Fund invests in a representative sample of securities in the MSCI EAFE® Index, which have a similar investment profile as the MSCI EAFE® Index. Securities selected have aggregate investment characteristics (based on market 101
capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the MSCI EAFE® Index. Correlation The MSCI EAFE® Index is a theoretical financial calculation, while the iShares® MSCI EAFE Index Fund is an actual investment portfolio. The performance of the iShares® MSCI EAFE Index Fund and the MSCI EAFE® Index will vary somewhat due to transaction costs, foreign currency valuation, asset valuations, corporate actions (such as mergers and spin-offs), timing variances, and differences between the iShares® MSCI EAFE Index Fund’s portfolio and the MSCI EAFE® Index resulting from legal restrictions (such as diversification requirements) that apply to the iShares® MSCI EAFE Index Fund but not to the MSCI EAFE® Index or the use of representative sampling. A figure of 100% would indicate perfect correlation. Any correlation of less than 100% is called “tracking error.” BFA expects that, over time, the iShares® MSCI EAFE Index Fund’s tracking error will not exceed 5%. The iShares® MSCI EAFE Index Fund, using a representative sampling strategy, can be expected to have a greater tracking error than a fund using replication strategy. Replication is a strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the MSCI EAFE® Index. Industry Concentration Policy The iShares® MSCI EAFE Index Fund will not concentrate its investments (i.e., hold 25% or more of its total assets in the stocks of a particular industry or group of industries), except that, to the extent practicable, the iShares® MSCI EAFE Index Fund will concentrate to approximately the same extent that the MSCI EAFE® Index concentrates in the stocks of such particular industry or group of industries. Holdings Information As of December 31, 2009, 99.70% of the iShares® MSCI EAFE Index Fund’s holdings consisted of equity securities, 0.01% consisted of cash and 0.29% was in other assets, including dividends booked but not yet received. The following tables summarize the iShares® MSCI EAFE Index Fund’s top holdings in individual companies and by sector as of such date. Top holdings in individual securities as of December 31, 2009 Percentage of Total Holdings
Company HSBC Holdings PLC BP PLC Nestle SA-REG Banco Santander SA BHP Billiton LTD Toyota Motor Corp Vodafone Group PLC Roche Holding AG - Genusschein Telefonica SA Novartis AG - REG
1.93% 1.77% 1.64% 1.29% 1.27% 1.19% 1.19% 1.17% 1.16% 1.12%
Top holdings by sector as of December 31, 2009 Percentage of Total Holdings
Sector Financials Industrials Materials
25.49% 11.29% 10.30% 102
Consumer Staples Consumer Discretionary Energy Health Care Telecommunication Services Utilities Information Technology Other
10.03% 9.67% 8.36% 8.28% 5.83% 5.80% 4.65% 0.30%
The information above was compiled from the iShares® website. We make no representation or warranty as to the accuracy of the information above. Information contained in the iShares® website is not incorporated by reference in, and should not be considered a part of, this disclosure statement or any term sheet. Historical Performance of the iShares® MSCI EAFE Index Fund We will provide historical price information with respect to the shares of the iShares® MSCI EAFE Index Fund in the relevant term sheet. You should not take any such historical prices as an indication of future performance. Disclaimer The CDs are not sponsored, endorsed, sold or promoted by BFA. BFA makes no representations or warranties to the owners of the CDs or any member of the public regarding the advisability of investing in the CDs. BFA has no obligation or liability in connection with the operation, marketing, trading or sale of the CDs. The iShares® MSCI EAFE Index Fund Is Subject to Currency Exchange Risk Because the prices of the equity securities underlying the iShares® MSCI EAFE Index Fund are converted into U.S. dollars for purposes of calculating the net asset value of the iShares® MSCI EAFE Index Fund, investors in the CDs will be exposed to currency exchange rate risk with respect to each of the currencies in which the equity securities underlying the iShares® MSCI EAFE Index Fund trade. Exposure to currency changes will depend on the extent to which such currencies strengthen or weaken against the U.S. dollar and the relative weight of the equity securities underlying the iShares® MSCI EAFE Index Fund denominated in each such currency. The devaluation of the U.S. dollar against the currencies in which the equity securities underlying the iShares® MSCI EAFE Index Fund trade will result in an increase in the net asset value of the iShares® MSCI EAFE Index Fund. Conversely, if the U.S. dollar strengthens against such currencies, the net asset value of the iShares® MSCI EAFE Index Fund will be adversely affected and may reduce or eliminate the likelihood of an early redemption or the payment at maturity, if any, on the CDs. Fluctuations in currency exchange rates can have a continuing impact on the net asset value of the iShares® MSCI EAFE Index Fund, and any negative currency impact on the iShares® MSCI EAFE Index Fund may significantly decrease the value of the CDs. The return on an exchange-traded fund composed of the equity securities underlying the iShares® MSCI EAFE Index Fund where the prices are not converted into U.S. dollars can be significantly different from the return on the iShares® MSCI EAFE Index Fund where the prices are converted into U.S. dollars. The MSCI EAFE® Index We have derived all information contained in this disclosure statement regarding the MSCI EAFE® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. The MSCI EAFE® Index is a stock index calculated, published and disseminated daily by MSCI, a majority-owned subsidiary of Morgan Stanley, through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited. Neither MSCI nor Morgan Stanley has any obligation to continue to calculate and publish, and may discontinue calculation and publication of the MSCI EAFE® Index. 103
The MSCI EAFE® Index is a free float-adjusted market capitalization index intended to measure the equity market performance of certain developed markets. The MSCI EAFE® Index is calculated daily in U.S. dollars and published in real time every 15 seconds during market trading hours. As of January 30, 2010, the MSCI EAFE® Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. Effective May 2010, Israel will be reclassfied as a developed market and will be included in the MSCI EAFE® Index. The MSCI EAFE® Index is reported by Bloomberg L.P. under the ticker symbol “MXEA.” The MSCI Global Investable Market Indices Methodology Constructing the MSCI Global Investable Market Indices MSCI undertakes an index construction process, which involves: (i) defining the Equity Universe; (ii) determining the Market Investable Equity Universe for each market; (iii) determining market capitalization size segments for each market; (iv) applying Index Continuity Rules for the MSCI Standard Index; (v) creating style segments within each size segment within each market; and (vi) classifying securities under the Global Industry Classification Standard (the “GICS”). The “relevant market” with respect to a single country index is equivalent to the single country, except in DM-classified countries in Europe (as described below), where all such countries are first aggregated into a single market for index construction purposes. Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the MSCI Global Investable Market Indices Methodology. The “relevant market” with respect to a composite index includes each of the single countries which comprise the composite index. The “Equity Universe” is the aggregation of all Market Investable Equity Universes. The “DM Investable Equity Universe” is the aggregation of all the Market Investable Equity Universes for Developed Markets. Defining the Equity Universe (i) Identifying Eligible Equity Securities: The Equity Universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as either Developed Markets (“DM”) or Emerging Markets (“EM”). All listed equity securities, or listed securities that exhibit characteristics of equity securities, except mutual funds, exchange traded funds, equity derivatives, limited partnerships, and most investment trusts, are eligible for inclusion in the Equity Universe. Real Estate Investment Trusts (“REITs”) in some countries and certain income trusts in Canada are also eligible for inclusion. (ii) Country Classification of Eligible Securities: Each company and its securities (i.e., share classes) are classified in one and only one country, which allows for a distinctive sorting of each company by its respective country. Determining the Market Investable Equity Universes A Market Investable Equity Universe for a market is derived by applying investability screens to individual companies and securities in the Equity Universe that are classified in that market. A market is equivalent to a single country, except in DM Europe, where all DM countries in Europe are aggregated into a single market for index construction purposes. Subsequently, individual DM Europe country indices within the MSCI Europe Index are derived from the constituents of the MSCI Europe Index under the Global Investable Market Indices methodology. The investability screens used to determine the Investable Equity Universe in each market are as follows:
104
(i)
Equity Universe Minimum Size Requirement: This investability screen is applied at the company level. In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization. A company will meet this requirement if its cumulative free float-adjusted market capitalization is within the top 99% of the sorted Equity Universe.
(ii)
Equity Universe Minimum Float−Adjusted Market Capitalization Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have a free float−adjusted market capitalization equal to or higher than 50% of the Equity Universe Minimum Size Requirement.
(iii)
DM and EM Minimum Liquidity Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security must have adequate liquidity as measured by the Annualized Traded Value Ratio (“ATVR”) and the Frequency of Trading. The ATVR screens out extreme daily trading volumes, taking into account the free float-adjusted market capitalization size of securities. The aim of the 12-month and 3-month ATVR together with 3-month Frequency of Trading is to select securities with a sound long and short-term liquidity. A minimum liquidity level of 20% of 3-month ATVR and 90% of 3-month Frequency of Trading over the last 4 consecutive quarters, as well as 20% of 12-month ATVR are required for the inclusion of a security in a Market Investable Equity Universe of a Developing Market. A minimum liquidity level of 15% of 3-month ATVR and 80% of 3-month Frequency of Trading over the last 4 consecutive quarters, as well as 15% of 12month ATVR are required for the inclusion of a security in a Market Investable Equity Universe of an Emerging Market. In instances when a security does not meet the above criteria, the security will be represented by a relevant liquid eligible Depository Receipt if it is trading in the same geographical region. Depository Receipts are deemed liquid if they meet all the above mentioned criteria for 12month ATVR, 3-month ATVR and 3-month Frequency of Trading.
(iv)
Global Minimum Foreign Inclusion Factor Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a Market Investable Equity Universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a Market Investable Equity Universe.
(v)
Minimum Length of Trading Requirement: This investability screen is applied at the individual security level. For an initial public offering (“IPO”) to be eligible for inclusion in a Market Investable Equity Universe, the new issue must have started trading at least four months before the implementation of the initial construction of the index or at least three months before the implementation of a Semi−Annual Index Review. This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the Minimum Length of Trading Requirement and may be included in a Market Investable Equity Universe and the Standard Index outside of a Quarterly or Semi−Annual Index Review.
Defining Market Capitalization Size Segments for Each Market Once a Market Investable Equity Universe is defined, it is segmented into the following size−based indices:
Investable Market Index (Large + Mid + Small)
Standard Index (Large + Mid)
Large Cap Index
Mid Cap Index 105
Small Cap Index
Creating the Size Segment Indices in each market involves the following steps: (i) defining the Market Coverage Target Range for each size segment; (ii) determining the Global Minimum Size Range for each size segment; (iii) determining the Market Size−Segment Cutoffs and associated Segment Number of Companies; (iv) assigning companies to the size segments; and (v) applying final size−segment investability requirements and index continuity rules. Index Continuity Rules for the Standard Indices In order to achieve index continuity, as well as provide some basic level of diversification within a market index, notwithstanding the effect of other index construction rules, a minimum number of five constituents will be maintained for a DM Standard Index and a minimum number of three constituents will be maintained for an EM Standard Index. If after the application of the index construction methodology, a Standard Index contains fewer than five securities in a Developed Market or three securities in an Emerging Market, then the largest securities by free float-adjusted market capitalization are added to the Standard Index in order to reach five constituents in that Developed Market or three in that Emerging Market. At subsequent Index Reviews, if the free float-adjusted market capitalization of a non-index constituent is at least 1.50 times the free float-adjusted market capitalization of the smallest existing constituent after rebalancing, the larger free float-adjusted market capitalization security replaces the smaller one. Creating Style Indices within Each Size Segment All securities in the investable equity universe are classified into Value or Growth segments using the MSCI Global Value and Growth methodology. Classifying Securities under the Global Industry Classification Standard All securities in the Global Investable Equity Universe are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor’s, the Global Industry Classification Standard (“GICS”). The GICS entails four levels of classification: (1) sector; (2) industry groups; (3) industries; (4) sub-industries. Under the GICS, each company is assigned uniquely to one sub−industry according to its principal business activity. Therefore, a company can belong to only one industry grouping at each of the four levels of the GICS. Maintenance of the MSCI Global Investable Market Indices The MSCI Global Investable Market Indices are maintained with the objective of reflecting the evolution of the underlying equity markets and segments on a timely basis, while seeking to achieve index continuity, continuous investability of constituents and replicability of the indices, and index stability and low index turnover. In particular, index maintenance involves: (i)
Semi−Annual Index Reviews (“SAIRs”) in May and November of the Size Segment and Global Value and Growth Indices which include:
Updating the indices on the basis of a fully refreshed Equity Universe.
Taking buffer rules into consideration for migration of securities across size and style segments.
Updating FIFs and Number of Shares (“NOS”).
106
The objective of the SAIRs is to systematically reassess the various dimensions of the Equity Universe for all markets on a fixed semi-annual timetable. A SAIR involves a comprehensive review of the Size Segment and Global Value and Growth Indices. (ii)
Quarterly Index Reviews (“QIRs”) in February and August of the Size Segment Indices aimed at:
Including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the index.
Allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR.
Reflecting the impact of significant market events on FIFs and updating NOS.
QIRs are designed to ensure that the indices continue to be an accurate reflection of the evolving equity marketplace. This is achieved by a timely reflection of significant market driven changes that were not captured in the index at the time of their actual occurrence but are significant enough to be reflected before the next SAIR. QIRs may result in additions or deletions due to migration to another Size Segment Index, and changes in FIFs and in NOS. Only additions of significant new investable companies are considered, and only for the Standard Index. The buffer zones used to manage the migration of companies from one segment to another are wider than those used in the SAIR. The style classification is reviewed only for companies that are reassigned to a different size segment. (iii) Ongoing event−related changes. Ongoing event-related changes to the indices are the result of mergers, acquisitions, spin-offs, bankruptcies, reorganizations and other similar corporate events. They can also result from capital reorganizations in the form of rights issues, bonus issues, public placements and other similar corporate actions that take place on a continuing basis. These changes generally are reflected in the indices at the time of the event. Significantly large IPOs are included in the indices after the close of the company’s tenth day of trading. Announcement Policy The results of the SAIRs are announced at least two weeks in advance of their effective implementation dates as of the close of the last business day of May and November. The results of the QIRs are announced at least two weeks in advance of their effective implementation dates as of the close of the last business day of February and August. All changes resulting from corporate events are announced prior to their implementation. The changes are typically announced at least ten business days prior to the changes becoming effective in the indices as an “expected” announcement, or as an “undetermined” announcement, when the effective dates are not known yet or when aspects of the event are uncertain. MSCI sends “confirmed” announcements at least two business days prior to events becoming effective in the indices, provided that all necessary public information concerning the event is available. The full list of all new and pending changes is delivered to clients on a daily basis, at 5:30 p.m., US Eastern Time through the Advance Corporate Events (ACE) File. In exceptional cases, events are announced during market hours for same or next day implementation. Announcements made by MSCI during market hours are usually linked to late company disclosure of corporate events or unexpected changes to previously announced corporate events. In the case of secondary offerings representing more than 5% of a security’s number of shares for existing constituents, these changes will be announced prior to the end of the subscription period when possible and a subsequent announcement confirming the details of the event (including the date of implementation) will be made as soon as the results are available.
107
Both primary equity offerings and secondary offerings for U.S. securities, representing at least 5% of the security’s number of shares, will be confirmed through an announcement during market hours for next day or shortly after implementation, as the completion of the events cannot be confirmed prior to the notification of the pricing. Early deletions of constituents due to bankruptcy or other significant cases are announced as soon as practicable prior to their implementation. Index Calculation Price Index Level A Global Investable Market Index is calculated using the Laspeyres’ concept of a weighted arithmetic average together with the concept of chain-linking. As a general principle, today’s index level is obtained by applying the change in the market performance to the previous period index level. IndexAdjustedMarketCapUSDt IndexInitialMarketCapUSDt
PriceIndexLevelUSDt = PriceIndexLevelUSDt-1 × PriceIndexLevelLocalt = PriceIndexLevelLocalt-1 ×
IndexAdjustedMarketCapForLocalt IndexInitialMarketCapUSDt
Where:
PriceIndexLevelUSDt-1 is the Price Index level in USD at time t-1
IndexAdjustedMarketCapUSDt is the Adjusted Market Capitalization of the index in USD at time t
IndexInitialMarketCapUSDt is the Initial Market Capitalization of the index in USD at time t
PriceIndexLevelLocalt-1 is the Price Index level in local currency at time t-1
IndexAdjustedMarketCapForLocalt is the Adjusted Market Capitalization of the index in USD converted using FX rate as of t-1 and used for local currency index at time t
Note: IndexInitialMarketCapUSD was previously called IndexUnadjustedMarketCapPreviousUSD Security Price Index Level SecurityPriceIndexLevel1 = SecurityPriceIndexLevelt-1 ×
SecurityAdjustedMarketCapForLocalt SecurityInitialMarketCapUSDt
SecurityAdjustedMarketCapForLocalt =
IndexNumberOfSharest -1 × PricePerSharet × InclusionFactort x PAFt FXratet-1
×
IndexNumberOfSharest -1 × PricePerSharet1 × InclusionFactort FXratet-1
SecurityInitialMarketCapUSDt = Where:
ICIt ICIt-1
SecurityPriceIndexLevelt-1 is Security Price Index level at time t-1
108
SecurityAdjustedMarketCapForLocalt is the Adjusted Market Capitalization of security s in USD converted using FX rate as of t-1
SecurityInitialMarketCapUSDt is the Initial Market Capitalization of security s in USD at time t
IndexNumberOfSharest-1 is the number of shares of security s at time t-1.
PricePerSharet is the price per share of security s at time t.
PricePerSharet-1 is the price per share of security s at time t-1.
InclusionFactort is the inclusion factor of security s at time t. The inclusion factor can be one or the combination of the following factors: Foreign Inclusion Factor, Domestic Inclusion Factor Growth Inclusion Factor, Value Inclusion Factor, Index Inclusion Factor.
PAFt is the Price Adjustment Factor of security s at time t.
FXratet -1 is the FX rate of the price currency of security s vs USD at time t-1. It is the value of 1 USD in foreign currency.
ICIt is the Internal Currency Index of price currency at time t. The ICI is different than 1 when a country changes the internal value of its currency (e.g. from Turkish Lira to New Turkish Lira – ICI = 1,000,000).
ICIt-1 is the Internal Currency Index of price currency at time t-1.
Index Market Capitalization
IndexAdjustedMarketCapUSDt = sε I,t
Index Number of Sharest-1 × Price Per Sharet × Inclusion Factort × PAFt FXratet
IndexAdjustedMarketCapForLocalt = s ε I,t
1
Index Number of Sharest× Price Per Sharet × Inclusion Factort × PAFt FXratet-1
ICIt ICIt1
IndexInitialMarketCapUSDt = s ε I,t
Index Number of Sharest-1 × Price Per Sharet × Inclusion Factort FXratet-1
Where:
IndexNumberOfSharest-1 is the number of shares of security s at time t-1.
PricePerSharet is the price per share of security s at time t.
PricePerSharet-1 is the price per share of security s at time t-1.
InclusionFactort is the inclusion factor of security s at time t. The inclusion factor can be one or the combination of the following factors: Foreign Inclusion Factor, Domestic Inclusion Factor Growth Inclusion Factor, Value Inclusion Factor, Index Inclusion Factor.
PAFt is the Price Adjustment Factor of security s at time t.
FXratet is the FX rate of the price currency of security s vs USD at time t. It is the value of 1 USD in foreign currency. 109
FXratet -1 is the FX rate of the price currency of security s vs USD at time t-1. It is the value of 1 USD in foreign currency.
ICIt is the Internal Currency Index of price currency at time t. The ICI is different than 1 when a country changes the internal value of its currency (e.g. from Turkish Lira to New Turkish Lira – ICI = 1,000,000).
ICIt-1 is the Internal Currency Index of price currency at time t-1.
Corporate Events Mergers and Acquisitions As a general principle, MSCI implements M&As as of the close of the last trading day of the acquired entity or merging entities (last offer day for tender offers), regardless of the status of the securities (index constituents or non-index constituents) involved in the event. MSCI uses market prices for implementation. This principle applies if all necessary information is available prior to the completion of the event and if the liquidity of the relevant constituent(s) is not expected to be significantly diminished on the day of implementation. Otherwise, MSCI will determine the most appropriate implementation method and announce it prior to the changes becoming effective in the indices. Tender Offers In tender offers, the acquired or merging security is generally deleted from the applicable MSCI Indices at the end of the initial offer period, when the offer is likely to be successful and / or if the free float of the security is likely to be substantially reduced (this rule is applicable even if the offer is extended), or once the results of the offer have been officially communicated and the offer has been successful and the security’s free float has been substantially reduced, if all required information is not available in advance or if the offer’s outcome is uncertain. The main factors considered by MSCI when assessing the outcome of a tender offer (not in order of importance) are: the announcement of the offer as friendly or hostile, a comparison of the offer price to the acquired security’s market price, the recommendation by the acquired company’s board of directors, the major shareholders’ stated intention whether to tender their shares, the required level of acceptance, the existence of pending regulatory approvals, market perception of the transaction, official preliminary results if any, and other additional conditions for the offer. In certain cases, securities may be deleted earlier than the last offer day. For example, in the case of tender offers in the United Kingdom, a security is typically deleted two business days after the offer is declared unconditional in all respects. If a security is deleted from an index, the security will not be reinstated immediately after its deletion even when the tender offer is subsequently declared unsuccessful and/or the free float of the security is not substantially reduced. It may be reconsidered for index inclusion in the context of a quarterly index review or annual full country index review. MSCI uses market prices for implementation. Late Announcements of Completion of Mergers and Acquisitions When the completion of an event is announced too late to be reflected as of the close of the last trading day of the acquired or merging entities, implementation occurs as of the close of the following day or as soon as practicable thereafter. In these cases, MSCI uses a calculated price for the acquired or merging entities. The calculated price is determined using the terms of the transaction and the price of the acquiring or merged entity, or, if not appropriate, using the last trading day’s market price of the acquired or merging entities. Conversions of Share Classes Conversions of a share class into another share class resulting in the deletion and/or addition of one or more classes of shares are implemented as of the close of the last trading day of the share class to be converted. Spin-Offs 110
On the ex-date of a spin-off, a PAF is applied to the price of the security of the parent company. The PAF is calculated based on the terms of the transaction and the market price of the spun-off security. If the spun-off entity qualifies for inclusion, it is included as of the close of its first trading day. If appropriate, MSCI may link the price history of the spun-off security to a security of the parent company. In cases of spin-offs of partially-owned companies, the post-event free float of the spun-off entity is calculated using a weighted average of the existing shares and the spun-off shares, each at their corresponding free float. Any resulting changes to FIFs and/or DIFs are implemented as of the close of the ex-date. When the spun-off security does not trade on the ex-date, a “detached” security is created to avoid a drop in the free float-adjusted market capitalization of the parent entity, regardless of whether the spun-off security is added or not. The detached security is included until the spun-off security begins trading, and is deleted thereafter. Generally, the value of the detached security is equal to the difference between the cum price and the ex price of the parent security. Corporate Actions Corporate actions such as splits, bonus issues and rights issues, which affect the price of a security, require a price adjustment. In general, the PAF is applied on the ex-date of the event to ensure that security prices are comparable between the ex-date and the cum date. To do so, MSCI adjusts for the value of the right and/or the value of the special assets that are distributed. In general, corporate actions do not impact the free float of the securities because the distribution of new shares is carried out on a pro rata basis to all existing shareholders. Therefore, MSCI will generally not implement any pending number of shares and/or free float updates simultaneously with the event. If a security does not trade for any reason on the ex-date of the corporate action, the event will be generally implemented on the day the security resumes trading. Share Placements and Offerings Changes in number of shares and FIF resulting from primary equity offerings representing more than 5% of the security’s number of shares are generally implemented as of the close of the first trading day of the new shares, if all necessary information is available at that time. Otherwise, the event is implemented as soon as practicable after the relevant information is made available. A primary equity offering involves the issuance of new shares by a company. Changes in number of shares and FIF resulting from primary equity offerings representing less than 5% of the security’s number of shares are deferred to the next regularly scheduled Quarterly Index Review following the completion of the event. For public secondary offerings of existing constituents representing more than 5% of the security’s number of shares, where possible, MSCI will announce these changes and reflect them shortly after the results of the subscription are known. Secondary public offerings that, given lack of sufficient notice, were not reflected immediately will be reflected at the next Quarterly Index Review. Secondary offerings involve the distribution of existing shares of current shareholders’ in a listed company and are usually pre-announced by a company or by a company’s shareholders and open for public subscription during a pre-determined period. Debt-to-Equity Swaps In general, large debt-to-equity swaps involve the conversion of debt into equity originally not convertible at the time of issue. In this case, changes in numbers of shares and subsequent FIF and/or DIF changes are implemented as of the close of the first trading day of the newly issued shares, or shortly thereafter if all necessary information is available at the time of the swap. In general, shares issued in debt-to-equity swaps are assumed to be issued to strategic investors. As such, the post event free float is calculated on a pro forma basis assuming that all these shares are non-free float. Changes in numbers of shares and subsequent FIF and/or DIF changes due to conversions of convertible bonds or other convertible instruments, including periodical conversions of preferred stocks and small debt-to-equity swaps are implemented as part of the quarterly index review. 111
Suspensions and Bankruptcies MSCI will remove from the MSCI Equity Index Series as soon as practicable companies that file for bankruptcy, companies that file for protection from their creditors and/or are suspended and for which a return to normal business activity and trading is unlikely in the near future. When the primary exchange price is not available, MSCI will delete securities at an over the counter or equivalent market price when such a price is available and deemed relevant. If no over the counter or equivalent price is available, the security will be deleted at the smallest price (unit or fraction of the currency) at which a security can trade on a given exchange. For securities that are suspended, MSCI will carry forward the market price prior to the suspension during the suspension period.
112
TABLE OF CONTENTS
Disclosure Statement Page Description of the CDs.....................................................................................................................................1 Risk Factors ...................................................................................................................................................12 General Terms of the CDs.............................................................................................................................36 Evidence of the CDs ......................................................................................................................................49 Where You Can Find Out More About Us .....................................................................................................49 JPMorgan Chase Bank, N.A..........................................................................................................................51 Deposit Insurance ..........................................................................................................................................52 Discounts and Secondary Market..................................................................................................................58 Hedging..........................................................................................................................................................59 Benefit Plan Investor Considerations.............................................................................................................59 Certain U.S. Federal Income Tax Consequences .........................................................................................61 The MSCI World IndexSM ...............................................................................................................................65 The S&P 500® Index ......................................................................................................................................70 The S&P 500® Risk Control 10% Excess Return Index ................................................................................75 The Dow Jones EURO STOXX 50® Index.....................................................................................................81 The Dow Jones — UBS Commodity IndexSM ................................................................................................85 The JPMorgan GBI Global Bond Total Return Index Hedged Into U.S. Dollars ...........................................95 The iShares® MSCI EAFE Index Fund ........................................................................................................101 In making your investment decision, you should rely only on the information contained or incorporated by reference in this disclosure statement and the accompanying term sheet. We have not authorized anyone to give you any additional or different information. The information in this disclosure statement and the accompanying term sheet may be accurate only on the date of the term sheet. The CDs described in this disclosure statement and accompanying term sheet are not appropriate for all investors, and involve important legal and tax consequences and investment risks, which should be discussed with your professional advisers. You should be aware that the regulations of the Financial Industry Regulatory Authority, or FINRA, and the laws of certain jurisdictions (including regulations and laws that require brokers to ensure that investments are suitable for their customers) may limit the availability of CDs. Neither this disclosure statement nor the accompanying term sheet constitutes an offer to sell or a solicitation of an offer to buy the CDs in any circumstances in which such offer or solicitation is unlawful.
113