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INDEX SUPPLEMENT J.P. MORGAN MOZAIC INDEX (USD) This document contains information solely about the J.P. Morgan MOZAIC Index (USD) (the “Index”), which information has been provided by J.P. Morgan Securities LLC (“JPMS”) solely in its capacity as a licensor of the Index. The Index and certain relevant “Select Considerations” are described in further detail within the document and are qualified in their entirety by the index rules (the “Rules”) which are appended hereto. Please read the information under the section titled “Important Information” below before reading any other material in this document. IMPORTANT INFORMATION The Index has been and may be licensed to one or several licensees (collectively, the “Licensee”) for the Licensee’s benefit. Neither the Licensee nor any product of the Licensee (the “Product”) is sponsored, operated, endorsed, sold or promoted by JPMS or any of its affiliates (together and individually, “J.P. Morgan”). J.P. Morgan makes no representation and no warranty, express or implied, to owners of the Product (or any person taking exposure to it) or any member of the public in any other circumstances (each a “Contract Owner”): (a) regarding the advisability of investing in securities or other financial or insurance products generally or in the Product particularly; or (b) the suitability or appropriateness of an exposure to the Index in seeking to achieve any particular objective. It is for those taking an exposure to the Product and/or the Index to satisfy themselves of these matters and such persons should seek appropriate professional advice before making any investment. J.P. Morgan is not responsible for and does not have any obligation or liability in connection with the issuance, administration, marketing or trading of the Product. The publication of the Index and the referencing of any asset or other factor of any kind in the Index do not constitute any form of investment recommendation or advice in respect of any such asset or other factor by J.P. Morgan, and no person should rely upon it as such. J.P. Morgan does not act as an investment adviser or investment manager in respect of the Index or the Product and does not accept any fiduciary duties in relation to the Index, the Licensee, the Product or any Contract Owner. The Index has been designed and is compiled, calculated, maintained and sponsored by J.P. Morgan without regard to the Licensee, the Product or any Contract Owner. The ability of the Licensee to make use of the Index may be terminated on short notice and it is the responsibility of the Licensee to provide for the consequences of that in the design of the Product. J.P. Morgan does not accept any legal obligation to take the needs of any person who may invest in a Product into account in designing, compiling, calculating, maintaining or sponsoring the Index or in any decision to cease doing so. J.P. Morgan does not give any representation, warranty or undertaking, of any type (whether express or implied, statutory or otherwise) in relation to the Index, as to condition, satisfactory quality, performance or fitness for purpose or as to the results to be achieved by an investment in the Product or any data included in or omissions from the Index, or the use of the Index in connection with the Product or the veracity, currency, completeness or accuracy of the information on which the Index is based (and, without limitation, J.P. Morgan accepts no liability to any Contract Owner for any errors or omissions in that information or the results of any interruption to it and J.P. Morgan shall be under no obligation to advise any person of any such error, omission or interruption). To the extent any such representation, warranty or undertaking could be deemed to have been given by J.P. Morgan, it is excluded save to the extent that such exclusion is prohibited by law. To the fullest extent permitted by law, J.P. Morgan shall have no liability or responsibility to any person or entity (including, without limitation, to any Contract Owner) for any losses, damages, costs, charges, expenses or other liabilities howsoever arising, including, without limitation, liability for any special, punitive, indirect or consequential damages (including loss of business or loss of profit, loss of time and loss of goodwill), even if notified of the possibility of the same, arising in connection with the design, compilation, calculation, maintenance or sponsoring of the Index or in connection with the Product. The Index is the exclusive property of J.P. Morgan. J.P. Morgan is under no obligation to continue compiling, calculating, maintaining or sponsoring the Index and may delegate or transfer to a third party some or all of its functions in relation to the Index.
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J.P. Morgan may independently issue or sponsor other indices or products that are similar to and may compete with the Index and the Product. J.P. Morgan may also transact in assets referenced in the Index (or in financial instruments such as derivatives that reference those assets). It is possible that these activities could have an effect (positive or negative) on the value of the Index and the Product. Each of the above paragraphs is severable. If the contents of any such paragraph is held to be or becomes invalid or unenforceable in any respect in any jurisdiction, it shall have no effect in that respect, but without prejudice to the remainder of this notice.
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SELECT CONSIDERATIONS The Index Calculation Agent and the Index Sponsor have discretion over the Index, and neither the Index Calculation Agent nor the Index Sponsor has an obligation to consider the interests of investors and others that may have exposure to Products linked to the Index. J.P. Morgan Securities plc (“JPMS plc”), an affiliate of JPMorgan Chase & Co., currently acts as the Index calculation agent (the “Index Calculation Agent”) and is responsible for calculating the level of the Index and determining the effect of certain developments on the Index. The Index Calculation Agent is entitled to exercise discretion in relation to the Index, including but not limited to the calculation of the level of the Index in the event of an Extraordinary Event or FX Disruption Event as well as the determination of the occurrence of a Market Disruption Event (each as defined below under “The J.P. Morgan MOZAIC Index (USD)”), and may also amend the rules governing the Index in certain circumstances. JPMS plc is also the Index Sponsor and is responsible for, among other things, the documentation of the Rules and the appointment of the Index Calculation Agent, and the Index Sponsor may also amend the rules governing the Index, as it deems appropriate. The judgments, policies and decisions for which the Index Calculation Agent and the Index Sponsor are responsible could have an impact, positive or negative, on the level of the Index. In taking any actions that might affect the Index, including the calculation of the Index level, neither the Index Calculation Agent nor the Index Sponsor has an obligation to consider the interests of investors or others that may have exposure to Products linked to the Index. JPMorgan Chase & Co., as the ultimate parent company of JPMS plc, controls the Index Calculation Agent and the Index Sponsor. Furthermore, the selection of the constituents of the Index (the “Constituents”) is not an investment recommendation by JPMS plc or any of its affiliates of the Constituents, or any of the securities, commodities, indices or futures contracts underlying the Constituents. See “The J.P. Morgan MOZAIC Index (USD).” The Index methodology may not be successful and may not outperform any alternative strategy that might be employed in respect of the Constituents. The Index methodology follows a notional proprietary strategy that operates on the basis of predetermined rules. No assurance can be given that the investment strategy on which the Index is based will be successful or that the Index will outperform any alternative strategy that might be employed in respect of the Constituents. The Constituents may not achieve their target volatility rate. Each selected Constituent has a Constituent Target Volatility (as defined below), which is used in determining the weight applied to such Constituent following a rebalancing. In calculating the level of the Index, the performance of each selected Constituent is scaled by its weight, which is in turn determined by comparing such Constituent’s recent actual volatility against the target volatility rate, subject to an upper-bound limit of 1,000% (the “Upper-Bound Limit”). A selected Constituent whose recent volatility exceeded the target volatility will generally have a weight that dampens the contribution of such Constituent’s performance in the calculation of the Index level, while a selected Constituent whose recent volatility was less than the target volatility will generally have a weight that magnifies the contribution of such Constituent’s performance. Because weights are established on the basis of the historical Constituent volatility and subject to the Upper-Bound Limit and because the realized volatility of a Constituent once its weight is put into effect may differ significantly from its historical levels and may change rapidly at any time, there can be no assurance the weighted average performance of any Constituent in the Index will realize an actual volatility equal to the Constituent Target Volatility. The actual realized volatility of any Constituent’s weighted performance in the Index could be significantly greater or less than the target volatility rate. Furthermore, while it is generally the case that the target volatility rates will sum to a “round” number if at any time six Constituents are currently referenced by the Index, as described below under “The J.P. Morgan MOZAIC Index (USD),” under certain circumstances, there may be more or fewer than six Constituents referenced by the Index, which may create further differences between the target volatility and actual realized volatility. -3-
If the values of the Constituents change or the market value of the futures contracts underlying the Constituents changes, the level of the Index may not change in the same manner. Changes in the values of the Constituents or the futures contracts underlying the Constituents may not result in a comparable change in the level of the Index. This is due to the fact that the Constituents are weighted in accordance with the Index’s methodology, as prescribed by the Rules. Such weights can have the effect of amplifying or dampening the performance of the Constituents, and the weights are rebalanced, generally on a monthly basis, and may be subject to “flattening” and other periods in which weights are set to zero. The Index’s changes will not be comparable to those of an index comprised of static and equally weighted notional exposures to the Constituents. The Index is not comprised of actual assets. The exposures to the Constituents are purely notional and will exist solely in the records maintained by or on behalf of the Index Calculation Agent. There is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest. The Index has a limited operating history and may perform in unanticipated ways. The “Live Date” for the Index was April 17, 2009, and therefore the Index has a limited operating history. Any back-testing or similar analysis performed by any person with respect to the Index must be considered illustrative only and may be based on estimates or assumptions not used by the Index Calculation Agent when determining the level of the Index. Past performance should not be considered indicative of future performance. Any future downgrades of the U.S. government’s credit rating by credit rating agencies may adversely affect the performance of the Index. In 2011, Standard & Poor’s Ratings Services (“Standard & Poor’s”) downgraded the U.S. government’s credit rating from AAA to AA+. The downgrade increased volatility in the global equity, credit and commodities markets, which might have adversely affected the levels of the Constituents. Future downgrades by credit ratings agencies may also increase this volatility. This may in turn have an adverse impact on the Index. There are risks associated with the Index’s momentum investment strategy. The Index is constructed using what is generally known as a momentum investment strategy. Momentum investing generally seeks to capitalize on positive trends in the price of assets. As such, the weights of the Constituents in the Index are based on the performance of the Constituents from a recent historical period of approximately six months. However, there is no guarantee that trends existing in the preceding period will continue in the future. A momentum strategy is different from a strategy that seeks long-term exposure to a portfolio consisting of constant components with fixed weights. The Index may fail to realize gains that could occur as a result of holding assets that have experienced recent poor performance, but that subsequently experience a recovery. Conversely, the Index may suffer losses as a result of holding assets that have experienced recent strong performance, but subsequently suffer a reversal. As a result, if market conditions do not represent a continuation of prior observed trends, the level of the Index, which is rebalanced based on prior trends, may decline or fail to appreciate. In particular, while momentum investing strategies are effective at identifying the market direction in trending markets, in non-trending, sideways markets, momentum investment strategies are subject to “whipsaws.” A whipsaw occurs when the market reverses and does the opposite of what is indicated by the trend indicator, resulting in a trading loss during the particular period. Consequently, the Index may perform poorly in non-trending, “choppy” markets characterized by short- term volatility. Additionally, due to the “long-only” construction of the Index, the weight of each Constituent will not be negative in respect of any rebalancing even if the relevant Constituent displayed a negative performance over the relevant six-month period.
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No assurance can be given that the investment strategy used to construct the Index will outperform any alternative index that might be constructed from the Constituents. The investment strategy used to construct the Index involves monthly rebalancing that is applied to the Constituents The Constituents are subject to monthly rebalancing. By contrast, a synthetic portfolio that does not rebalance monthly could see greater compounded gains over time through exposure to a consistently and rapidly appreciating portfolio consisting of the Constituents. Therefore, your return on Products linked to the Index may be less than the return you could realize on an alternative investment that is not subject to rebalancing. Rebalancings and exposure flattenings are not effected with respect to Constituents in respect of which the relevant weekday is not a Scheduled Trading Day or in respect of which such weekday is a Disrupted Day. Although Index rebalancings are scheduled to occur as of the first weekday of each month and exposure flattenings can be triggered as of any weekday based on recent declines in the Index level, in the event such weekday is not a Scheduled Trading Day or is a Disrupted Day with respect to one or more Constituents, then those Constituents will, in the case of rebalancing, not be rebalanced that month, and, in the case of the exposure flattening mechanism, will not be subject to the initiation of an exposure flattening period and hence will not have their weights adjusted to zero (if they are positive at that time). Such occurrences may yield positive weights for more or fewer than six Constituents in a given month, may cause continued Index declines during what would otherwise be an exposure flattening period for the affected Constituents and may have other consequences that may adversely impact the Index. For more information on the Index’s monthly rebalancing and its exposure flattening mechanism, see “The J.P. Morgan MOZAIC Index (USD).” The Index’s exposure flattening mechanism may not be successful in preventing the Index level from declining, and may in fact cause the Index to have worse performance. The Index’s exposure flattening mechanism is only triggered following recent historical declines of the Index level of more than 3.00% over a five-weekday period, and then only after a lag. In addition, in the event that a weekday on which an exposure flattening period would have been triggered in respect of one or more Constituents is not a Scheduled Trading Day or is a Disrupted Day in respect of those Constituents, the exposure flattening mechanism will not alter the weights of those Constituents, and hence those Constituents may continue to cause declines in the Index level notwithstanding prior declines in the Index level that were sufficient to trigger an exposure flattening period. In measuring the Index level changes during an historical five-weekday observation period, the exposure flattening mechanism takes into account the effect of any exposure flattening period that overlapped with such observation period, and hence the exposure flattening mechanism may not take into account the full extent of the negative performance of the normally weighted Constituents. This in turn may result in an exposure flattening period not being triggered even though negative performance of the normally weighted Constituents would justify it. For the foregoing reasons, the exposure flattening mechanism cannot be considered a safeguard against declines in the Index level. Furthermore, if Constituents subject to the exposure flattening mechanism recover their losses during the relevant exposure flattening period, the Index will not capture such recovery, resulting in lower performance. For more information on the exposure flattening mechanism, see “The J.P. Morgan MOZAIC Index (USD).” Constituent weights are subject to a high upper-bound limit and hence can increase exposure to Constituents in a way that effectively exposes the Index to leverage, potentially causing increased volatility in the Index level. For each selected Constituent, the rebalancing mechanism sets the weight of such Constituent to a level that would have caused the weighted historical performance of such Constituent over a recent 125-weekday observation period (approximately six months) (the “Lookback Period,” as defined in greater detail below under -5-
“The J.P. Morgan MOZAIC Index (USD)”) to have a volatility equal to the Constituent Target Volatility, subject to the Upper-Bound Limit. In connection with a rebalancing, a selected Constituent whose volatility over the Lookback Period was less than the Constituent Target Volatility will generally have a new weight that magnifies the contribution of such Constituent’s performance in the calculation of the Index level, producing results similar to leverage. When weights magnify Constituent performance, any movements in the prices or levels of the Constituents may result in greater changes in the levels of the Index than if leverage were not used. In particular, leverage will magnify any negative performance of the Constituents. The Index tracks daily weighted percentage changes in Constituent prices and levels, and hence the daily contribution of changes in Constituent prices and levels to changes in the Index level is not path dependent. The Index does not track a hypothetical fixed level of investment in the Constituents, but rather the weighted percentage changes in the prices and levels of the Constituents. Prior period changes in a Constituent’s price or level does not impact the contribution of changes in the price or level of such Constituent in the current measurement period to changes in the Index level, except to the extent that such changes are reflected in the methodology for monthly rebalancing and with respect to the application of the Constituent flattening mechanism. For example, a significant downward change in the price or level of a Constituent immediately prior to the current measurement period will not – except in the context of monthly rebalancings and the application of the Constituent flattening mechanism – dampen the contribution of current or future changes in such Constituent’s price or level to changes in the Index level. As such, the daily contribution of changes in Constituent prices and levels to changes in the Index level is not price dependent. Lower weights of Constituents will dampen the impact of their returns on the Index level. A selected Constituent whose volatility over the Lookback Period exceeded the Constituent Target Volatility will generally have a weight that dampens the contribution of such Constituent’s performance in the calculation of the Index level. As a result, any positive performance of Constituents subject to such weight to the Index level will not be fully reflected in the Index level. The Index may be notionally uninvested. A number of circumstances – including recent poor performance of some or all of the Constituents resulting in zero weights in the rebalancing process or through the imposition of exposure flattening periods – may result in the Index being partially or completely “uninvested” on a notional basis. To the extent the sum of all Constituent weights is less than 100%, a portion of the Index may be considered notionally “uninvested” and the returns in respect of such portion will be zero. If the sum of all Constituent weights is equal to zero, the Index value will remain unchanged, reflecting zero returns for each day such sum is equal to zero. The Index is subject to significant risks associated with futures contracts. The Constituents are comprised of futures contracts and indices that track futures contracts. The price of a futures contract depends not only on the price of the underlying asset referenced by the futures contract, but also on other factors, including but not limited to changing supply and demand relationships, interest rates, governmental and regulatory policies and the policies of the exchanges on which the futures contracts trade. In addition, the futures markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity in the markets, participation of speculators, and government regulation and intervention. These factors and others can cause the prices of futures contracts to be volatile and unpredictable. The settlement price of the futures contracts may not be readily available. The official settlement price of the relevant futures contracts are used to calculate the level of the Index. Any disruption in trading of the relevant futures contracts could delay the release or availability of the official settlement price. This may delay or prevent the calculation of the Index.
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Some of the Constituents are excess return commodity indices, which carry risks associated with notional investments in such indices. The commodity-linked Constituents are excess return indices within the S&P GSCI TM commodity index group. The policies of the sponsor of these indices concerning methodology and calculation, including decisions regarding additions, deletions or substitutions of the assets underlying the indices, could affect the level of these Constituents. The excess return indices constituting the commodity-linked Constituents track returns from hypothetical exposures to certain commodity futures contracts that take into account changes in the price level of the underlying futures contracts as well as roll yield, but not “total returns.” A commodity futures index that reflects “total returns” would reflect the returns from a notional fully collateralized investment in the underlying futures contracts, including any interest that could be earned on funds committed to the margin on the underlying futures contracts. The Index may be affected by significant volatility in the Constituents, each of which is subject to the volatility associated with futures contracts. Prices are subject to sudden changes and can move dramatically over short periods of time, even when they have been relatively stable for an extended period of time leading up to the change. As a result, the levels of the Constituents and, therefore, the Index may decline dramatically before the resulting increased volatility will be reflected in the Lookback Periods used to measure historical volatility in the Index’s rebalancing mechanism. Consequently, the Index may experience sharp declines over short periods of time, notwithstanding the target volatility feature. This risk may be magnified by the risks associated with futures contracts. Suspensions or disruptions of market trading in futures contracts may adversely affect the Index. Futures markets are subject to temporary suspensions, distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators, and government regulation and intervention. In addition, U.S. and other futures exchanges have regulations that limit the magnitude of futures contract price changes that may occur in a single day. These limits may be 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 may be referred to as a “limit price.” Once the limit price has been reached in a particular contract, no trades may be made at a price beyond the limit (although trades can continue within the limit), or trading may be limited for a set period of time. Limit prices have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at potentially disadvantageous times or prices. These circumstances could affect the level of the Index. The performance of foreign currency denominated Constituents is not adjusted for exchange rate movements when determining relative performance and weights for a monthly rebalancing. In the monthly rebalancing process, the six highest Constituent return levels are assessed based on the cumulative returns of each Constituent in local currency terms, without adjusting for currency differences, over the Lookback Period. As a result, Constituents that, on a dollar-adjusted basis, had relatively weaker or even negative performance, may nevertheless be ranked high enough to receive a positive weight in the upcoming period. This will have the consequence of producing notional allocations that may differ from those that would have obtained had they been based on performance measured on a dollar-parity basis. And, as indicated below, even though currency adjustment is not made when determining weights, the Index level itself does take into account currency fluctuation against the U.S. dollar. The Index level will be subject to currency exchange risk. Because the returns on Constituents that are futures contracts on foreign equity indices or governmentissued fixed income securities are converted into U.S. dollars for the purposes of calculating the returns of the Index, the Index level will reflect currency exchange rate risk with respect to each of the relevant foreign currencies. The returns of the Index, however, will not reflect the changes in the notional value of the non-U.S. Constituents due solely to changes in the value of those currencies against the U.S. dollar. Such currency -7-
exchange risk, therefore, will depend on the extent to which those currencies strengthen or weaken against the U.S. dollar together with whether each non-U.S. Constituent appreciates or declines in value, as adjusted by the applicable weights of such non-U.S. Constituent in the Index. For example, if a non-U.S. Constituent has a positive daily return (as measured in its local currency), and the U.S. dollar strengthens against such non-U.S. Constituent’s currency, such non-U.S. Constituent’s contribution to the Index’s return shall be less than it would have been had its contribution been based solely on its local currency return. Furthermore, if a non-U.S. Constituent has a negative daily return (as measured in its local currency), and the U.S. dollar weakens against such non-U.S. Constituent’s currency, such non-U.S. Constituent’s negative contribution to the Index’s return shall be grater than it would have been had its contribution been based solely on its local currency return. 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;
political, civil or military unrest; and
the extent of governmental surpluses or deficits in the relevant countries and the United States.
All of these factors are, in turn, sensitive to the monetary, fiscal and trade policies pursued by the governments of various countries, including the United States and other countries important to international trade and finance. The Constituents comprising the Index may be replaced by substitutes in certain events. Following the occurrence of certain events with respect to a Constituent as described under “The J.P. Morgan MOZAIC Index (USD),” the affected Constituent may be replaced by a substitute futures contract, index or other asset, index or measure. The changing of a Constituent may affect the performance of the Index, as the replacement Constituent may perform significantly worse than the affected Constituent on either a standalone basis or as measured by its contribution to the Index’s return. The Index is subject to market risks. The performance of the Index is dependent on the performance of the Constituents. Certain Constituents are subject to significant risks associated with government-issued fixed-income securities and may be volatile. The fixed income-linked Constituents are futures contracts for U.S., German and Japanese governmentissued debt securities. The market prices of the underlying debt securities may be volatile and significantly influenced by a number of factors, particularly the yields on these instruments as compared to current market interest rates and the actual or perceived credit quality of the governments issuing the underlying debt securities. In general, fixed-income securities are significantly affected by changes in current market interest rates. As interest rates rise, the price of fixed-income securities, such as the government-issued debt securities underlying certain Constituents, may decrease, and as interest rates decrease, the price of fixed-income securities, such as these underlying debt securities, may increase. Interest rates are subject to volatility due to a variety of factors, including:
sentiment regarding underlying strength or weakness in the economies of the governments issuing the underlying debt securities and global economies;
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expectations regarding the level of price inflation;
sentiment regarding credit quality in the governments issuing the underlying debt securities and global credit markets;
central bank policies regarding interest rates; and
the performance of global capital markets. Fluctuations in interest rates could affect the levels of the Constituents and the Index.
U.S. rating agencies have recently downgraded the credit ratings and/or assigned negative outlooks to many governments worldwide, including the United States, Germany and Japan, and may continue to do so in the future. Any perceived decline in the creditworthiness of a government that issues securities underlying a fixed income-linked Constituent as a result of a credit rating downgrade or otherwise, may cause the yield on the relevant securities to increase and the prices of such securities to fall, perhaps significantly, and may cause increased volatility in local or global credit markets. Any such decline over the term of a Product linked to the Index would adversely impact the prices of the futures contracts underlying the relevant fixed income-linked Constituent and could have a negative impact on the level of the Index and the value of such Product. The Constituents may be affected in unexpected ways by the recent sovereign debt crisis in Europe and related global economic conditions. The recent European debt crisis and related European financial restructuring efforts have contributed to instability in global markets. If global economic and market conditions, or economic conditions in Europe, the United States or other key markets, remain uncertain or deteriorate further, the Constituents may be affected in unexpected ways. If a sovereign government were to default on its debt obligations, or if the market perceives that a default has become more likely, yields on the government-issued debt securities underlying the fixed income-linked Constituents may change rapidly and dramatically, and such changes may adversely affect the level of the Index. Commodity prices are characterized by high and unpredictable volatility, which could lead to high and unpredictable volatility in prices and levels of the commodity-linked Constituents and hence in the Index. Market prices of the commodities and commodity futures contracts underlying the commodity-linked Constituents tend to be highly volatile and may fluctuate rapidly based on numerous factors, including: changes in supply and demand relationships; governmental programs and policies, national and international monetary, trade, political and economic events, changes in interest rates and exchange rates, speculation and trading in commodities and related contracts, weather, and agricultural, trade, fiscal and exchange control policies. Many commodities are also highly cyclical. These factors may affect the levels of the indices that comprise the commodity-linked Constituents in varying ways, and different factors may cause the value of different commodities included in the commodity-linked Constituents, and the prices of their futures contracts, to move in inconsistent directions at inconsistent rates. This, in turn, may adversely affect the Index. The Index provides only one means for exposure to commodities. The high volatility and cyclical nature of commodity markets may render these investments inappropriate as the focus of an investment portfolio. Certain Constituents or their underlying futures contracts are foreign futures contracts, and in some cases such futures contracts are linked to foreign securities. Certain fixed income- and equity-linked Constituents are foreign futures contracts linked to foreign securities, and certain futures contracts underlying the indices that constitute the commodity-linked Constituents are foreign commodity futures contracts. With respect to such Constituents, the performance of the underlying foreign futures contracts depends on conditions on foreign futures markets, which may differ substantially from conditions in U.S. markets. And in the case of fixed income- and equity-linked Constituents that constitute foreign futures contracts, the futures contracts are in turn linked to securities issued by non-U.S. companies and -9-
non-U.S. governments. As a result, the values of these futures contracts, and ultimately of the related Constituents, will also be affected by political, economic, financial and social factors in the relevant countries, including changes in a relevant country’s government, economic and fiscal policies, currency exchange laws and other foreign laws or restrictions. The economies of these countries may differ unfavorably from the economy of the United States in such respects as growth of gross national product, rate of inflation, market volatility, capital reinvestment, resources and self-sufficiency. These countries may be subjected to different and, in some cases, more adverse economic environments. Some or all of these factors may adversely impact the value of the affected Constituents and hence of the Index and may exacerbate negative changes or offset positive changes resulting from other factors. The Index may in the future include contracts that are not traded on regulated futures exchanges. The Index, through its exposure to the Constituents, is currently based solely on futures contracts traded on regulated futures exchanges (referred to in the United States as “designated contract markets”). If these exchange-traded futures contracts cease to exist, or if the calculation agent for the Constituents substitutes a futures contract in certain circumstances, the Index may in the future include futures contracts or over-the-counter contracts traded on trading facilities that are subject to lesser degrees of regulation or, in some cases, no substantive regulation. As a result, trading in such contracts, and the manner in which prices and volumes are reported by the relevant trading facilities, may not be subject to the provisions of, and the protections afforded by, the Commodity Exchange Act, or other applicable statutes and related regulations that govern trading on regulated futures exchanges. In addition, many electronic trading facilities have only recently initiated trading and do not have significant trading histories. As a result, the trading of contracts on such facilities, and the inclusion of such contracts in the Index, through its exposure to the Constituents, may be subject to certain risks not presented by regulated exchange-traded futures contracts, including risks related to the liquidity and price histories of the relevant contracts. An Increase in the margin requirements for commodity futures contracts included in the Non-Securities-based Constituents may adversely affect the level of the Index. Futures exchanges require market participants to post collateral in order to open and to keep open positions in futures contracts. If an exchange increases the amount of collateral required to be posted to hold positions in commodity futures contracts underlying the Non-Securities-based Constituents, market participants who are unwilling or unable to post additional collateral may liquidate their positions, which may cause the price of the relevant commodity futures contracts to decline significantly. As a result, the level of the Index and the value of the CDs may be adversely affected. JPMS is a primary dealer in connection with purchases and sales of U.S. Treasury securities by the Federal Reserve and JPMS’s actions in that capacity may affect the level of the Index. JPMS is one of the primary dealers through which the Federal Reserve conducts open-market purchases and sales of U.S. Treasury and federal agency securities, including 2-Year Treasury Notes, 5-Year Treasury Notes and 10-Year Treasury Notes. Such activities may affect the prices and yields on the U.S. Treasury securities underlying the Constituents linked to U.S. government-issued debt securities and hence the level of the Index. JPMS has no obligation to take into consideration the Index when undertaking these activities. Correlation of performances among the Constituents may reduce the performance of the Index. Performances of the Constituents may become highly correlated from time to time, including, but not limited to, a period in which there is a substantial decline in a particular sector or asset type represented by the Constituents and which has a higher weight in the Index relative to any of the other sectors or asset types, as determined by the Index’s strategy. High correlation during periods of negative returns among Constituents representing any one sector or asset type could have an adverse effect on the Index. Changes in the value of the Constituents may offset each other. At a time when the value of a Constituent representing a particular asset class or geographic region -10-
increases, the value of other Constituents representing a different asset class or geographic region may not increase as much or may decline. Therefore, in calculating the level of the Index, increases in the values of some of the Constituents may be moderated, or more than offset, by lesser increases or declines in the values of other Constituents. Any Products linked to the Index will not be regulated by the Commodity Futures Trading Commission. An investment in any Products linked to the Index neither constitutes an investment in futures contracts, options on futures contracts nor a collective investment vehicle that trades in these futures contracts (i.e., the Products will not constitute a direct or indirect investment by a Contract Owner in the futures contracts), and a Contract Owner would not benefit from the regulatory protections of the Commodity Futures Trading Commission, commonly referred to as the “CFTC.” Among other things, this means that J.P. Morgan is not registered with the CFTC as a futures commission merchant and a Contract Owner would 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. For example, the price a Contract Owner pays to purchase any such Products would be used by J.P. Morgan for its own purposes and would not be subject to customer funds segregation requirements provided to customers that trade futures on an exchange regulated by the CFTC. Unlike an investment in any such Products, an investment in a collective investment vehicle that invests in 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 such Products would not be interests in a commodity pool, the Products would not be regulated by the CFTC as a commodity pool, J.P. Morgan would not be registered with the CFTC as a commodity pool operator, and a Contract Owner would not benefit from the CFTC’s or any nonU.S. regulatory authority’s regulatory protections afforded to persons who invest in regulated commodity pools. J.P. Morgan has not independently verified disclosures that were derived from publically available information. The disclosures contained in this index supplement derived from publicly available sources have not been independently verified by J.P. Morgan. J.P. Morgan has not participated, and will not participate, in the preparation of such documents or made any due diligence inquiry with respect to the issuer of a security on which relevant futures contracts or an index is linked. J.P. Morgan cannot give any assurance that all events occurring prior to the date of this disclosure (including events that would affect the accuracy or completeness of the publicly available documents of the issuer of such security) that would affect the closing price of that security will have been publicly disclosed. Subsequent disclosure of any of those events or the disclosure of or failure to disclose material future events concerning the issuer of any such security could adversely affect the Index. J.P. Morgan has no affiliation with the Underlying Index Sponsors J.P. Morgan is not affiliated with S&P Dow Jones Indices LLC, Deutsche Börse AG or Nikkei Inc. (the “Underlying Index Sponsors”) in any way (except for arrangements discussed below in “THE S&P GSCI INDICES — License Agreement”) and have no ability to control the Underlying Index Sponsors, including any errors in or discontinuation of disclosure regarding their methods or policies relating to the calculation of the Constituents. The Underlying Index Sponsors are under no obligation to continue to calculate their respective Constituents nor are they required to calculate any successor indices. If the Underlying Index Sponsors discontinue or suspend the calculation of a relevant index, it may become difficult to determine values that are relevant for calculations related to the Index and any Product linked to the Index. S&P Dow Jones Indices LLC may be required to replace a contract underlying an S&P GSCI 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 the underlying physical commodity included in the S&P GSCI Index. Data concerning this Designated Contract will be used to calculate the S&P GSCI Index. The termination or replacement of a futures contract on an established exchange occurs infrequently; however, if one or more Designated Contracts were to be terminated or replaced by -11-
an exchange, a comparable futures contract would be selected by the S&P GSCI Index Committee, as the case may be, if available, to replace each such Designated Contract. The termination or replacement of any Designated Contract may have an adverse impact on the value of the individual S&P GSCI Index. Suspension or disruptions of market trading in the commodity and related futures markets may adversely affect the value of any Products linked to the Index. Some of the potential Constituent sub-indices 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 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, 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, and can have further pronounced pricing volatility during extended periods of low liquidity. In respect of Constituent sub-indices that represent energy, it should be noted that due to the significant level of its continuous consumption, limited reserves, and oil cartel controls, energy commodities are subject to rapid price increases in the event of perceived or actual shortages.
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THE J.P. MORGAN MOZAIC INDEX (USD) General The J.P. Morgan MOZAIC Index (USD) (the “Index”) was developed and is maintained and calculated by J.P. Morgan Securities plc (“JPMS plc”). The description of the Index and methodology included in this index supplement is based on rules formulated by JPMS plc (the “Rules”). The Rules, and not this description, will govern the calculation and constitution of the Index and other decisions and actions related to their maintenance. The Rules in effect as of the date of this index supplement are included as part of the index supplement attached as Annex A to this index supplement. The Index is the intellectual property of JPMS plc, and JPMS plc reserves all rights with respect to its ownership of the Index. The Index is published to Bloomberg L.P. on the page “JMOZUSD Index.” Live calculation of the Index commenced on April 17, 2009 (the “Live Date”), with Index levels calculated on a hypothetical historical basis from January 1, 1999 (the “Index Start Date”). The initial level of the Index for January 1, 1999 was set at 100.00 (the “Base Level”). The Index tracks a dynamic, rules-based strategy offering notional exposure to a range of developed country government bond futures constituents (the “Government Bond Futures Constituents”) and developed country equity index futures constituents (the “Equity Index Futures Constituents” and together with the Government Bond Futures Constituents, the “Securities-based Constituents”) and exposure to certain listed excess return indices within the S&P GSCITM commodity index group (the “Non-Securities-based Constituents”, and together with the Securities-based Constituents, the “Constituents”). The strategy underlying the Index and the Rules:
tracks percentage changes in the daily-weighted prices and levels of selected Constituents, after adjusting for currency differences and the application of weights whose levels are determined and rebalanced on a monthly basis;
selects, based on recent past performance, Constituents to be tracked on a monthly basis (typically six Constituents) from a candidate list of 12 Constituents;
excludes Constituents with recent negative performance, regardless of their performance relative to others in the candidate list of 12 Constituents;
establishes weights for the selected Constituents based on a “risk parity” framework that looks to recent historical volatility; and
employs an exposure “flattening” feature to temporarily suspend exposures in the Constituents in the event recent overall performance has declined beyond a specified threshold.
To implement the foregoing strategy, the Rules contemplate a monthly rebalancing event, generally on the first weekday of each month, in respect of the Constituents. In the monthly rebalancing, the cumulative returns (in local currency terms, without adjusting for currency differences or the effect of compounding) of the 12 Constituents are measured over a recent 125-weekday observation period (approximately six months) (the “Lookback Period,” as defined in greater detail below). Each Constituent whose cumulative return in the Lookback Period is ranked in the highest six return levels w ill have a positive weight for the upcoming month so long as such Constituent’s cumulative performance over the Lookback Period was positive. The weights for each of the Constituents that did not have one of the six highest returns or whose returns were negative during the Lookback Period will be set to zero for the upcoming month. If a Constituent is selected for the upcoming month, then its weight will be determined, based on a “risk parity” framework, to be the weight that would have yielded during the Lookback Period an annualized volatility of 7.75%÷6, or approximately 1.29% (the “Constituent Target Volatility”), subject to an upperbound limit of 1,000% (the “Upper-Bound Limit”). The risk parity framework generally results in higher -13-
weights to selected Constituents that had lower historical volatility in the Lookback Period and lower weights to those that had higher historical volatility during the Lookback Period. The first weekday of a particular month is the Rebalancing Day (as defined below), u nless such weekday is not a Scheduled Trading Day (as defined below) or such weekday is a Disrupted Day (as defined below) with respect to a particular Constituent, in which case that Constituent’s weight for the upcoming month will remain the same as the prior month’s weight. In respect of each Constituent, on each Scheduled Trading Day that is not a Disrupted Day for such Constituent, if the Index level declines by more than 3.00% over the five -weekday period ending on the second weekday immediately preceding such Scheduled Trading Day, then, notwithstanding its weight at that time, the weight of such Constituent will be subject to a five-weekday “flattening” period (beginning on the weekday immediately following such Scheduled Trading Day), during which time its weight will temporarily be set to zero, unless such Constituent is already then subject to an existing exposure flattening period. A Constituent that is already then subject to an exposure flattening period will remain in its original exposure flattening period and cannot be subject to a new exposure flattening period until the completion of the original period. Constituents in respect of which a given weekday either is not a Scheduled Trading Day or is a Disrupted Day will not be subject to the commencement of an exposure flattening period on the following weekday. The Index does not track a hypothetical fixed level of investment in the Constituents, but rather the weighted percentage changes in the prices and levels of the Constituents. Accord ingly, the daily contribution of changes in Constituent prices and levels to changes in the Index level is not path dependent. Constituent weights are subject to a high upper-bound limit but are not subject to a separate leverage charge in the event weights exceed 100%. Individual and total weights of the Constituents can exceed 100% and each can be as low as zero, but Constituent weights can never be negative, or synthetically short, either in the aggregate or in respect of any single Constituent. To th e extent the sum of all Constituent weights is less than 100%, a portion of the Index may be considered notionally “uninvested” and the returns in respect of such portion will be zero. If the sum of all Constituent weights is equal to zero, the Index value will remain unchanged, reflecting zero returns for each day such sum is equal to zero. No assurance can be given that the Index’s strategy will be successful or that the Index will generate positive returns or will outperform any alternative strategy that might be constructed from the Constituents. Furthermore, the future volatility of any Constituent may not be consistent with its historical volatility. The actual realized volatility of any Constituent may be greater or less than the Constituent Target Volatility. The Index is described as tracking “notional” or “synthetic” exposures because there is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest. The Index merely references certain assets, the performance of which will be used as a reference point for calculating the Index level. Any Index level prior to the Live Date is a hypothetical historical, or “back-tested,” level. Such levels should not be taken as an indication of future performance, and no assurance can be given as to the levels or performance of the Index on a future date. Back-tested results are achieved by means of a retroactive application of a back-tested model designed with the benefit of hindsight. The Index Calculation Agent, in calculating hypothetical back-tested index levels, may have applied the disruption provisions specified in the Rules differently than it otherwise would have applied such provisions in a “live” calculation scenario. Additionally, the precision and rounding of the levels of the Index or a Constituent (or other calculated values) may differ from the methodology applied on a going forward basis. In calculating the hypothetical historical levels, the Index Calculation Agent may have made certain assumptions in respect of the timing surrounding the publication of certain indicators and Index levels. These assumptions may have a material impact on the back-tested levels occurring on or -14-
before the Live Date. No representation is made that any investment that references the Index will or is likely to achieve returns similar to any hypothetical historical returns. Alternative modeling techniques or assumptions might provide different results. Finally, back-tested results of past performance are neither an indicator nor a guarantee of future performance or returns. Actual results and performance may vary compared to such hypothetical back-tested levels.
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Index Sponsor; Index Calculation Agent; Amendment of Rules; Limitation of Liability JPMS plc is the sponsor of the Index (the “Index Sponsor”). The Index Sponsor is responsible for, among other things, the creation and design of the Index, the documentation of the Rules, and the appointment of the calculation agent of the Index (the “Index Calculation Agent”), which may be the Index Sponsor, a nonrelated third party or an affiliate or subsidiary of the Index Sponsor. As of the date of this Index Supplement, JPMS plc is also the Index Calculation Agent. The Index Calculation Agent is responsible for:
calculating the Index level in respect of each weekday in accordance with the Rules; and
determining (subject to the prior agreement of the Index Sponsor) if a Market Disruption Event, Disrupted Day or Extraordinary Event (or other similar event) has occurred and the related consequences and adjustments in accordance with the Rules.
The Index Calculation Agent will act in good faith and in a commercially reasonable manner with respect to the performance of its obligations and the exercise of its discretion pursuant to the Rules. The Index Sponsor may at any time and for any reason terminate the appointment of an Index Calculation Agent and appoint an alternative entity as the replacement Index Calculation Agent. While the Rules are intended to be comprehensive, ambiguities may arise. In those circumstances, the Index Calculation Agent will resolve those ambiguities in a reasonable manner and, if necessary, amend the Rules to reflect that resolution. The Index Calculation Agent’s determinations in respect of the Index and interpretations of the Rules will be final. The Index Sponsor may delegate and/or transfer any of its obligations or responsibilities in connection with the Index to one or more entities which it determines are appropriate. The Index Calculation Agent must obtain written permission from the Index Sponsor prior to any delegation or transfer of its responsibilities or obligations in connection with the Index to a third party. None of the Index Sponsor, the Index Calculation Agent or any of their respective affiliates or subsidiaries or any of their respective directors, officers, employees, representatives, delegates or agents (each a “Relevant Person”) will have any responsibility to any person (whether as a result of negligence or otherwise) for any determinations made or anything done (or omitted to be determined or done) in respect of the Index or publication of the Index Level (or failure to publish such level) and any use to which any person may put the Index or the Index Level. No Relevant Person will take the interests of Contract Owners into account in making any determination in respect of the Index. All determinations in respect of the Index and the Index Level will be final, conclusive and binding and no person will be entitled to make any claim against any of the Relevant Persons in respect thereof. Once a determination or calculation is made or action taken by the Index Calculation Agent in respect of the Index, neither the Index Calculation Agent nor any other Relevant Person will be under any obligation to revise any determination or calculation made or action taken for any reason. Constituents of the Index There are currently 12 Constituents in the Index, of which five are Government Bond Futures Constituents, three are Equity Index Futures Constituents and four are Non-Securities-based Constituents. Government Bond Futures Constituents and Equity Index Futures Constituents are also referred to as Securities-based Constituents. Government Bond Futures Constituents The Government Bond Futures Constituents consist of:
the CBOT 2-Year U.S. Treasury Note Futures Contract (Bloomberg ticker: ZT/TU), which is a series of -16-
exchange-traded futures contracts with expiry dates at three month intervals. As defined by the Relevant Exchange, the underlying unit of each contract is a single notional note issued by the U.S. Treasury that has a face value at maturity of $200,000, and Deliverable Grades of instruments eligible for settlement include U.S. Treasury notes with (a) an original term to maturity of not more than five years and three months and (b) a remaining term to maturity of not less than one year and nine months from the first day of the delivery month and not more than two years from the last day of the delivery month, where the invoice price equals the futures settlement price times a conversion factor, plus accrued interest, and the conversion factor is the price of the delivered note ($1 par value) to yield 6% (the “2 Year Note Futures”);
the CBOT 10-Year U.S. Treasury Note Futures Contract (Bloomberg ticker: ZN/TY), which is a series of exchange-traded futures contracts with expiry dates at three month intervals. As defined by the Relevant Exchange, the underlying unit of each contract is a single notional note issued by the U.S. Treasury that has a face value at maturity of $100,000, and Deliverable Grades of instruments eligible for settlement include U.S. Treasury notes with a remaining term to maturity of at least six and a half years, but not more than ten years, from the first day of the delivery month, where the invoice price equals the futures settlement price times a conversion factor, plus accrued interest, and the conversion factor is the price of the delivered note ($1 par value) to yield 6% (the “10 Year Note Futures”);
the EUREX Euro-Schatz Futures Contract (Bloomberg ticker: FGBS/DU), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange, each contract references certain notional debt instruments issued by the Federal Republic of Germany that have (a) a face value at maturity of 100,000 European Union euros, (b) a remaining term on the Delivery Day of not less than one and three quarter years, and not more than two and a quarter years, and (c) has a 6% coupon (the “Schatz Futures”);
the EUREX Euro-Bund Futures Contract (Bloomberg ticker: FGBL/RX), which is series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange, each contract references certain notional debt instruments issued by the Federal Republic of Germany that have (a) a face value at maturity of 100,000 European Union euros, (b) a remaining term on the Delivery Day of not less than eight and a half years, and not more than ten and half years, and (c) has a 6% coupon (the “Bund Futures”); and
the Osaka 10-Year Japanese Government Bond Futures Contract (Bloomberg ticker: JGB/JB), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. Each contract references a single notional bond issued by the State of Japan that has (a) a face value at maturity of 100,000,000 Japanese yen, (b) a remaining term to maturity of not less than seven years, and not more than eleven years, as of the issued date and delivery date and (c) pays a notional 6% coupon (the “JGB Futures”).
Equity Index Futures Constituents The Equity Index Futures Constituents consist of:
the CME Standard and Poor’s 500 Stock Price IndexTM Futures Contract (Bloomberg ticker: SP/SP), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange, each contract references the Standard and Poor’s 500 Stock Price Index, which provides a notional exposure equal to the product of the level of the Standard and Poor’s 500 Stock Price Index and $250 (the “S&P Futures”);
the EUREX DAX® Index Futures Contract (Bloomberg ticker: FDAX/DX), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange, each contract references the Deutscher Aktien Index which provides a notional exposure equal to the product of the level of the DAX Index and 25 European Union euros (the “DAX Futures”); and
the Osaka Nikkei 225 Index Futures Contract (Bloomberg ticker: NK/NK), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange, each contract references the Nikkei Stock Average (Nikkei 225 Index), which provides a notional exposure equal to the product of the level of the Nikkei 225 Index and 1,000 Japanese yen (the “Nikkei Futures”). -17-
Non-Securities-based Constituents The Index references the following Non-Securities-based Constituents:
the S&P GSCITM Agriculture Excess Return Index is published daily on Bloomberg Ticker SPGCAGP Index (the “GSCI AG Index”);
the S&P GSCITM Precious Metals OC Excess Return Index is published daily on Bloomberg Ticker SPGCPMP Index (the “GSCI PM Index”);
the S&P GSCITM Industrial Metals Excess Return Index is published daily on Bloomberg Ticker SPGCINP Index (the “GSCI IM Index”); and
the S&P GSCITM Energy Excess Return Index is published daily on Bloomberg Ticker SPGCENP Index (the “GSCI EN Index”).
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The following table sets forth the 12 current Constituents and also contains the related code or Bloomberg ticker, “Relevant Exchange” for each Constituent, to the extent applicable, as well as the local reporting currency of each Constituent’s price or level and (where applicable) the Reuters page referenced by the FX rate for each applicable Constituent, as the case may be.
No.
Government Bond Futures Constituents
1
2 Year Note Futures
ZT/TU
Chicago Board of Trade U.S. dollars or any successor
N/A
2
10 Year Note Futures
ZN/TY
Chicago Board of Trade U.S. dollars or any successor
N/A
3
Schatz Futures
FGBS/DU
EUREX Exchange or any successor
European Union euro
WMRSPOT05
4
Bund Futures
FGBL/RX
EUREX Exchange or any successor
European Union euro
WMRSPOT05
5
JGB Futures
JGB/JB
Osaka Stock Exchange or any successor
Japanese yen
WMRSPOT12
No.
Equity Index Futures Constituents
Code
Code
Reporting Currency
Relevant Exchange
Reporting Currency
Relevant Exchange
Reuters Page
Reuters Page
6
S&P Futures
SP/SP
Chicago Mercantile Exchange or any successor
U.S. dollars
N/A
7
DAX Futures
FDAX/DX
EUREX Exchange or any successor
European Union euro
WMRSPOT05
8
Nikkei Futures
NK/NK
Osaka Stock Exchange or any successor
Japanese yen
WMRSPOT12
No.
Non-Securities-based Constituents
Code
Reporting Currency
Relevant Exchange
Reuters Page
9
GSCI AG Index
SPGCAGP Index
N/A
U.S. dollars
N/A
10
GSCI PM Index
SPGCPMP Index
N/A
U.S. dollars
N/A
11
GSCI IM Index
SPGCINP Index
N/A
U.S. dollars
N/A
12
GSCI EN Index
SPGCENP Index
N/A
U.S. dollars
N/A
Monthly Rebalancing The Index Calculation Agent calculates the Index’s notional exposure to each Constituent as of its monthly Rebalancing Day (as defined below), and the rebalanced notional exposure to such Constituent is reflected in the Index beginning as of the weekday immediately following such Rebalancing Day. With respect to a particular Constituent, a “Rebalancing Day” means:
if the first weekday of a month is a Scheduled Trading Day for such Constituent and is not a Disrupted -19-
Day for such Constituent, such weekday will be the Rebalancing Day for such Constituent; and
if the first weekday of a month is not a Scheduled Trading Day or is a Disrupted Day for such Constituent, there shall be no Rebalancing Day that month for such Constituent, meaning that the Index Calculation Agent shall not rebalance such Constituent for the given month and its weight will remain unchanged from the prior month.
Rebalancing Weights Beginning as of the weekday immediately following the monthly Rebalancing Day for a particular Constituent, the weight assigned to such Constituent (the “Monthly Constituent Weight”) shall be determined as follows:
if the Return Signal (as defined below) for such Constituent for such month is equal to zero, then that Constituent’s Monthly Constituent Weight shall be zero;
otherwise, such Constituent’s Monthly Constituent Weight shall equal the lesser of (i) 1,000% (the “Upper-Bound Limit”) and (ii) the Constituent Target Volatility divided by a measure of such Constituent’s volatility over the Lookback Period (as defined below) (such Constituent’s “ Constituent Historical Volatility”), expressed as follows: Monthly Constituent Weight = Constituent Target Volatility ÷ Constituent Historical Volatility In this scenario, the Monthly Constituent Weight is based on a “risk parity” framework and is essentially the weight that would have yielded during the Lookback Period an annualized volatility equal to the Constituent Target Volatility of 7.75%÷6, or approximately 1.29%, subject to the Upper Bound Limit. The risk parity framework generally results in higher Monthly Constituent Weights to selected Constituents that had lower historical volatility in the Lookback Period and lower Monthly Constituent Weights to those that had higher historical volatility during the Lookback Period.
Thereafter, the Monthly Constituent Weight for such Constituent shall remain the same for each weekday until the application of the Monthly Constituent Weight from the next Rebalancing Day. Relevant Definitions The “Lookback Period” for a particular Constituent and a particular Rebalancing Day is the 125 weekday period ending on the second weekday prior to such Rebalancing Day. The “Return Signal” (which is referred to as the Trading Signal in the Rules) for a particular Constituent and a particular Rebalancing Day is either one or zero and is determined as follows:
the cumulative return (i.e., the sum of the Daily Returns (as defined below) for such Constituent) of each Constituent over the Lookback Period is determined;
the cumulative returns of all Constituents are ordered, and the six highest returns are determined;
if the cumulative return of such Constituent over the Lookback Period falls among the six highest returns and such cumulative return is greater than zero, it will be assigned a Return Signal of one (1) for the month; and
otherwise, such Constituent will be assigned a Return Signal of zero (0) for the month.
Note that more than six Constituents may meet these criteria if there is a tie for sixth place. In addition, if one or more Constituents with positive weights from the prior month are not rebalanced because the first weekday of the month is not a Scheduled Trading Day for such Constituents, more than six Constituents may -20-
have positive weights for a given month. “Constituent Historical Volatility” for a particular Constituent and a particular Rebalancing Day is calculated as the volatility of the Daily Returns of such Constituent over the relevant Lookback Period and is expressed mathematically as follows:
Where: σc,t
refers to the volatility of the relevant Constituent c as of the weekday t, which in this case is the second weekday immediately preceding the day originally scheduled for such Rebalancing Day;
Rc,t
refers to the Daily Return of the relevant Constituent c as of the weekday t, which in this case is the second weekday immediately preceding the day originally scheduled for such Rebalancing Day;
Rc,k
refers to the Daily Return of the relevant Constituent c as of the weekday k (with k=t referring to the second weekday immediately preceding the relevant Rebalancing Day, k=t-1 referring to the third weekday immediately preceding the day originally scheduled for such Rebalancing Day and so forth); and
“Scheduled Trading Day” means:
in respect of a Securities-based Constituent, each day on which the Relevant Exchange (see the table above under the heading “— Constituents of the Index”) is scheduled to be open for trading for its regular trading session, or in respect of any such exchange, any successor exchange therefor (broadly construed as occurring as a result of a merger, acquisition or otherwise); and
in respect of a Non-Securities-based Constituent, each day in respect of which the relevant index sponsor is scheduled to publish the Closing Price (as defined below) for such Constituent.
“Closing Price” means (i) in the case of a Securities-based Constituent, the official settlement price in respect of such Securities-based Constituent, as calculated and published by the applicable Constituent Sponsor (as defined below), and (ii) in the case of a Non-Securities-based Constituent, the official closing level in respect of such Non-Securities-based Constituent, as calculated and published by the applicable Constituent Sponsor. “Constituent Sponsor” means, in respect of any Constituent, the Relevant Exchange or any corporation or other entity that, as determined by the Index Calculation Agent: (a) is responsible for setting and reviewing the rules and procedures and the method of calculation and adjustments, if any, related to such Constituent and (b) announces (directly or through an agent) the level or price of such Constituent on a regular basis in respect of each Scheduled Trading Day. “Disrupted Day” means, in respect of any Scheduled Trading Day for any Constituent, the occurrence or existence of a Market Disruption Event (as defined below). “Market Disruption Event” means, in respect of any Scheduled Trading Day and a Constituent:
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in the case of a Securities-based Constituent, the failure of by the relevant Constituent Sponsor to calculate and publish the Closing Price of such Securities-based Constituent; and
in the case of a Non-Securities-based Constituent, the occurrence of any one or more of the following circumstances: o
material limitation, suspension, or disruption of trading in one or more of the futures contra cts included in such Non-Securities-based Constituent which results in a failure by the exchange on which such futures contract is traded to report a closing price for such futures contract on the day on which such event occurs or any succeeding day on which it continues;
o
the closing price for any futures contract included in such Non-Securities-based Constituent is a “limit price,” which means that the closing price for such futures contract for a day has increased or decreased from the previous day’s closing price by the maximum amount permitted under applicable exchange rules;
o
a failure by the applicable exchange or other price source to announce or publish the closing price for any futures contract included in such Non-Securities-based Constituent; or
o
the failure of by the relevant Constituent Sponsor to calculate and publish the Closing Price of such Non-Securities-based Constituent.
Calculation and Publication of the Index Level The Index Calculation Agent calculates the Index level in respect of each weekday; provided, however, that if a weekday is a Disrupted Day in respect of a Constituent and such Constituent’s Monthly Constituent Weight for such weekday is not equal to zero, the Index Calculation Agent will not publish an Index level for such weekday. The Index level was established as 100.00 as of January 1, 1999. The Index level in respect of each subsequent weekday is equal to the sum of the prior weekday’s Index level plus the product of (i) the prior weekday’s Index level and (ii) the sum of the weighted U.S. dollar-adjusted return, if any, since the prior weekday for each Constituent (subject to the application of any Exposure Flattening Period (as defined below) in respect of such Constituent on such new weekday). The Index level calculation is expressed mathematically as follows: Indext = Indext-1 x (1 + USD Returnst) Where: t
refers in this case to the weekday in respect of which the Index level is being calculated;
Indext
refers to the Index level in respect of weekday t;
Indext-1
refers to the Index level in respect of the weekday immediately preceding weekday t; and
USD Returnst
refers to the sum of the weighted U.S. dollar-adjusted return, if any, since the prior weekday for each Constituent.
However, if, as a result of the foregoing calculation, the Index level would be zero or less than zero, the Index level will as of that day and thereafter be set to zero. The Index is published to Bloomberg L.P. on the page “JMOZUSD Index.” The Index level will be expressed to at least two decimal places, as determined by the Index Calculation Agent in a commercially reasonable manner. The Index Calculation Agent may maintain the Index to a greater degree of specification and may calculate the Index level using such calculated levels. Neither the Index Sponsor nor the Index Calculation Agent is under any obligation to continue the -22-
calculation, publication and dissemination of the Index. Calculation of USD Returnst “USD Returnst” for the Index in respect of weekday t is calculated as the sum of the weighted U.S. dollaradjusted return, if any, since the prior weekday for each Constituent (subject to the application of any Exposure Flattening Period in respect of such Constituent for such new weekday). In order to calculate the weighted U.S. dollar-adjusted return, if any, of a Constituent, the unadjusted return for such Constituent for the relevant weekday (the “Daily Return”) must first be calculated. Securities-based Constituents. The Daily Return for a Securities-based Constituent is calculated with respect to each weekday as follows:
if such weekday is a Scheduled Trading Day for such Constituent and is not a Disrupted Day for such Constituent, and such weekday occurs in the period from, and including, the Roll Day (as defined below) in respect of the Second Near Futures Contract for such Constituent to, but excluding, the Expiry Last Trading Day (as defined below) of the First Near Futures Contract (as defined below) for such Constituent:
Where: “Rc,t”
means the Daily Return in respect of weekday t for Constituent c; means, in respect of a Scheduled Trading Day on weekday t for Constituent c that is not a Disrupted Day for such Constituent, the Closing Price of the Second Near Futures Contract (as defined below) for such Constituent published by the Relevant Exchange as of such Scheduled Trading Day; and
means, in respect of a Scheduled Trading Day on weekday t for Constituent c that is not a Disrupted Day for such Constituent, the Closing Price of the Second Near Futures Contract for such Constituent published by the Relevant Exchange in respect of the first immediately preceding Scheduled Trading Day that was not a Disrupted Day in respect of such Constituent.
if such weekday is a Scheduled Trading Day for such Constituent and is not a Disrupted Day for such Constituent, and such weekday is prior to the Roll Day in respect of the Second Near Futures Contract for such Constituent:
Where: “Rc,t”
means the Daily Return on weekday t for Constituent c; means, in respect of a Scheduled Trading Day on weekday t for Constituent c that is not a Disrupted Day for such Constituent, the Closing Price of the First Near Futures Contract for such Constituent published by the Relevant Exchange as of such Scheduled Trading Day; and
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means, in respect of a Scheduled Trading Day on weekday t for Constituent c that is not a Disrupted Day for such Constituent, the Closing Price of the First Near Futures Contract for such Constituent published by the Relevant Exchange in respect of the first immediately preceding Scheduled Trading Day that was not a Disrupted Day in respect of such Constituent.
if such weekday is not a Scheduled Trading Day for such Constituent or is a Disrupted Day for such Constituent, then the Daily Return for such Constituent for such weekday will be deemed to be zero.
Non-Securities-based Constituents. The Daily Return for a Non-Securities-based Constituent is calculated with respect each weekday as follows:
if such weekday is a Scheduled Trading Day for such Constituent and is not a Disrupted Day for such Constituent:
Where: “Cmdtc,t”
means, in respect of a Scheduled Trading Day on weekday t for Constituent c that is not a Disrupted Day for such Constituent, the Closing Price of such Constituent as of such Scheduled Trading Day; and
“Cmdtc,t-1”
means, in respect of a Scheduled Trading Day on weekday t for Constituent c that is not a Disrupted Day for such Constituent, the Closing Price of such Constituent in respect of the first immediately preceding Scheduled Trading Day that was not a Disrupted Day in respect of such Constituent.
if such weekday is not a Scheduled Trading Day for such Constituent or is a Disrupted Day for such Constituent, then the Daily Return for such Constituent for such weekday will be zero.
U.S. Dollar Adjustment to Daily Returns The next step in calculating the weighted U.S. dollar-adjusted return, if any, of a Constituent, is to convert the Daily Return of each Constituent that is quoted in a foreign currency into U.S. dollars, which is in effect a conversion of such Daily Return from a return expressed in foreign currency terms to a return expressed in U.S. dollar terms. The U.S. dollar-adjusted return Daily Return for a foreign-currency Constituent in respect of weekday t (“USDRc,t”) is calculated as follows:
Where: “Rc,t”
means the Daily Return in respect of weekday t for Constituent c; means the applicable FX Rate (as defined below) in respect of weekday t for Constituent c; and
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means the applicable FX Rate for the weekday immediately preceding weekday t for Constituent c. If any weekday is an FX Disrupted Day (as defined below), the Index Calculation Agent shall determine the FX Rate in respect of such weekday by taking into consideration all available information, that it, in good faith, deems relevant. Adjust the Weight for an Exposure Flattening Period The next step is to determine the then-applicable Monthly Constituent Weights; provided, however, that if there is an Exposure Flattening Period then in effect with respect to any Constituent for such weekday t, such Constituent’s Monthly Constituent Weight for such weekday t shall be set to zero. Applying the Weight The next step in calculating the weighted U.S. dollar-adjusted return, if any, of a Constituent, is to multiply the weight for such Constituent (as determined above) to the U.S. dollar-adjusted return for such Constituent (i.e., “USDRc,t” with respect to weekday t). Final Calculation Finally, when calculating “USD Returnst” for weekday t, the weighted U.S. dollar-adjusted return, if any, of each Constituent is added together. Relevant Definitions “Expiry Last Trading Day” means, in respect of a quarterly futures contract that is a Securities-based Constituent, the last Scheduled Trading Day for such contract as specified by the Relevant Exchange. “First Near Futures Contract” means, in respect of a Scheduled Trading Day, the quarterly futures contract with the Expiry Last Trading Day that follows most closely such Scheduled Trading Day. “Second Near Futures Contract” means, in respect of a Scheduled Trading Day, the quarterly futures contract with the Expiry Last Trading Day that follows most closely the Expiry Last Trading Day of the First Near Futures Contract. “FX Rate” means, in respect of a particular weekday:
for Constituents whose reporting currency is currently the European Union euro, the “Mid” exchange rate expressed as a number of U.S. dollars for one European Union euro, as published on the FX Price Source in respect of the Fixing Time for such weekday; and
for Constituents whose reporting currency is currently the Japanese yen, the “Mid” exchange rate expressed as a number of U.S. dollars for one Japanese yen, as derived from the number of Japanese yen for one U.S. dollar published on the FX Price Source in respect of the Fixing Time for such weekday. “FX Price Source” means, in respect of a particular Constituent, the corresponding Reuters page, as set forth in the table above under the heading “— Constituents of the Index,” or if the relevant rate is not published or announced by such FX Price Source at the relevant time, the successor or an alternative price source or page/publication for the relevant rate as determined by the Index Calculation Agent, in its sole discretion. “Fixing Time” means, in respect of a particular day, approximately 4:00 pm London, England time. “FX Disrupted Day” means, in respect of a particular day, where:
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the FX Rate is not available on the FX Price Source (as defined below) for the Fixing Time; or
an FX Disruption Event has occurred or is continuing. “FX Disruption Event” means, in respect of any applicable day, the occurrence or continuation of any of the following events (as determined by the Index Calculation Agent):
a “Convertibility Event,” which is an event that, in effect, prevents, restricts or delays a market participant’s ability to: o
convert an FX Currency (as defined below) in an FX Currency Pair (as defined below) into the other FX Currency in such FX Currency Pair through customary legal channels; or
o
convert an FX Currency in an FX Currency Pair into the other FX Currency in such FX Currency Pair at a rate at least as favorable as the rate for domestic institutions located in an FX Currency Jurisdiction (as defined below) in such FX Currency Pair;
a “Deliverability Event,” which is an event that has the effect of preventing, restricting or delaying a market participant from delivering an FX Currency from accounts inside an FX Currency Jurisdiction to accounts outside of such FX Currency Jurisdiction;
a “Liquidity Event,” which is the imposition by an FX Currency Jurisdiction (or any political subdivision or regulatory authority thereof) of any capital or currency controls (such as a restriction placed on the holding of assets in or transactions through any account in an FX Currency Jurisdiction by a non-resident of such FX Currency Jurisdiction) or the publication of any notice of an intention to do so, which the Index Calculation Agent determines is likely to materially affect an investment in an FX Currency Jurisdiction;
a “Taxation Event,” which is the implementation by an FX Currency Jurisdiction or the publication of any notice of an intention to implement any changes to the laws or regulations relating to foreign investment in such FX Currency Jurisdiction (including, but not limited to, changes in tax laws and/or laws relating to capital markets and corporate ownership), which the Index Calculation Agent determines are likely to materially affect an investment in such FX Currency Jurisdiction; or
a “Discontinuity Event” which is the occurrence or continuation of the pegging of one FX Currency in an FX Currency Pair to the other FX Currency in such FX Currency Pair, or any other currency or the controlled appreciation or devaluation by an FX Currency Jurisdiction (or any political subdivision or regulatory authority thereof) of an FX Currency, or any other currency, as determined by the Index Calculation Agent. “FX Currency” means U.S. dollars, European Union euros or Japanese yen. “FX Currency Pair” means:
U.S. dollars and European Union euros; and
U.S. dollars and Japanese yen. “FX Currency Jurisdiction” means the United States, the European Union or Japan, or any political subdivision or regulatory authority thereof.
Exposure Flattening Mechanism In respect of each Constituent and each weekday that is both a Scheduled Trading Day and not a Disrupted Day for such Constituent, if the Index level declines by more than 3.00% over the five-weekday period ending on the second weekday immediately preceding such Scheduled Trading Day, then, notwithstanding its weight at that -26-
time, such Constituent will be subject to a five-weekday exposure flattening period (beginning on the weekday immediately following such Scheduled Trading Day) (an “Exposure Flattening Period”) during which period such Constituent’s weight in the Index will be temporarily set to zero, unless such Constituent is already then subject to an existing Exposure Flattening Period. A Constituent that is already then subject to an Exposure Flattening Period will remain in its original Exposure Flattening Period and cannot be subject to a new Exposure Flattening Period until the completion of the original Exposure Flattening Period. Constituents in respect of which a given weekday either is not a Scheduled Trading Day or is a Disrupted Day will not be subject to the commencement of an Exposure Flattening Period on the following weekday. Roll Scheduled for Each Securities-based Constituent Each Securities-based Constituent rolls over as of its respective roll days as set out below (each such day, a “Roll Day”). Each such Roll Day shall be considered to be the Roll Day in respect of the futures contract that the exposure notionally rolls over to on such Roll Day, as set forth below:
In respect of the 2 Year Note Futures, the exposure notionally rolls over from the nearest delivery quarterly 2 Year Note Futures to the following 2 Year Note Futures on the last trading day of the option on the nearest delivery 2 Year Note Futures in the month before which such nearest delivery quarterly 2 Year Note Futures expires;
In respect of the 10 Year Note Futures, the exposure notionally rolls over from the nearest delivery quarterly 10 Year Note Futures to the following 10 Year Note Futures on the last trading day of the option on the nearest delivery 10 Year Note Futures in the month before which such nearest delivery quarterly 10 Year Note Futures expires;
In respect of the Schatz Futures, the exposure notionally rolls over from the nearest delivery quarterly Schatz Futures to the following Schatz Futures on the fifth calendar day of the month in which such nearest delivery quarterly Schatz Futures is due to expire;
In respect of the Bund Futures, the exposure notionally rolls over from the nearest delivery quarterly Bund Futures to the following Bund Futures on the fifth calendar day of the month in which such nearest delivery quarterly Bund Futures is due to expire;
In respect of the JGB Futures, the exposure notionally rolls over from the nearest delivery quarterly JGB Futures to the following JGB Futures on the tenth weekday prior to delivery of the front JGB Futures in the month in which such nearest delivery quarterly JGB Futures is due to expire;
In respect of the S&P Futures, the exposure notionally rolls over from the nearest delivery quarterly S&P Futures to the following S&P Futures on the third weekday prior to the Expiry Last Trading Day of such nearest delivery quarterly S&P Futures;
In respect of the DAX Futures, the exposure notionally rolls over from the nearest delivery quarterly DAX Futures to the following DAX Futures on the third weekday prior to the Expiry Last Trading Day of such nearest delivery quarterly DAX Future; and
In respect of the Nikkei Futures, the exposure notionally rolls over from the nearest delivery quarterly Nikkei Futures to the following Nikkei Futures on the second weekday prior to the Expiry Last Trading Day of such nearest delivery quarterly Nikkei Futures.
In respect of any scheduled Roll Day for a Securities-based Constituent where the immediately preceding Scheduled Trading Day (the “Original Scheduled Trading Day”) for such Constituent was a Disrupted Day for such Constituent (for these purposes, an “Affected Securities-based Constituent”), then the relevant Roll Day for the Affected Securities-based Constituent will be deemed to be the first weekday immediately following the first Scheduled Trading Day that is not a Disrupted Day for the Affected Securities-based Constituent, after the Original -27-
Scheduled Trading Day; provided, however, that if first Scheduled Trading Day that is not a Disrupted Day in respect of the Affected Securities-based Constituent (the “Affected Constituent Determination Day”) falls on or after the Expiry Last Trading Day, then the Index Calculation Agent will determine the Daily Return in respect of the Affected Securities-based Constituent and the Affected Constituent Determination Day pursuant to the formula set out in the second bullet point under “—Calculation and Publication of the Index Level – Calculation of USD 𝑓𝑟𝑜𝑛𝑡 Returnst – Securities-based Constituents” above, but using the Index Calculation Agent’s determination of 𝐹𝑐,𝑡 𝑓𝑟𝑜𝑛𝑡 and 𝐹𝑐,𝑡−1 in respect of the First Near Futures Contract as such First Near Futures Contract is determined in respect of the Original Scheduled Trading Day, acting in good faith and using such information and/or methods as it determines, in its reasonable discretion, are appropriate; provided further, however, that in the event that each of the 10 Scheduled Trading Days immediately following the scheduled Expiry Last Trading Day are Disrupted Days in respect of such Affected Securities-based Constituent, then in such case, that 10th Scheduled Trading Day shall be deemed to be the applicable Roll Day (notwithstanding that it is a Disrupted Day in respect of the Affected Securities-based Constituent), and the Index Calculation Agent shall implement a roll in respect of the Affected Securities-based Constituent acting in good faith using such information and/or methods as it determines, in its reasonable discretion, are appropriate. Amendments The Index Sponsor may amend the Rules as it deems appropriate. Such amendments may include (without limitation):
correcting or curing any errors, omission or contradictory provisions; or
modifications to the methodology described in the Rules (including, without limitation, a change in the frequency of calculation of the Index Level) that are necessary or desirable in order for the calculation of the Index to continue notwithstanding any economic, market, regulatory, legal, financial or other circumstances as of the Live Date of the Index; or
modifications of a formal, minor or technical nature.
The Index Sponsor will notify the Index Calculation Agent (if a different entity than the Index Sponsor) before making an amendment pursuant to this provision. The Index Sponsor may, but is not obliged to, take into account the views of the Index Calculation Agent regarding any proposed amendment. Following any amendment, the Index Sponsor will make available (as soon as practicable) the amended version of the Rules and will include the effective date of such amendment in the new version of the Rules. However, the Index Sponsor is under no obligation to inform any person about any amendments to the Index (except as required by law). Extraordinary Events The events described below under “Successor Constituents or Reference Data,” “—Change in Law,” “— Material Change” and “—Impairment of License or Other Rights,” “—Successor Currency or Change to an Underlying Currency” and “—Non-Publication of a Constituent as a Result of Cancellation of a Constituent” constitute “Extraordinary Events.” Successor Constituents or Reference Data If any of the Constituents, or any data or information referenced by a Constituent or the Index is:
not calculated and announced by the applicable Constituent Sponsor or the sponsor or provider of such data or information but is calculated and announced by a successor sponsor or provider acceptable to the Index Calculation Agent; or
replaced by a successor Constituent, successor data or successor information using, in the determination of -28-
the Index Calculation Agent, the same or substantially similar formula for and method of calculation as used in the calculation or preparation of such Constituent, data, or information , then such Constituent, data or information will be deemed to be the constituent, or reference data so calculated and announced by that successor sponsor or provider as the case may be with effect from a date determined by the Index Calculation Agent who may make such adjustments to the Rules as it determines appropriate to account for such change. Change in Law Without prejudice to the ability of the Index Calculation Agent to amend the Rules in respect of a Change in Law, the Index Calculation Agent may exclude or substitute any Constituent or other any data or information referenced by a Constituent or the Index:
following the occurrence (and/or continuation) of a Change in Law (as defined below); or
in circumstances where it considers it reasonably necessary to do so to reflect the objective of the Index, including (without prejudice to the generality of the foregoing) any perception among market participants generally that the published value of a Constituent or any data or information referenced by a Constituent or the Index is inaccurate (e.g., an exchange fails to correct such value of any affected futures contract),
and then the Index Calculation Agent may adjust the Rules as it determines in good faith to be appropriate to account for such exclusion or substitution on such date(s) selected by the Index Calculation Agent. “Change in Law” means, on or after the Live Date:
due to: o
the adoption of, or any change in, any applicable law, regulation, order or rule (including, without limitation, any tax law); or
o
the promulgation of, or any change in, the announcement or statement of a formal or informal interpretation by any court, tribunal or regulatory authority (or any representative thereof) with competent jurisdiction of any applicable law, rule, regulation or order (including, without limitation, as implemented by the U.S. Commodity and Futures Trading Commission, the U.S. Securities and Exchange Commission or any exchange or trading facility),
the Index Calculation Agent determines in good faith that
o
it is contrary to such law, rule, regulation or order for any market participants that are brokers or financial intermediaries (individually or collectively) to hold, acquire or dispose of (in whole or in part) a position or interest in or a transaction referencing or relating to the Index, any Constituent, or any component of the Index or any Constituent; or
o
holding a position or interest in or a transaction referencing or relating to the Index, any Constituent or any component of the Index or any Constituent is (or, but for the consequent disposal or termination thereof, would otherwise be) in excess of any allowable position limit(s) applicable to any market participants that are brokers or financial intermediaries (individually or collectively) under any such law, rule, regulation or order in relation to the Index, any Constituent or any component of the Index or any Constituent, including in any case traded on any exchange(s), market or other trading facility (including, without limitation, any Relevant Exchange); or
the occurrence or existence of any: o
suspension or limitation imposed on trading futures contracts (including, without limitation, referencing the Non-Securities-based Constituents); or -29-
o
any other event that causes trading in futures contracts (including, without limitation, referencing the Non-Securities-based Constituents) to cease.
Material Change On any weekday, if any Constituent Sponsor or any non-affiliated third party person that provides any data or information referenced by a Constituent or the Index makes a material change in the formula for or the method of calculating or preparation of such Constituent, data or information, which affects the ability of the Index Calculation Agent to calculate the Index Level, then the Index Calculation Agent may make such adjustment(s) that it determines to be appropriate to any variable, calculation, methodology or detail in the Rules to account for such modification. Such adjustment may occur prior to, on or after the date of such material change, depending on when such change is announced and when the Index Calculation Agent determines such change has occurred. Impairment of License or Other Rights If, at any time, any relevant license or other right or ability of the Index Calculation Agent or the Index Sponsor (or any of their affiliates) to use any Constituent or relevant data or information or to refer to the level or price or other information in respect of any Constituent or relevant data or information (or other component of the Index or another matter that could affect the Index) terminates, becomes impaired, ceases or cannot be obtained or will cease to be available on commercially reasonable terms or the Index Calculation Agent’s right or ability to use (i) the Constituent for the purposes of the Index or (ii) the Index in connection with any other license or sub-license agreement is otherwise impaired, ceases or cannot be obtained or will cease to be available on commercially reasonable terms (for any reason), then Index Calculation Agent may remove such Constituent or any other relevant data or information from the Index or substitute a successor constituent, data or information and may make such adjustment to these Rules as it determines appropriate to account for such change(s) on such date(s) selected by the Index Calculation Agent including, without limitation, selecting a replacement constituent, index or reference asset having similar characteristics to such Constituent and the date such replacement is effective. Changes in Currency or Change to an Underlying Currency If, at any time, any currency is lawfully eliminated, converted, redenominated or exchanged for any successor currency, then such currency shall be deemed replaced by such successor currency. To the extent that any such elimination, conversion, redenomination or exchange results in two or more currencies that were formerly associated with the original currency, the Index Calculation Agent may modify these Rules to account for such elimination, conversion, redenomination or exchange. For example, the Index Calculation Agent may select one of the applicable currencies to be a successor currency or amend the formulas for calculating the Index to account for the new exchange rate, if any. Non-Publication of a Constituent as a Result of Cancellation of a Constituent If a Constituent Sponsor or a Relevant Exchange, as the case may be, permanently cancels a Constituent (including, for the avoidance of doubt, amending the frequency or timing of the issuance of options or futures contracts, determined by reference to the frequency or timing as of the Live Date), and no successor index or contract exists that is acceptable to the Index Calculation Agent, the Index Calculation Agent shall either:
make such adjustment(s) that it determines to be appropriate to any variable, calculation, methodology, valuation terms or any other rule in relation to the Index to account for such cancellation, including but not limited to excluding or substituting the affected Constituent; or
cease to calculate and publish the Index Level.
Such adjustment may occur prior to, on or after the date of such cancellation, depending on when such cancellation is announced and when the Index Calculation Agent becomes aware of such change.
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Corrections in Respect of the Index If any publicly available financial information (including, but not limited to, interest rates, spot exchange rates, index levels, futures contract prices and volatility levels) published by the relevant financial information source selected by the Index Calculation Agent acting in good faith and used in any calculation or determination with respect to the Index and the Rules is subsequently corrected, or if the Index Calculation Agent identifies an error or omission in any of its calculations or determinations in respect of the Index, the Index Calculation Agent may, if the Index Calculation Agent determines that such error, omission or correction (as the case may be) is material and it is practicable, adjust or correct the relevant calculation or determination to take into account such correction as soon as reasonably practicable to do so.
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BACKGROUND ON THE UNDERLYING FUTURES CONTRACTS Futures contracts are contracts that legally obligate the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. Overview of Futures Market Futures contracts 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 index supplement, all of the Securities-based Constituents are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of an underlying asset or financial instrument during a stated delivery month for a fixed price. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the underlying asset or financial instrument is to be delivered by the seller (whose position is therefore described as “short”) and acquired by the purchaser (whose position is therefore described as “long”). A futures contract on a government bond typically permits satisfaction of the delivery obligation by delivery of any of the bonds referenced by that futures contract that meet the specification identified by the relevant exchange. The deliverable bonds may feature different coupons and maturities and consequently also different prices. At any given time, certain deliverable bonds will be more economical to acquire and deliver than others, which are commonly referred to as the “cheapest to deliver.” The price for such futures contracts on any day generally tracks the price of the particular bonds that are “cheapest to deliver” on such day. Since equity indices are not tangible items that can be purchased or sold directly, a futures contract on an equity index provides for the payment and receipt of cash based on the level of such equity index at settlement or liquidation of the futures contract. No purchase price is 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 it may be lower than 5% of the notional value of the contract. This margin deposit provides collateral for the obligations of the parties to the futures contract. By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. In the United States, futures contracts are traded on organized exchanges, known as “designated contract markets.” At any time prior to the expiration of a futures contract, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position, subject to the availability of a liquid secondary market. This operates to terminate the position and fix the trader’s profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a “futures commission merchant,” which is a member of the clearing house. Unlike equity securities, futures contracts, by their terms, have stated expirations at a specified point in time prior to expiration. At a specific point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular asset or financial instrument with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as “rolling.” For example, a market participant with a long position in a futures contract expiring in November who wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell the November contract, which serves to close out the existing long position, and buy a futures contract expiring in December. This will “roll” the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month. Futures exchanges and clearing houses in the United States are subject to regulation by the Commodity Futures Trading Commission. Exchanges may adopt rules and take other actions that affect trading, including -32-
imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. Futures markets outside the United States are generally subject to regulation by comparable regulatory authorities. The structure and nature of trading on non-U.S. exchanges, however, may differ from this description.
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BACKGROUND ON THE FEDERAL REPUBLIC OF GERMANY Any and all disclosures contained in this index supplement regarding the Federal Republic of Germany (“Germany”) and German debt securities, including Schatz, Bobl and Bund (the “German Bonds”), have been derived from publicly available documents, without independent verification. In connection with any offering of Products linked to this Index, J.P. Morgan has not participated in the preparation of those documents or made any due diligence inquiry with respect to the information provided in those documents. Furthermore, J.P. Morgan cannot give any assurance that all events occurring prior to the date of this index supplement (including events that would affect the accuracy or completeness of the publicly available documents) that would affect the performance of Germany or the German Bonds have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning Germany or the German Bonds described in those publicly available documents could affect the performance of the German Bonds and, therefore, the value of any Products linked to this Index. J.P. Morgan makes no representation to a Contract Owner as to the performance of Germany or the German Bonds. Germany Germany is a foreign sovereign government. Germany, as co-signatory with respect to Landwirtschaftliche Rentenbank and as guarantor and co-signatory with respect to KfW, has filed financial and other information with the SEC in registration statements under Schedule B of the Securities Act of 1933. Information filed by Germany with the SEC can be reviewed, without cost, electronically through a web site maintained by the SEC. The address of the SEC’s web site is http://www.sec.gov. Information filed with the SEC by Germany can be located by reference to Landwirtschaftliche Rentenbank’s CIK Code: 0001144797, and KfW’s CIK Code: 0000821533. In addition, information filed with the SEC can be inspected and copied at the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of this material can also be obtained from the Public Reference Section, at prescribed rates. Various third-party websites contain detailed information regarding Germany and its government, economy and fiscal affairs, including (i) http://www.cia.gov (World Factbook); (ii) http://databank.worldbank.org (World dataBank); and (iii) http://www.imf.org (International Monetary Fund). Information contained in these third-party websites is not incorporated by reference in, and should not be considered a part of, this index supplement. J.P. Morgan makes no representation or warranty as to the accuracy or completeness of information contained on these third-party websites. Germany and its various agencies and affiliates also maintain websites that contain such information, in English, including (i) http://www.deutsche-finanzagentur.de (Bundesrepublik Deutschland Finanzagentur GmbH); (ii) http://www.bundesbank.de (Deutsche Bundesbank); and (iii) http://www.destatis.de (Statistisches Bundesamt Deutschland). Information contained in these German websites is not incorporated by reference in, and should not be considered a part of, this index supplement. J.P. Morgan makes no representation or warranty as to the accuracy or completeness of information contained on these German websites. German Bonds The German Bonds are German-government debt securities issued by the German Finance Agency. The German Bonds pay a fixed coupon every year until maturity, at which point the holder is entitled to receive the final coupon payment and the return of the principal. The coupon rate for German Bond issuances varies, with the rate generally reflecting the market interest rate at the time of the first issue of the relevant German Bonds.
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BACKGROUND ON JAPAN Any and all disclosures contained in this index supplement regarding Japan and Japanese government bonds (“Japanese Bonds”) have been derived from publicly available documents, without independent verification. In connection with any offering of Products linked to this Index, J.P. Morgan has not participated in the preparation of those documents or made any due diligence inquiry with respect to the information provided in those documents. Furthermore, J.P. Morgan cannot give any assurance that all events occurring prior to the date of this index supplement (including events that would affect the accuracy or completeness of the publicly available documents) that would affect the performance of Japan or the Japanese Bonds have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning Japan or the Japanese Bonds described in those publicly available documents could affect the performance of the Japanese Bonds and, therefore, the value of any Products linked to this Index. J.P. Morgan makes no representation to a Contract Owner as to the performance of Japan or the Japanese Bonds. Japan Japan is a foreign sovereign government. Japan, as registrant, has filed financial and other information specified by the SEC in annual reports pursuant to the Securities Act of 1933. Additionally, Japan, as guarantor with respect to the Japan Finance Corporation, has filed financial and other information with the SEC in registration statements under Schedule B of the Securities Act of 1933. Information filed by Japan with the SEC can be reviewed, without cost, electronically through a web site maintained by the SEC. The address of the SEC’s web site is http://www.sec.gov. Information filed with the SEC by Japan as registrant can be located by reference to its CIK Code: 0000837056 and as guarantor by reference to Japan Finance Corporation’s CIK Code: 0001109604. In addition, information filed with the SEC can be inspected and copied at the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of this material can also be obtained from the Public Reference Section, at prescribed rates. Various third party websites contain detailed information regarding Japan and its government, economy and fiscal affairs, including (i) http://www.cia.gov (World Factbook); (ii) http://databank.worldbank.org (World dataBank); and (iii) http://www.imf.org (International Monetary Fund). Information contained in these third-party websites is not incorporated by reference in, and should not be considered a part of, this index supplement. J.P. Morgan makes no representation or warranty as to the accuracy or completeness of information contained on these third-party websites. Japan and its various agencies and affiliates also maintain websites that contain such information, in English, including (i) http://www.mof.go.jp (Ministry of Finance Japan); (ii) http://www.boj.or.jp (Bank of Japan); and (iii) http://www.stat.go.jp (Statistics Bureau and Director-General for Policy Planning of Japan). Information contained in these Japanese websites is not incorporated by reference in, and should not be considered a part of, this index supplement. J.P. Morgan makes no representation or warranty as to the accuracy or completeness of information contained on these Japanese websites. Japanese Bonds Japanese Bonds are Japan-government debt securities issued by the Ministry of Finance Japan. Japanese Bonds pay a fixed coupon every six months until maturity, at which point the holder is entitled to receive the final coupon payment and the return of the principal. The coupon rate for Japanese Bond issuances varies, with the rate generally reflecting the market interest rate at the time of the first issue of the Japanese Bonds.
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BACKGROUND ON THE S&P 500® INDEX All information contained in this index supplement regarding the S&P 500® Index, including, without limitation, its make-up, method of calculation and changes in its components, has been derived from publicly available information, without independent verification. This information reflects the policies of, and is subject to change by, S&P Dow Jones Indices LLC. The S&P 500 ® Index is calculated, maintained and published by S&P Dow Jones Indices LLC. S&P Dow Jones Indices LLC has no obligation to continue to publish, and may discontinue the publication of, the S&P 500® Index. The S&P 500® Index is reported by Bloomberg L.P. under the ticker symbol “SPX.” In July 2012, The McGraw-Hill Companies, Inc. (“McGraw-Hill”), the owner of the S&P Indices business, and CME Group Inc. (“CME Group”), the 90% owner of the CME Group and Dow Jones & Company, Inc. joint venture that owns the Dow Jones Indexes business, formed a new joint venture, S&P Dow Jones Indices LLC, which owns the S&P Indices business and the Dow Jones Indexes business, including the S&P 500 ® Index. 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 Dow Jones Indices LLC began to use a new methodology to calculate the Market Value of the S&P Component Stocks and on September 16, 2005, S&P Dow Jones Indices LLC completed its transition to the new calculation methodology. The 500 companies are not the 500 largest companies listed on the New York Stock Exchange (the “NYSE”) and not all 500 companies are listed on such exchange. S&P Dow Jones Indices LLC 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 Dow Jones Indices LLC 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 Dow Jones Indices LLC 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. The S&P 500® Index is a float-adjusted index. 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. Float adjustment excludes shares that are closely held by control groups, other publicly traded companies or government agencies. Beginning September 21, 2012, all share-holdings with a position greater than 5% of a stock’s outstanding shares, other than holdings by “block owners,” are removed from the float for purposes of calculating the S&P 500 ® Index. Generally, these “control holders” include officers and directors, private equity, venture capital & special equity firms, other publicly traded companies that hold shares for control, strategic partners, holders of restricted shares, ESOPs, employee and family trusts, foundations associated with the company, holders of unlisted share classes of stock or government entities at all levels (other than government retirement/pension funds) and any individual person who controls a 5% or greater stake in a company as reported in regulatory filings. Holdings by block owners, such as depositary banks, pension funds, mutual funds & ETF providers, 401(k) plans of the company, government retirement/pension funds, investment funds of insurance companies, asset managers and investment funds, independent foundations and savings and investment plans, are ordinarily considered to be part of the float. Prior to September 21, 2012, S&P Dow Jones Indices LLC defined three groups of shareholders whose holdings were subject to float adjustment if the relevant group’s holdings exceeding 10% of the outstanding shares: • holdings by other publicly traded corporations, venture capital firms, private equity firms, strategic partners, or leveraged buyout groups; -36-
• 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. Under these previous float-adjustment rules, in cases where holdings in a group exceeded 10% of the outstanding shares of a company, the holdings of that group were 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 and shares that trust beneficiaries may buy or sell without difficulty or significant additional expense beyond typical brokerage fees were part of the float. Treasury stock, stock options, equity participation units, warrants, preferred stock, convertible stock and rights are generally not part of the float. However, shares held in a trust to allow investors in countries outside the country of domicile (e.g., ADRs, CDIs and Canadian exchangeable shares) are normally part of the float unless those shares form a control block. If a company has more than one class of stock outstanding, shares in an unlisted or nontraded class are treated as a control block. For each stock, an investable weight factor (“IWF”) is calculated by dividing the available float shares by the total shares outstanding. Beginning September 21, 2012, available float shares are defined as total shares outstanding less shares held by control holders. Prior to September 21, 2012, available float shares were defined as the total shares outstanding less shares held in one or more of the three groups listed above where the group holdings exceeded 10% of the outstanding shares. The 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. As of the date of this index supplement, 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 S&P 500® US-75 Index comparable over time and is the manipulation point for all adjustments to the S&P 500 ® 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 spin-offs. 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 closing level of the S&P 500® Index. 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.
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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
Comments
Divisor Adjustment
Company added/ deleted divisor adjustment.
Net change in market value determines
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 the 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.
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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 the Market value of the S&P Component Stock. All stock split and dividend adjustments are made after the close of treading 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 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 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.
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BACKGROUND ON THE DAX® INDEX All information contained in this index supplement regarding the DAX® Index, including, without limitation, its make-up, method of calculation and changes in its components, has been derived from publicly available information, without independent verification. This information reflects the policies of, and is subject to change by, Deutsche Börse AG (“Deutsche Börse”). The DAX® Index is calculated, maintained and published by Deutsche Börse. Deutsche Börse has no obligation to continue to publish, and may discontinue publication of, the DAX® Index. The DAX® Index is reported by Bloomberg L.P. under the ticker symbol “DAX.” The DAX® Index comprises the 30 largest and most actively traded companies listed on the Frankfurt Stock Exchange. These companies are selected from the continuously traded companies in the Prime Standard Segment that meet certain selection criteria. To be listed in the Prime Standard, a company must meet minimum statutory requirements, which include the regular publication of financial reports, and must satisfy additional transparency requirements. The reference date of the DAX® Index is December 30, 1987. The DAX® Index is capital-weighted, meaning the weight of any individual issue is proportionate to its respective share in the overall capitalization of all index component issuers. The weight of any single company is capped at 10% of the DAX® Index capitalization, measured quarterly. Weighting is based exclusively on the free float portion of the issued share capital of any class of shares involved. Both the number of shares included in the issued share capital and the free float factor are updated on one day each quarter (the “chaining date”). The DAX® Index is a performance (i.e. total return) index, which reinvests all income from dividend and bonus payments in the DAX® Index portfolio. Methodology of the DAX® Index The Working Committee of Equity Indices and the Management Board of Deutsche Börse The Working Committee for Equity Indices (the “Committee”) advises Deutsche Börse on all issues related to the DAX® Index, recommending measures that are necessary in order to ensure the relevance of the DAX® Index range and the correctness and transparency of the DAX ® Index calculation process. In accordance with the various rules, the Committee pronounces recommendations in respect of the composition of the DAX ® Index. However, any decisions on the composition of and possible modifications to the DAX ® Index are exclusively taken by the Management Board of Deutsche Börse (the “Board”). These decisions are published in a press release and on Deutsche Börse’s publicly available website at www.deutsche-boerse.com in the evening after the Committee has concluded its meeting. Information contained in Deutsche Börse’s website is not incorporated by reference in, and should not be considered a part of, this pricing supplement. J.P. Morgan has not participated in the preparation of, or independently verified, any information contained on Deutsche Börse’s website. The Committee’s meetings usually take place on the third trading day in each of March, June, September and December. The date for the respective next meeting is announced via a press release on Deutsche Börse’s website on the evening of the current meeting. The so-called “equity index ranking” is published monthly by Deutsche Börse, containing all relevant data in respect of the key criteria order book turnover and market capitalization. This publication also serves the Committee as a basis for decision-making at its quarterly meetings. It is produced at the beginning of each month and published via the Internet. Free Float For the determination of the free float portion used to weight a company’s class of shares in the DAX ® Index and for the ranking lists, the following definition applies:
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1. All shareholdings of an owner which, on an accumulated basis, account for at least 5% of a company’s share capital attributed to a class of shares are considered to be non-free float. Shareholdings of an owner also include shareholdings: held by the family of the owner as defined by §15a of the German Securities Trading Act (“WpHG”); for which a pooling has been arranged in which the owner has an interest; managed or kept in safe custody by a third party for account of the owner; and held by a company which the owner controls as defined by Section 22(3) of the WpHG. 2. The definition of “non-free float”—irrespective of the size of a shareholding—covers any shareholding of an owner that is subject to a statutory or contractual qualifying period of at least six months with regard to its disposal by the owner. This applies only during the qualifying period. Shareholdings as defined by No. 1 above are counted as shareholdings for the calculation according to No. 1. Shares held by the issuing company (treasury shares) are always considered as block holdings and are not part of the free float of the share class. 3. As long as the size of such a shareholding does not exceed 25% of a company’s share capital, the definition of free float includes all shareholdings held by: asset managers and trust companies; investment funds and pension funds; and capital investment companies or foreign investment companies in their respective special fund assets with the purpose of pursuing short-term investment strategies. Such shares, for which the acquirer has at the time of purchase clearly and publicly stated that strategic goals are being pursued and that the intention is to actively influence the company policies and ongoing business of the company, are not considered as such a short-term investment. In addition, shares having been acquired through a public purchase offer are not considered as short-term investment. This does not apply to shareholdings managed or held in safe custody according to No. 1, or to venture capital companies, or other assets serving similar purposes. The shareholdings as defined by No. 1 above are not counted as shareholdings for the calculation according to No. 1. Index Composition Selection Criteria To be included or to remain in the DAX® Index, companies have to satisfy certain prerequisites. All classes of the company’s shares must: be listed in the Prime Standard Segment on the Frankfurt Stock Exchange; be traded continuously on Deutsche Börse’s electronic trading system Xetra ®; and show a free float portion of at least 10%. If, for any company, more than one class of shares fulfills the above criteria, only the respective larger or more liquid class can be included in the DAX® Index. Moreover, companies must either: have their headquarters (or operating headquarters) in Germany; or have a major share of the stock exchange turnover at the Frankfurt Stock Exchange and their juristic headquarters in the European Union (“EU”) or in a European Free Trade Association (“EFTA”) state. To preserve the character of the DAX® Index, the Board reserves the right to exclude certain companies from the DAX® Index in coordination with the Committee. One possible reason for such an exclusion could be that the applicable company is a foreign holding company with headquarters in Germany, but a clear focus on business activities abroad. For companies already part of the DAX® Index, the above paragraph does not apply. Companies that satisfied the prerequisites listed above are selected for inclusion in the DAX ® Index according exclusively to the following two key criteria: order book turnover on Xetra® and in Frankfurt floor trading (within the preceding twelve months); and -41-
free float market capitalization (determined using the average of the volume-weighted average price (“VWAP”) of the last 20 trading days prior to the last day of the month) on the last trading day of each month.
Taking these criteria into account, the Committee submits proposals to the Board to leave the current composition of the DAX® Index unchanged or to effect changes. The final decision as to whether or not to replace an index component issue is taken by the Board. These decisions will be directly reflected in the respective rankings. Adjustments to Index Composition Ordinary adjustments to the DAX® Index are made once each year in September, based on the following criteria:
Regular Exit (40/40 rule): an index component issue is removed from the DAX ® Index if its ranking in either exchange turnover or market capitalization is worse than 40, provided that there is an advancing issue ranking 35 or better in both criteria Regular Entry (30/30 rule): a company can be included in the DAX ® Index if it ranks 30 or better in both exchange turnover and market capitalization, provided there is an index component with a ranking worse than 35 in at least one criterion.
Furthermore, under the “fast-entry” and “fast-exit” rules, which are applied in March, June, September and December: Fast Exit (45/45 rule): an index component issue is removed from the DAX ® Index if its ranking in either exchange turnover or market capitalization is worse than 45, provided that an advancing issue ranks 35 or better in both criteria (35/35). If no such issue exists, the successor is determined by applying the criteria (35/40) and (35/45) successively. If no suitable issue can be found, no substitution will be carried out. Fast Entry (25/25 rule): a company can be included in the DAX ® Index if it ranks 25 or better in both exchange turnover and market capitalization. In return, the index component issue with a ranking worse than 35 in one criterion and the lowest market capitalization is removed. Where no such issue exists, the respective component issue with the lowest market capitalization is removed from the DAX® Index instead. In cases where there are several companies meeting the criteria for any of the above rules, the best and worst candidates according to market capitalization are included or removed from the DAX ® Index, respectively. In exceptional cases, including takeovers announced at short notice or significant changes in a company’s free float, the Board may—in agreement with the Committee—deviate from these rules. Based on the rankings and further criteria involved, the Committee recommends in these cases if—and if so, against which issuer—such company is to be admitted to the DAX ® Index. Finally, extraordinary adjustments to the index composition have to be performed, regardless of the “fastexit” or “fast-entry” rules, upon occurrence of specific events, such as insolvency. In addition, a company can be removed immediately if its index weight based on the actual market capitalization exceeds 10% and its annualized 30-day volatility exceeds 250%. The relevant figures are published by Deutsche Börse on a daily basis. The Board, in agreement with the Committee, may decide on the removal and may replace the company two full trading days after the announcement. Adjustments are also necessary in two scenarios in the mergers and acquisitions context: if an absorbing or emerging company meets basis criteria for inclusion in the DAX ® Index, as soon as the free float of the absorbed company falls below 10%, the company is removed from the DAX® Index under the ordinary or extraordinary adjustments described above. The absorbed company is replaced by the absorbing or emerging company on the same date; and if an absorbing company is already included in the DAX ® Index or does not meet the basis criteria for inclusion in the DAX® Index, as soon as the free float of the absorbed company falls below 10%, the company is removed from the DAX® Index under the ordinary or extraordinary
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adjustments described above. On the same date, the absorbed company is replaced by a new company determined by the Fast Exit Rule. The weight of the company represented in the DAX® Index is adjusted to the new number of shares on the quarterly date after the merger has taken place. Index Calculation The DAX® Index is weighted by market capitalization; however, only freely available and tradable shares (“free float”) are taken into account. The DAX® Index is a performance (i.e. total return) index, which reinvests all income from dividend and bonus payments in the DAX® Index portfolio. The DAX® Index Formula The DAX® Index is conceived according to the Laspeyres formula set out below: Indext = KT × ∑pit × ffiT × qiT × cit × Base ∑pi0 × qi0 cit
=
Adjustment factor of company i at time t
ffiT
=
Free float factor of share class i at time T
n
=
Number of shares in the DAX® Index
pi0
=
Closing price of share i on the trading day before the first inclusion in the DAX ® Index
piT
=
Price of share i at time t
qi0
=
Number of shares of company i on the trading day before the first inclusion in the DAX® Index
qiT
=
Number of shares of company i at time T
t
=
Calculation time of the DAX® Index
KT
=
The DAX® Index chaining factor valid as of chaining date T
T
=
Date of the last chaining
The formula set out below is equivalent in analytic terms, but designed to achieve relative weighting:
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The DAX® Index calculation can be reproduced in simplified terms by using the expression F i: Multiply the current price by the respective F i weighting factor; Take the sum of these products; and Divide this by the base value (A) which remains constant until a modification in the DAX® Index composition occurs. The Fi factors provide information on the number of shares required from each company to track the underlying DAX® Index portfolio. Calculation Frequency Index calculation is performed on every exchange trading day in Frankfurt, using prices traded on Deutsche Börse’s electronic trading system Xetra®, whereby the last determined prices are used. The DAX® Index is calculated continuously once a second or once a minute. The DAX ® Index is distributed as soon as current prices are available for all 30 index components included in the DAX ® Index (but no later than 9:03 a.m.). As long as opening prices for individual shares are not available, the particular closing prices of the previous day are taken instead for calculating the DAX® Index. In the event of a suspension during trading hours, the last price determined before such a suspension is used for all subsequent computations. If such suspension occurs before the start of trading, the closing price of the previous day is taken instead. The “official” closing index level is calculated using the respective closing prices (or last prices) established on Xetra®. Adjustments and Corrections The DAX® Index is adjusted for exogenous influences (e.g. price-relevant capital changes) by means of certain correction factors, assuming a reinvestment according to the “opération blanche.” If the absolute amount of the accumulated distributions (dividends, bonus and special distributions, spin-offs or subscription rights on other security-classes) between two regular chaining dates accounts for more than 10% of the market capitalization of the distributing company on the day before the first distribution, the part of the distribution exceeding the 10% will not be reinvested in a single stock but in the overall index portfolio per unscheduled chaining date. The working committee of Deutsche Börse reserves the right to correct any incorrect index values with immediate effect after becoming aware of such incorrect index values. A historical correction is usually applied as of the start of the calculation of the current business day. Deutsche Börse will inform the general public of any such corrections immediately.
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BACKGROUND ON THE NIKKEI 225 INDEX All information contained in this index supplement regarding the Nikkei 225 Index, including, without limitation, its make-up, method of calculation and changes in its components, has been derived from publicly available information without independent verification. This information reflects the policies of, and is subject to change by Nikkei Inc. The Nikkei 225 Index was developed by Nikkei Inc. and is calculated, maintained and published by Nikkei Inc. Nikkei Inc. has no obligation to continue to publish, and may discontinue the publication of, the Nikkei 225 Index. The Nikkei 225 Index is reported by Bloomberg L.P. under the ticker symbol “NKY.” The Nikkei 225 Index is a stock index that measures the composite price performance of selected Japanese stocks. The Nikkei 225 Index, as of the date of this index supplement, is based on 225 underlying stocks (the “Nikkei Underlying Stocks”) trading on the Tokyo Stock Exchange (“TSE”) representing a broad cross-section of Japanese industries. Non-ordinary shares, such as shares of ETFs, REITs, preferred stock or other preferred securities or tracking stocks are excluded from the Nikkei 225 Index. All 225 Nikkei Underlying Stocks are stocks listed in the First Section of the TSE. Stocks listed in the First Section of the TSE are among the most actively traded stocks on the TSE. Nikkei Inc. rules require that the 75 most liquid issues (one-third of the component count of the Nikkei 225 Index) be included in the Nikkei 225 Index. Nikkei Inc. first calculated and published the Nikkei 225 Index in 1970. Rules of the Periodic Review Nikkei Underlying Stocks are reviewed annually (the “periodic review”) in accordance with the following rules, and results of the review are applied on the first trading day in October. Results of the review become effective on the first trading day of October, and there is no limit to the number of Nikkei Underlying Stocks that can be affected. Stocks selected by the procedures outlined below are presented as candidates to a committee comprised of academics and market professionals for comment; based on comments from the committee, Nikkei Inc. determines and announces any changes to the Nikkei Underlying Stocks. High Liquidity Group The top 450 most liquid stocks are chosen from the TSE First Section. For purposes of this selection, liquidity is measured by (i) trading volume in the preceding 5-year period and (ii) the magnitude of price fluctuation by volume in the preceding 5-year period. These 450 stocks constitute the “High Liquidity Group” for the review. Those Nikkei Underlying Stocks that are not in the High Liquidity Group are removed. Those stocks that are not currently Nikkei Underlying Stocks but that are in the top 75 of the High Liquidity Group are added. Sector Balance The High Liquidity Group is then categorized into the following six sectors: Technology, Financials, Consumer Goods, Materials, Capital Goods/Others and Transportation and Utilities. These six sector categories are further divided into 36 industrial classifications as follows:
Technology – Pharmaceuticals, Electrical machinery, Automobiles, Precision Machinery, Telecommunications; Financials – Banks, Miscellaneous Finance, Securities, Insurance; Consumer Goods – Marine Products, Food, Retail, Services; Materials – Mining, Textiles, Paper and Pulp, Chemicals, Oil, Rubber, Ceramics, Steel, Nonferrous Metal, Trading House; Capital Goods/Others – Construction, Machinery, Shipbuilding, Transportation, Equipment, Miscellaneous Manufacturing, Real Estate; and Transportation and Utilities – Railroads and Busses, Trucking, Shipping, Airlines, Warehousing, Electric Power, Gas.
The “appropriate number” of constituents for each sector is defined to be half the number of stocks in -45-
that sector. After the liquidity-based adjustments, discussed above, a rebalancing is conducted if any of the sectors are over- or under-represented. The degree of representation is evaluated by comparing the actual number of constituents in the sector against the appropriate number for that sector. For over-represented sectors, current constituents in the sector are deleted in the order of liquidity (lowest liquidity first) to correct the overage. For under-represented sectors, non- constituent stocks are added from the High Liquidity Group in the order of liquidity (highest liquidity first) to correct the shortage. Extraordinary Replacement Rules Nikkei Underlying Stocks removed from the TSE First Section are deleted from the Nikkei 225 Index. Reasons for removal from the TSE First Section include: designation as a “security to be delisted” or actual delisting by reason of bankruptcy (including filing under the Corporate Reorganization Act, Civil Rehabilitation Act or liquidation), delisting due to corporate restructuring such as merger, share exchange or share transfer, designation as a “security to be delisted” or actual delisting due to excess debt or transfer to the Second Section. In addition, a component stock transferred to the “Kanri-Post” (Posts for stocks under supervision) is in principle a candidate for deletion. However, the decision to delete such candidates will be made by examining the sustainability and the probability of delisting in the individual case. When a Nikkei Underlying Stock is deleted from the Nikkei 225 Index as outlined in the preceding paragraph, a new Nikkei Underlying Stock will be selected and added, in principle, from the same sector of the High Liquidity Group in order of liquidity. Notwithstanding the foregoing, the following rules may apply depending on the timing and circumstances of the deletion: (i) when such deletion is scheduled close to the periodic review, additional stocks may be selected as part of the periodic review process and (ii) when multiple deletions are scheduled in a season other than the periodic review, additions may be selected using the sector balancing rules outlined above. Procedures to Implement Constituent Changes As a general rule, for both the periodic review and the extraordinary replacement rules, additions and deletions are made effective on the same day in order to keep the number of Nikkei Underlying Stocks 225. However, under the circumstances outlined below, when an addition cannot be made on the same day as a deletion, the Nikkei 225 Index may be calculated with fewer than 225 Nikkei Underlying Stocks. In this case, the divisor is adjusted to ensure continuity. The first instance when the Nikkei 225 Index may be calculated with fewer than 225 Nikkei Underlying Stocks is when a Nikkei Underlying Stock is delisted by reason of share exchange or transfer and the succeeding company becomes listed a short period of time later. The second instance is when a Nikkei Underlying Stock is deleted due to a sudden announcement of bankruptcy, or is designated as a “security to be delisted” for the same reason, and there is not sufficient time to add a new Nikkei Underlying Stock in the same day. Calculation of the Nikkei 225 Index The Nikkei 225 Index is a modified, price-weighted index (i.e., a Nikkei Underlying Stock’s weight in the index is based on its price per share rather than the total market capitalization of the issuer) which is calculated by (i) multiplying the per share price of each Nikkei Underlying Stock by the corresponding weighting factor for such Nikkei Underlying Stock (a “Weight Factor”), (ii) calculating the sum of all these products and (iii) dividing such sum by a divisor (the “Divisor”). The Divisor was initially set at 225 for the date of May 16, 1949 using historical numbers from May 16, 1949, the date on which the TSE was reopened. The Divisor was 25.473 as of November 4, 2014, and is subject to periodic adjustments as set forth below. Each Weight Factor is computed by dividing ¥50 by the par value of the relevant Nikkei Underlying Stock, so that the share price of each Nikkei Underlying Stock when multiplied by its Weight Factor corresponds to a share price based on a uniform par value of ¥50. The stock prices used in the calculation of the Nikkei 225 Index are those reported by a primary market for the Nikkei Underlying Stocks (currently the TSE). The level of the Nikkei 225 Index is calculated once per minute during TSE trading hours. In order to maintain continuity in the Nikkei 225 Index in the event of certain changes due to non-market -46-
factors affecting the Nikkei Underlying Stocks, such as the addition or deletion of stocks, substitution of stocks, stock splits or distributions of assets to stockholders, the Divisor used in calculating the Nikkei 225 Index is adjusted in a manner designed to prevent any instantaneous change or discontinuity in the level of the Nikkei 225 Index. Thereafter, the Divisor remains at the new value until a further adjustment is necessary as the result of another change. As a result of such change affecting any Nikkei Underlying Stock, the Divisor is adjusted in such a way that the sum of all share prices immediately after such change multiplied by the applicable Weight Factor and divided by the new Divisor (i.e., the level of the Nikkei 225 Index immediately after such change) will equal the level of the Nikkei 225 Index immediately prior to the change. The Tokyo Stock Exchange The TSE is one of the world’s largest securities exchanges in terms of market capitalization. Trading hours are currently from 9:00 a.m. to 11:00 a.m. and from 12:30 p.m. to 3:00 p.m., Tokyo time, Monday through Friday. Due to the time zone difference, on any normal trading day the TSE will close prior to the opening of business in New York City on the same calendar day. Therefore, the closing level of the Nikkei 225 Index on a trading day will generally be available in the United States by the opening of business on the same calendar day. The TSE has adopted certain measures, including daily price floors and ceilings on individual stocks, intended to prevent any extreme short-term price fluctuations resulting from order imbalances. In general, any stock listed on the TSE cannot be traded at a price lower than the applicable price floor or higher than the applicable price ceiling. These price floors and ceilings are expressed in absolute Japanese yen, rather than percentage limits based on the closing price of the stock on the previous trading day. In addition, when there is a major order imbalance in a listed stock, the TSE posts a “special bid quote” or a “special asked quote” for that stock at a specified higher or lower price level than the stock’s last sale price in order to solicit counter-orders and balance supply and demand for the stock. Prospective investors should also be aware that the TSE may suspend the trading of individual stocks in certain limited and extraordinary circumstances, including, for example, unusual trading activity in that stock. As a result, changes in the Nikkei 225 Index may be limited by price limitations or special quotes, or by suspension of trading, on individual stocks that make up the Nikkei 225 Index, and these limitations, in turn, may adversely affect the value of any Products linked to the Index.
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BACKGROUND ON THE S&P GSCI INDICES All information contained in this index supplement regarding the S&P GSCI Indices (as defined below), including, without limitation, their make-up, method of calculation and changes in their components, has been derived from publicly available information, without independent verification. This information reflects the policies of, and is subject to change by, S&P Dow Jones Indices LLC, the publisher of the S&P GSCI Indices. The S&P GSCI Indices are determined, composed and calculated by S&P Dow Jones Indices LLC, without regard to any Products linked to the Index. S&P Dow Jones Indices LLC acquired the rights to the S&P GSCI Indices from Goldman, Sachs & Co. in 2007. Goldman, Sachs & Co. established and began calculating the S&P GSCI™ in May 1991. The former name of the S&P GSCI™ was the Goldman Sachs Commodity Index, or GSCI®. S&P Dow Jones Indices LLC has no obligation to continue to publish, and may discontinue publication of, any S&P GSCI Index. In July 2012, McGraw-Hill, the owner of the S&P Indices business, and CME Group, the 90% owner of the CME Group and Dow Jones & Company, Inc. joint venture that owns the Dow Jones Indexes business, formed a new joint venture, S&P Dow Jones Indices LLC, which owns the S&P Indices business and the Dow Jones Indexes business, including the S&P GSCI Indices. Any Products linked to the Index may be linked in whole or in part to the performance of the S&P GSCI™ Index (“S&P GSCI™”), the S&P GSCI™ Light Energy Index or certain of the S&P GSCI™’s commodity sector sub- indices: the S&P GSCI™ Agriculture Index, the S&P GSCI™ Energy Index, the S&P GSCI™ Industrial Metals Index, the S&P GSCI™ Livestock Index and the S&P GSCI™ Precious Metals Index (each a “S&P GSCI Sector Index,” and together, the “S&P GSCI Sector Indices”), or the S&P GSCI™’s single commodity subindices (each a “S&P GSCI Single Component Index,” and collectively, the “S&P GSCI Single Component Indices”). The S&P GSCI Single Component Indices and S&P GSCI Sector Indices are referred to collectively as the “S&P GSCI Component Indices,” and together with the S&P GSCI™ and the S&P GSCI™ Light Energy Index, the “S&P GSCI Indices,” and each, a “S&P GSCI Index.” If any Products linked to the Index are linked to any S&P GSCI Single Component Index, any relevant disclosure for such S&P GSCI Single Component Index will be provided in the relevant terms supplement. S&P Dow Jones Indices LLC publishes excess return and total return versions of each of the S&P GSCI Indices. The relevant terms supplement will specify whether any Products linked to the Index are linked to the excess return or total return version of the S&P GSCI Indices. The excess return versions of the S&P GSCI Indices is based on price levels of the futures contracts included in that S&P GSCI Index as well as the discount or premium obtained by “rolling” hypothetical positions in those contracts forward as they approach delivery. The total return versions of the S&P GSCI Indices incorporate the returns of the excess return versions, except that the total return versions also reflect interest earned on hypothetical, fully collateralized contract positions on the included commodities. The S&P GSCI™ is an index on a world production-weighted basket of principal non-financial commodities (i.e., physical commodities) that satisfy specified criteria. The S&P GSCI™ is designed to be a measure of the performance over time of the markets for these commodities. The only commodities represented in the S&P GSCI™ are those physical commodities on which active and liquid contracts are traded on trading facilities in major industrialized countries. The commodities included in the S&P GSCI™ are weighted, on a production basis, to reflect the relative significance (in the view of S&P, as described below) of such commodities to the world economy. The fluctuations in the value of the S&P GSCI™ are intended generally to correlate with changes in the prices of such physical commodities in global markets. The S&P GSCI™ has been normalized such that its hypothetical level on January 2, 1970 was 100. Futures contracts on the S&P GSCI™, and options on such futures contracts, are currently listed for trading on the Chicago Mercantile Exchange. The S&P GSCI™ Light Energy Index is composed of the same commodity futures contracts as the S&P GSCI™ but with those weights for contracts in the energy sector having been divided by 4. Because the weights of energy-related S&P GSCI™ commodities are reduced in the S&P Light Energy Index relative to the S&P GSCI™, the relative weights of the remaining S&P GSCI™ commodities are necessarily increased. As a result, although the S&P Light Energy Index contains all of the S&P GSCI™ commodities that are included in the S&P GSCI™, they are not world-production weighted in the same manner as the S&P GSCI™ and may not serve as a benchmark for changes in inflation or other economic factors. In particular, because of the significance of energy-related -48-
commodities to the world economy, a significant reduction in the weights of these commodities in the S&P GSCI™ Light Energy Index will substantially limit the effect of changes in energy prices on the S&P GSCI™ Light Energy Index. Increases in the prices of energy commodities, therefore, will not increase the level of the S&P GSCI™ Light Energy Index to the same extent as the S&P GSCI™. The S&P GSCI™ Agriculture Index is a world production-weighted index of certain agricultural commodities in the world economy, including Wheat, Kansas Wheat, Corn, Soybeans, Cotton, Sugar, Coffee and Cocoa. The S&P GSCI™ Energy Index is a world production-weighted index of certain energy commodities in the world economy, including Crude Oil, Brent Crude Oil, RBOB Gasoline, Heating Oil, Gasoil and Natural Gas. The S&P GSCI™ Industrial Metals Index is a world production-weighted index of certain industrial metals commodities in the world economy, including High Grade Primary Aluminum, Copper, Standard Lead, Primary Nickel and Special High Grade Zinc. The S&P GSCI™ Livestock Index is a world production-weighted index of certain livestock commodities in the world economy, including live cattle, feeder cattle and lean hogs. The S&P GSCI™ Precious Metals Index is a world production-weighted index consisting of two precious metals commodities in the world economy: Gold and Silver. Set forth below is a summary of the methodology used to calculate the S&P GSCI Indices. Because the S&P GSCI™ is the base index of the S&P GSCI Component Indices, the methodology for compiling the S&P GSCI™ relates as well to the methodology of compiling the S&P GSCI Component Indices. Each of the S&P GSCI Component Indices is calculated in the same manner as the S&P GSCI™, except that (i) the daily contract reference price, CPWs and roll weights (each as discussed below) used in performing those calculations are limited to those of the commodities included in the relevant S&P GSCI Component Index and (ii) each S&P GSCI Component Index has a separate normalizing constant (discussed below). The methodology for determining the composition and weighting of the S&P GSCI™ and for calculating its value is subject to modification in a manner consistent with the purposes of the S&P GSCI™, as described below. S&P Dow Jones Indices LLC makes the official calculations of the S&P GSCI Indices. The Index Committee and the Index Advisory Panel S&P Dow Jones Indices LLC has established an index committee (the “Index Committee”) to oversee the daily management and operations of the S&P GSCI™, and is responsible for all analytical methods and calculation of the S&P GSCI Indices. The Index Committee consists of full- time professional members of S&P Dow Jones Indices LLC’s staff. At each meeting, the Index Committee reviews any issues that may affect index constituents, statistics comparing the composition of the indices to the market, commodities that are being considered as candidates for addition to an index and any significant market events. In addition, the Index Committee may revise index policy covering rules for selecting commodities or other matters. S&P Dow Jones Indices LLC considers information about changes to its indices and related matters to be potentially market-moving and material. Therefore, all Index Committee discussions are confidential. S&P Dow Jones Indices LLC has established an index advisory panel (the “Advisory Panel”) to assist it in connection with the operation of the S&P GSCI™. The Advisory Panel meets on an annual basis and at other times at the request of the Index Committee. The principal purpose of the Advisory Panel is to advise the Index Committee with respect to, among other things, the calculation of the S&P GSCI™, the effectiveness of the S&P GSCI™ as a measure of commodity futures market performance and the need for changes in the composition or in the methodology of the S&P GSCI™. The Advisory Panel acts solely in an advisory and consultative capacity; the Index Committee makes all decisions with respect to the composition, calculation and operation of the S&P GSCI™. Composition of the S&P GSCI™ In order to be included in the S&P GSCI™, a contract must satisfy the following eligibility criteria:
the contract must be in respect of a physical commodity and not a financial commodity;
the contract must have a specified expiration or term or provide in some other manner for delivery or settlement at a specified time, or within a specified period, in the future; -49-
the contract must, at any given point in time, be available for trading at least five months prior to its expiration or such other date or time period specified for delivery or settlement;
the contract must be traded on an exchange, facility or other platform (referred to as a “trading facility”) that allows market participants to execute spread transactions, through a single order entry, between the pairs of contract expirations included in the S&P GSCI™ that, at any given point in time, will be involved in the rolls to be effected in the next three roll periods (defined below);
the contract must be denominated in U.S. dollars; and
the contract must be traded on or through a trading facility that has its principal place of business or operations in a country that is a member of the Organization for Economic Cooperation and Development and that: o
makes price quotations generally available to its members or participants (and to S&P Dow Jones Indices LLC) in a manner and with a frequency that is sufficient to provide reasonably reliable indications of the level of the relevant market at any given point in time;
o
makes reliable trading volume information available to S&P Dow Jones Indices LLC with at least the frequency required by S&P Dow Jones Indices LLC to make the monthly determinations;
o
accepts bids and offers from multiple participants or price providers; and
o
is accessible by a sufficiently broad range of participants
The price of the relevant contract that is used as a reference or benchmark by market participants (referred to as the “daily contract reference price”) generally must have been available on a continuous basis for at least two years prior to the proposed date of inclusion in the S&P GSCI™. In appropriate circumstances, S&P Dow Jones Indices LLC may determine that a shorter time period is sufficient or that historical daily contract reference prices for such contract may be derived from daily contract reference prices for a similar or related contract. The daily contract reference price may be (but is not required to be) the price (a) used by the relevant trading facility or clearing facility to determine the margin obligations (if any) of its members or participants or margining transactions or for other purposes or (b) referred to generally as the reference, closing or settlement price of the relevant contract. At and after the time a contract is included in the S&P GSCI™, the daily contract reference price for such contract must be published between 10:00 a.m. and 4:00 p.m., New York City time, on each business day relating to such contract by the trading facility on or through which it is traded and must generally be available to all members of, or participants in, such facility (and to S&P Dow Jones Indices LLC) on the same day from the trading facility or through a recognized third-party data vendor. Such publication must include, at all times, daily contract reference prices for at least one expiration or settlement date that is five months or more from the date the determination is made, as well as for all expiration or settlement dates during such five-month period. For a contract to be eligible for inclusion in the S&P GSCI™, volume data with respect to such contract must be available for at least the three months immediately preceding the date on which the determination is made. The following eligibility criteria apply:
In order to be added to the S&P GSCI™, a contract that is not included in the S&P GSCI™ at the time of determination and that is based on a commodity that is not represented in the S&P GSCI™ at such time must have an annualized total dollar value traded over the relevant period of at least U.S. $15 billion. The total dollar value traded is the dollar value of the total quantity of the commodity underlying transactions in the relevant contract over the period for which the calculation is made, based on the average of the daily contract reference prices on the last day of each month during the period. -50-
In order to continue to be included in the S&P GSCI™, a contract that is already included in the S&P GSCI™ at the time of determination and that is the only contract on the relevant commodity included in the S&P GSCI™ must have an annualized total dollar value traded of at least U.S. $5 billion over the relevant period and of at least U.S. $10 billion during at least one of the three most recent annual periods used in making the determination.
In order to be added to the S&P GSCI™, a contract that is not included in the S&P GSCI™ at the time of determination and that is based on a commodity on which there are one or more contracts already included in the S&P GSCI™ at such time must have an annualized total dollar value traded over the relevant period of at least U.S. $30 billion.
In order to continue to be included in the S&P GSCI™, a contract that is already included in the S&P GSCI™ at the time of determination and that is based on a commodity on which there are one or more contracts already included in the S&P GSCI™ at such time must have an annualized total dollar value traded, over the relevant period of at least U.S. $10 billion over the relevant period and of at least U.S. $20 billion during at least one of the three most recent annual periods used in making the determination.
In addition to the volume requirements described above, a contract must have a minimum reference percentage dollar weight:
In order to continue to be included in the S&P GSCI™, a contract that is already included in the S&P GSCI™ at the time of determination must have a reference percentage dollar weight of at least 0.10%. The reference percentage dollar weight of a contract is determined by multiplying the CPW (defined below) of a contract by the average of its daily contract reference prices on the last day of each month during the relevant period. These amounts are summed for all contracts included in the S&P GSCI™ and each contract’s percentage of the total is then determined.
In order to be added to the S&P GSCI™, a contract that is not included in the S&P GSCI™ at the time of determination must have a reference percentage dollar weight of at least 1.00% at the time of determination.
In the event that two or more contracts on the same commodity satisfy the eligibility criteria, such contracts are included in the S&P GSCI™ in the order of their respective total quantity traded during the relevant period (determined as the total quantity of the commodity underlying transactions in the relevant contract), with the contract having the highest total quantity traded being included first. No further contracts are included if such inclusion results in the portion of the S&P GSCI™ attributable to such commodity exceeding a particular level. If under the procedure set forth in the preceding paragraph, additional contracts could be included with respect to several commodities at the same time, the procedure is first applied to the commodity that has the smallest portion of the S&P GSCI™ attributable to it at the time of determination. Subject to the other eligibility criteria, the contract with the highest total quantity traded on such commodity is included. Before any additional contracts on any commodity are included, the portion of the S&P GSCI™ attributable to all commodities is recalculated. The selection procedure described above is then repeated with respect to the contracts on the commodity that then has the smallest portion of the S&P GSCI™ attributable to it. The contracts currently included in the S&P GSCI™ are all futures contracts traded on the New York Mercantile Exchange, Inc. (“NYMEX”), ICE Futures Europe (“ICE-Europe”), ICE Futures U.S. (“ICE-US”), the Chicago Mercantile Exchange (“CME”), the Chicago Board of Trade (“CBOT”), the Kansas City Board of Trade (“KBT”), the Commodities Exchange Inc. (“CMX”) and the London Metal Exchange (“LME”). The quantity of each of the contracts included in the S&P GSCI™ is determined on the basis of a five-year average (referred to as the “world production average”) of the production quantity of the underlying commodity from sources determined by S&P Dow Jones Indices LLC to be reasonably accurate and reliable, such as the United Nations Industrial Commodity Statistics Yearbook. However, if a commodity is primarily a regional commodity, based on its production, use, pricing, transportation or other factors, S&P Dow Jones Indices LLC may calculate the weight of such commodity based on regional, rather than world, production data. At present, natural gas is the only -51-
commodity the weight of which is calculated on the basis of regional production data, with the relevant region being North America. The five-year moving average is updated annually for each commodity included in the S&P GSCI™, based on the most recent five-year period (ending approximately two years prior to the date of calculation and moving backwards) for which complete data for all commodities is available. The contract production weights (the “CPWs”) used in calculating the S&P GSCI™ are derived from world or regional production averages, as applicable, of the relevant commodities, and are calculated based on the total quantity traded for the relevant contract and the world or regional production average, as applicable, of the underlying commodity. However, if the volume of trading in the relevant contract, as a multiple of the production levels of the commodity, is below specified thresholds, the CPW of the contract is reduced until the threshold is satisfied. This is designed to ensure that trading in each such contract is sufficiently liquid relative to the production of the commodity. In addition, S&P Dow Jones Indices LLC performs this calculation on a monthly basis and, if the multiple of any contract is below the prescribed threshold, the composition of the S&P GSCI™ is reevaluated, based on the criteria and weighting procedure described above. This procedure is undertaken to allow the S&P GSCI™ to shift from contracts that have lost substantial liquidity into more liquid contracts, during the course of a given year. As a result, it is possible that the composition or weighting of the S&P GSCI™ will change on one or more of these monthly evaluation dates. In addition, regardless of whether any changes have occurred during the year, S&P Dow Jones Indices LLC reevaluates the composition of the S&P GSCI™ at the conclusion of each year, based on the above criteria. Other commodities that satisfy such criteria, if any, will be added to the S&P GSCI™. Commodities included in the S&P GSCI™ that no longer satisfy such criteria, if any, will be deleted. S&P Dow Jones Indices LLC also determines whether modifications in the selection criteria or the methodology for determining the composition and weights of and for calculating the S&P GSCI™ are necessary or appropriate in order to assure that the S&P GSCI™ represents a measure of commodity market performance. S&P Dow Jones Indices LLC has the discretion to make any such modifications. Contract Expirations Because the S&P GSCI™ comprises actively traded contracts with scheduled expirations, it can only be calculated by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as “contract expirations.” The contract expirations included in the S&P GSCI™ for each commodity during a given year are designated by S&P Dow Jones Indices LLC, provided that each such contract must be an “active contract.” An “active contract” for this purpose is a liquid, actively traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry. If a trading facility deletes one or more contract expirations, the S&P GSCI™ will be calculated during the remainder of the year in which such deletion occurs based on the remaining contract expirations designated by S&P Dow Jones Indices LLC. If a trading facility ceases trading in all contract expirations relating to a particular contract, S&P Dow Jones Indices LLC may designate an eligible replacement contract on the commodity. To the extent practicable, the replacement will be in effect during the next monthly review of the composition of the S&P GSCI™. If that timing is not practicable, S&P Dow Jones Indices LLC will determine the date of the replacement and will consider a number of factors, including the differences between the existing contract and the replacement contract specifications and contract expirations. Value of the S&P GSCI™ The value of the S&P GSCI™ on any given day is equal to the total dollar weight of the S&P GSCI™ divided by a normalizing constant that assures the continuity of the S&P GSCI™ over time. The total dollar weight of the S&P GSCI™ is the sum of the dollar weight of each of the underlying commodities. The dollar weight of each such commodity on any given day is equal to:
the “daily contract reference price” (discussed below),
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multiplied by the appropriate CPWs, and
during a roll period, the appropriate “roll weights” (discussed below).
The daily contract reference price used in calculating the dollar weight of each commodity on any given day is the most recent daily contract reference price made available by the relevant trading facility, except that the daily contract reference price for the most recent prior day will be used if the exchange is closed or otherwise fails to publish a daily contract reference price on that day. In addition, if the trading facility fails to make a daily contract reference price available or publishes a daily contract reference price that, in the reasonable judgment of S&P Dow Jones Indices LLC, reflects manifest error, the relevant calculation will be delayed until the price is made available or corrected; provided that, if the price is not made available or corrected by 4:00 p.m., New York City time, S&P Dow Jones Indices LLC may, if it deems such action to be appropriate under the circumstances, determine the appropriate daily contract reference price for the applicable futures contract in its reasonable judgment for purposes of the relevant S&P GSCI™ calculation. The “roll weight” of each commodity reflects the fact that the positions in contracts must be liquidated or rolled forward into more distant contract expirations as they approach expiration. If actual positions in the relevant markets were rolled forward, the roll would likely need to take place over a period of days. Since the S&P GSCI™ is designed to replicate the performance of actual investments in the underlying contracts, the rolling process incorporated in the S&P GSCI™ also takes place over a period of days at the beginning of each month (referred to as the “roll period”). On each day of the roll period, the “roll weights” of the first nearby contract expiration on a particular commodity and the more distant contract expiration into which it is rolled are adjusted, so that the hypothetical position in the contract on the commodity that is included in the S&P GSCI™ is gradually shifted from the first nearby contract expiration to the more distant contract expiration. If on any day during a roll period any of the following conditions exists, the portion of the roll that would have taken place on that day is deferred until the next day on which such conditions do not exist:
no daily contract reference price is available for a given contract expiration;
any such price represents the maximum or minimum price for such contract month, based on exchange price limits (referred to as a “Limit Price”);
the daily contract reference price published by the relevant trading facility reflects manifest error, or such price is not published by 4:00 p.m., New York City time. In that event, S&P Dow Jones Indices LLC may, but is not required to, determine a daily contract reference price and complete the relevant portion of the roll based on such price; provided, that, if the trading facility publishes a price before the opening of trading on the next day, S&P Dow Jones Indices LLC will revise the portion of the roll accordingly; or
trading in the relevant contract terminates prior to its scheduled closing time.
If any of these conditions exist throughout the roll period, the roll with respect to the affected contract will be effected in its entirety on the next day on which such conditions no longer exist. Contract Daily Return The contract daily return on any given day is equal to the sum, for each of the commodities included in the S&P GSCI™, of the applicable daily contract reference price on the relevant contract multiplied by the appropriate CPW and the appropriate “roll weight,” divided by the total dollar weight of the S&P GSCI™ on the preceding day, minus one. Calculation of the S&P GSCI Indices Excess return S&P GSCI Indices
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The value of any excess return version of a S&P GSCI Index on any day on which the S&P GSCI™ is calculated (an “S&P GSCI™ Business Day”) is equal to the product of:
the value of the applicable S&P GSCI Index on the immediately preceding S&P GSCI™ Business Day; and
one plus the contract daily return of the applicable S&P GSCI Index on the S&P GSCI™ Business Day on which the calculation is made. Total Return S&P GSCI Indices
The value of any total return version of a S&P GSCI Index on any S&P GSCI™ Business Day reflects the value of an investment in the excess return version of that S&P GSCI Index together with a Treasury bill return and is equal to the product of:
the value of the applicable S&P GSCI Index on the immediately preceding S&P GSCI™ Business Day;
one plus the sum of the contract daily return and the Treasury Bill return on the S&P GSCI™ Business Day on which the calculation is made; and
one plus the Treasury Bill return for each non-S&P GSCI™ Business Day since the immediately preceding S&P GSCI™ Business Day.
The Treasury Bill return is the return on a hypothetical investment in the applicable S&P GSCI Index at a rate equal to the interest rate on a specified U.S. Treasury Bill. at a rate equal to the interest rate on a specified U.S. Treasury Bill. Information All information contained herein relating to the S&P GSCI™ and each of the S&P GSCI Indices, including their make-up, method of calculation, changes in their components and historical performance, has been derived from publicly available information, without independent verification. The information contained herein with respect to each of the S&P GSCI Indices and the S&P GSCI™ reflects the policies of, and is subject to change by, S&P Dow Jones Indices LLC. Current information regarding the market values of the S&P GSCI Indices is available from S&P Dow Jones Indices LLC and from numerous public information sources. License Agreement with S&P The S&P GSCI Indices are licensed by S&P Dow Jones Indices LLC for use in connection with an issuance of any Products linked to the Index. Any Products linked to the Index are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or its third party licensors. Neither S&P Dow Jones Indices LLC nor its third party licensors makes any representation or warranty, express or implied, to the owners of any Products linked to the Index or any member of the public regarding the advisability of investing in securities generally or in any Products linked to the Index particularly or the ability of the S&P GSCI Indices to track general stock market performance. S&P and its third party licensor’s only relationship to JPMorgan Chase & Co. is the licensing of certain trademarks and trade names of S&P and the third party licensors and of the S&P GSCI Indices which are determined, composed and calculated by S&P or its third party licensors without regard to JPMorgan Chase & Co. or any Products linked to the Index. S&P Dow Jones Indices LLC and its third party licensors have no obligation to take the needs of JPMorgan Chase & Co. or the owners of any Products linked to the Index into consideration in determining, composing or calculating the S&P GSCI Indices. Neither S&P Dow Jones Indices LLC nor its third party licensors is responsible for and has not participated in the determination of the prices and amount of any Products linked to the Index or the timing of the -54-
issuance or sale of any Products linked to the Index or in the determination or calculation of the equation by which any Products linked to the Index are to be converted into cash. S&P Dow Jones Indices LLC has no obligation or liability in connection with the administration, marketing or trading of any Products linked to the Index. NEITHER S&P DOW JONES INDICES, ITS AFFILIATES NOR THEIR THIRD PARTY LICENSORS GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE S&P GSCI INDICES OR ANY DATA INCLUDED THEREIN OR ANY COMMUNICATIONS, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATIONS (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS OR DELAYS 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 MARKS, THE S&P GSCI INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES, ITS AFFILIATES OR THEIR THIRD PARTY LICENSORS BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE. “Standard & Poor’s,” “S&P” and “S&P GSCI™” are trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use by J.P. Morgan Securities LLC and sublicensed for use by JPMorgan Chase & Co.
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DISCLAIMERS
S&P Index Disclaimers S&P GSCITM Agriculture OC Excess Return Index S&P GSCITM Precious Metals OC Excess Return Index S&P GSCITM Industrial Metals OC Excess Return Index S&P GSCITM Energy OC Excess Return Index (together, the “S&P GSCI Indices”) Each S&P GSCI® Index (each, an “S&P GSCI® Index”) is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by JPMS plc and/or its affiliates (the “JPM Licensee”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI. S&P ® and S&P GSCI® are trademarks of S&P and have been licensed for use by SPDJI and its affiliates and sublicensed for certain purposes by the JPM Licensee. The S&P GSCI ® Indices are not owned, endorsed, or approved by or associated with Goldman Sachs & Co. or its affiliated companies. The JPM Licensee’s Index is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates or third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices do not make any representation or warranty, express or implied, to counterparts to the JPM Licensee’s Index or any member of the public regarding the advisability of investing in securities generally or in the JPM Licensee’s Index particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices’ only relationship to the JPM Licensee with respect to the S&P GSCI ® Index is the licensing of the S&P GSCI ® Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices. The S&P GSCI® Index is determined, composed and calculated by S&P Dow Jones Indices without regard to the JPM Licensee or the JPM Licensee’s Index. S&P Dow Jones Indices have no obligation to take the needs of the JPM Licensee or the owners of or counterparts to the Index into consideration in determining, composing or calculating the S&P GSCI ® Index. S&P Dow Jones Indices are not responsible for and have not participated in the determination or calculation of the Index. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the JPM Licensee’s Index. There is no assurance that investment products based on the S&P GSCI ® Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a futures contract within the S&P GSCI ® Index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such contract, nor is it considered to be investment advice. Notwithstanding the foregoing, CME Group Inc. and its affiliates may independently issue and/or sponsor financial products unrelated to the JPM Licensee’s Index currently being maintained by the JPM Licensee, but which may be similar to and competitive with the JPM Licensee’s Index. In addition, CME Group Inc. and its affiliates may trade financial products which are linked to the performance of the S&P GSCI ® Index. It is possible that this trading activity will affect the value of the S&P GSCI ® Index and the JPM Licensee’s Index. S&P DOW JONES INDICES DO NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P GSCI ® INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE JPM LICENSEE, OWNERS OF OR COUNTERPARTS TO THE JPM LICENSEE’S INDEX, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P GSCI ® INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR -56-
ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND THE JPM LICENSEE, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES. FX Rates Disclaimers The FX Rates are provided by The WM Company plc in conjunction with Reuters Limited. The WM Company plc shall not be liable for any errors in or delays in providing or making available the data contained within this service or for any actions taken in reliance on the same, except to the extent that the same is directly caused by its or its employees’ negligence.
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ANNEX A [remainder of page intentionally left blank]
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The J.P. Morgan MOZAIC Index (USD)
Index Rules
21 August 2009, as amended and restated on 30 November 2016 © All Rights Reserved
Table of Contents
1.
Introduction .............................................................................................................................. 6
2.
General Notes on the Index ................................................................................................ 6
3.
Index Calculation .................................................................................................................... 9
5.
Calculation Agent and Index Sponsor .......................................................................... 17
6.
Market Disruption Events ................................................................................................ 17
7.
Extraordinary Events ......................................................................................................... 17
8.
Corrections in respect of the Index .............................................................................. 19
9.
Responsibility ....................................................................................................................... 19
10. Miscellaneous........................................................................................................................ 19 11. Hypothetical Back-Tested Levels .................................................................................. 19 12. Definitions .............................................................................................................................. 20
2
Notices, Disclaimers and Conflicts Capitalized terms used in this section but not otherwise defined have the meanings set out in other parts of the Rules. Neither the Index Sponsor nor the Index Calculation Agent endorses or makes any representation or warranty, express or implied, in connection with any security, transaction, fund, structured deposit or other financial product or investment (each, a “Product”) that references the Index including as to the advisability or purchasing or entering into or issuing a Product or the results to be obtained by any party using the Index in connection with a Product. Furthermore, neither the Index Sponsor nor the Index Calculation Agent has any obligation or liability in connection with the administration, entry into, issuance, marketing or trading of any such Product. The Index is the exclusive property of the Index Sponsor and the Index Sponsor retains all proprietary rights in the Index. No one may reproduce, distribute or disseminate this document or the information contained in this document or an Index Level (as applicable) without the prior written consent of the Index Sponsor. This document is not intended for distribution to, or use by any person in, a jurisdiction where such distribution is prohibited by law or regulation. Neither the Index Sponsor nor the Index Calculation Agent in its capacity as such has any liability whatsoever to any person who uses the Index (or any Index Level) in any circumstances. Potential conflicts of interest may exist between the structure and operation of the Index, the roles and responsibilities of the Index Sponsor and Index Calculation Agent, and the normal business activities of the Index Sponsor, the Index Calculation Agent or any Relevant Person. During the course of their businesses, the Index Sponsor, the Index Calculation Agent and any Relevant Person may enter into or promote, offer or sell transactions or investments (structured or otherwise) that reference the Index, any Constituent or any component of a Constituent. In addition, the Index Sponsor, the Index Calculation Agent and any Relevant Person may have, or may have had, interests or positions, or may buy, sell or otherwise trade positions in or relating to the Index, any Constituent or any component of a Constituent, or may invest or engage in transactions with other persons, or on behalf of such persons, relating to any of these. Such activity could give rise to a conflict of interest, and such conflict may have an impact, positive or negative, on the Index Level. None of the Index Sponsor, the Index Calculation Agent and the Relevant Persons have any duty (a) to consider the circumstances of any person when participating in such transactions or (b) to conduct themselves in a manner that is favorable to anyone with exposure to the Index. Neither the Index Sponsor nor the Index Calculation Agent is under any obligation to continue the calculation, publication or dissemination of the Index. The Index Sponsor may at any time and without notice terminate the calculation, publication or dissemination of the Index. The Index Sponsor may delegate or transfer to a third party some or all of its functions in relation to the Index. Except as provided in the following paragraph, none of the Index Sponsor, the Index Calculation Agent or any Relevant Person gives any representation, warranty or undertaking, of any type (whether express or implied, statutory or otherwise) in relation to the Index, as to (i) the condition, satisfactory quality, performance or fitness for purpose of the Index, (ii) the results to be achieved by an investment in any Product, (iii) any data included in or omissions from the Index, (iv) the use of the Index in connection with a Product, (v) the Index Level at any time on any day, (vi) the veracity, currency, completeness or accuracy of the Index Level or the information on which the Index or the Index Level is based (and without limitation, the Index Sponsor and the Index Calculation Agent accept no liability to any investor in a Product or any issuer or counterparty of a Product for any errors or omissions in that information or the results of any interruption to it and the Index Sponsor and the Index Calculation Agent shall be under no obligation to advise any person of any such error, omission or interruption), or (vii) any other matter. To the extent any such representation, warranty or undertaking could be deemed to have been given by the Index Sponsor, the Index Calculation Agent or any Relevant Person, it is excluded save to the extent that such exclusion is prohibited by law.
3
To the fullest extent permitted by law, none of the Index Sponsor, the Index Calculation Agent and the Relevant Persons shall have any liability or responsibility to any person or entity (including, without limitation, any investor in any Product or any issuer or counterparty of a Product) for any loss, damages, costs, charges, expenses or other liabilities howsoever arising, including, without limitation, liability for any special, punitive, indirect or consequential damages (including loss of business or loss of profit, loss of time and loss of goodwill), even if notified of the possibility of the same, arising in connection with the design, compilation, calculation, maintenance or sponsoring of the Index or in connection with any Product. Nothing in these Rules shall be taken to exclude any liability for fraud on the part of the Index Sponsor or Index Calculation Agent. The Index Sponsor or the Index Calculation Agent may make certain calculations based on information obtained from publicly available sources without independently verifying such information and neither of them accepts responsibility or liability in respect of such calculations or information. Notwithstanding anything to the contrary, nothing in these Rules should be construed to be investment advice or a recommendation to purchase a specific Product, issue a specific Product or enter into any transaction. Nothing in these Rules or any other communication between you, on the one hand, and the Index Sponsor, the Index Calculation Agent or any Relevant Person, on the other hand, should be deemed to or be construed as creating a “fiduciary relationship” or any relationship of agency or trust. None of the Index Sponsor, the Index Calculation Agent or any Relevant Person is a fiduciary for you, and none of them accept any duty of care in respect of any person or entity. You should make your own investment decision based on your own judgment and on your own examination of the specific Product that you are purchasing or issuing or transaction you are entering into, and you should consult your own legal, regulatory, investment, tax, accounting and other professional advisers as you deem necessary in connection with any purchase or issuance of a Product or entry into any transaction. The foregoing notices, disclaimers and conflicts disclosure is not intended to be exhaustive. Anyone reading these Rules should seek such advice as you consider necessary from your professional advisors, legal, tax or otherwise, without reliance on the Index Sponsor, Index Calculation Agent or any Relevant Person to satisfy you that you fully understand these Rules and the risks associated with the Index. These Rules have been developed with the possibility of one or more entities entering into or promoting, offering or selling Products (structured or otherwise) linked to the Index and the hedging of such transactions or Products in any manner that they see fit. Copyright JPMorgan Chase & Co. 2015. All rights reserved. J.P. Morgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities plc is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. The Index Sponsor and the Index Calculation Agent do not assume any obligation or duty to any party in connection with the Index and do not assume any relationship of agency, trust or of a fiduciary nature with such party. The Index Sponsor owns all intellectual property rights in: (i) the development of and methodology for producing the Index, (ii) the Index Levels, and (iii) these Rules. Third parties shall not use the Index Sponsor’s intellectual property without the prior written consent of the Index Sponsor (including in situations in which a third party performs certain functions in relation to the Index).
THIS DOCUMENT IS IMPORTANT. YOU SHOULD NOT INVEST IN A PRODUCT LINKED TO THE INDEX UNLESS YOU HAVE ENSURED THAT YOU FULLY UNDERSTAND THE NATURE OF SUCH AN INVESTMENT AND THE RISKS INVOLVED AND ARE SATISFIED THAT THE INVESTMENT IS SUITABLE AND APPROPRIATE FOR YOUR CIRCUMSTANCES AND OBJECTIVES. IF YOU ARE IN 4
ANY DOUBT ABOUT THIS YOU SHOULD TAKE ADVICE FROM AN APPROPRIATELY QUALIFIED ADVISER. EVEN IF YOU ARE A HIGHLY SOPHISTICATED INVESTOR WHO REGULARLY TRANSACTS IN PRODUCTS LINKED TO INDICES OF THIS TYPE, YOU ARE STRONGLY ADVISED TO TAKE SUCH ADVICE IN ANY EVENT.
5
1.
Introduction
This document comprises the index rules (“Rules”) of the J.P. Morgan MOZAIC Index (USD) (“Index”). The Rules may be amended from time to time pursuant to the provisions set out in Section 4.1 (Amendments) below. This document is published by JPMS plc of 25 Bank Street, Canary Wharf, London E14 5JP, United Kingdom in its capacity as Index Calculation Agent. ALL PERSONS READING THIS DOCUMENT SHOULD REFER TO THE NOTICES, DISCLAIMERS AND CONFLICTS SECTIONS AND CONSIDER THE INFORMATION CONTAINED IN THIS DOCUMENT IN LIGHT OF SUCH NOTICES, DISCLAIMERS AND CONFLICTS. NOTHING HEREIN CONSTITUTES AN OFFER TO BUY OR SELL ANY SECURITIES, PARTICIPATE IN ANY TRANSACTION OR ADOPT ANY INVESTMENT STRATEGY OR LEGAL, TAX, REGULATORY OR ACCOUNTING ADVICE. 2.
General Notes on the Index
2.1
Algorithmic Strategy
The Index is a rules-based investment strategy that seeks to replicate, in accordance with the methodology described herein, synthetic exposure to a portfolio of Government Bond Futures Constituents and Equity Index Futures Constituents (each, as defined in Section 2.2 below, and together, the “Securities-based Constituents”) and synthetic exposure to certain excess return indices within the S&P GSCITM commodity index group (the “Non-Securities-based Constituents”, and together with the Securities-based Constituents, the “Constituents”). The Index is composed of a universe of twelve Constituents, although, in most circumstances, the Index will initiate synthetic long exposure in respect of six (or fewer) Constituents, in accordance with the methodology described herein. The Index seeks to provide, in most circumstances: (a) long synthetic exposure to each of the six Constituents with the highest relative performance, ranked on the basis of a ranking methodology as of the applicable rebalancing date, which also satisfy the Trade Signal test, as set out in Section 3.5.3 (Trading Signal) below and (b) neutral synthetic exposure to the remaining Constituents. The Index’s exposure to the Constituents is scaled up or down each month on the basis of a Constituent Leverage adjustment as set out in Section 3.5.2 (Calculating the Constituent Leverages) below, which is determined for each Constituent on the basis of the historical realised volatility of such Constituent over a defined period of time, and by the Target Volatility which is set at 7.75%. The Index is denominated in USD and each Constituent that is not denominated in USD has its daily return converted into USD on a daily basis, in accordance with the provisions set out in the Rules. The Index also embeds a mechanic, which is referred in these Rules as “InTrade Indicator” which, depending on the recent performance of the Index, can switch the existing synthetic long exposure positions within the Index into synthetic neutral exposure positions for all Constituents for a specified period of time, in accordance with the terms set out in Section 3.5.7 (InTrade) below. The Index is a synthetic strategy. There is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest. The Index Calculation Agent and its affiliates have no obligation to buy, sell or hold any of the Constituents or any asset underlying any of the Constituents. 2.2
The Securities-based Constituents
The Index references the following Securities-based Constituents: The “Government Bond Futures Constituents” consist of: (i)
the CBOT 2-Year U.S. Treasury Note Futures Contract (Code: ZT/TU), which is a series of exchange-traded futures contracts with expiry dates at three month intervals. As defined by the Relevant Exchange the underlying unit of each contract is a single notional note issued by the U.S. Treasury that has a face value at maturity of USD 200,000 and Deliverable Grades of instruments eligible for settlement include U.S. Treasury notes with (a) an original term to maturity of not more than five years and three months, and (b) a remaining term to maturity of not less than one
6
year and nine months from the first day of the delivery month and not more than two years from the last day of the delivery month, where the invoice price equals the futures settlement price times a conversion factor, plus accrued interest and the conversion factor is the price of the delivered note ($1 par value) to yield (6) percent (the “2 Year Note Futures”); (ii)
the CBOT 10-Year U.S. Treasury Note Futures Contract (Code: ZN/TY), which is a series of exchange-traded futures contracts with expiry dates at three month intervals. As defined by the Relevant Exchange the underlying unit of each contract is a single notional note issued by the U.S. Treasury that has a face value at maturity of USD 100,000 and Deliverable Grades of instruments eligible for settlement include U.S. Treasury notes with a remaining term to maturity of at least six and a half years, but not more than ten years, from the first day of the delivery month, where the invoice price equals the futures settlement price times a conversion factor, plus accrued interest and the conversion factor is the price of the delivered note ($1 par value) to yield (6) percent (the “10 Year Note Futures”);
(iii)
the EUREX Euro-Schatz Futures Contract (Code: FGBS/DU), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange each contract references certain notional debt instruments issued by the Federal Republic of Germany that have (a) a face value at maturity of EUR 100,000, (b) a remaining term on the Delivery Day of not less than one and three quarter years, and not more than two and a quarter years, and (c) has a six (6) percent coupon (the “Schatz Futures”);
(iv)
the EUREX Euro-Bund Futures Contract (Code: FGBL/RX), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange each contract references certain notional debt instruments issued by the Federal Republic of Germany that have (a) a face value at maturity of EUR 100,000, (b) a remaining term on the Delivery Day of not less than eight and a half years, and not more than ten and half years, and (c) has a six (6) percent coupon (the “Bund Futures”); and
(v)
the Osaka 10-Year Japanese Government Bond Futures Contract (Code: JGB/JB), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. Each contract references a single notional bond issued by the State of Japan that has (a) a face value at maturity of JPY 100,000,000, (b) a remaining term to maturity of not less than seven years, and not more than eleven years, as of the issued date and delivery date and (c) pays a notional six (6) percent coupon (the “JGB Futures”).
The “Equity Index Futures Constituents” consist of: (i)
the CME Standard and Poor’s 500 Stock Price IndexTM Futures Contract (Code: SP/SP), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange each contract references the Standard and Poor’s 500 Stock Price Index, which provides a notional exposure equal to the product of the level of the Standard and Poor’s 500 Stock Price Index and USD250 (the “S&P Futures”);
(ii)
the EUREX DAX® Index Futures Contract (Code: FDAX/DX), which is a series of exchange-traded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange each contract references the Deutscher Aktien Index which provides a notional exposure equal to the product of the level of the DAX Index and EUR25 (the “DAX Futures”); and
(iii)
the Osaka Nikkei 225 Index Futures Contract (Code: NK/NK), which is a series of exchangetraded futures contracts, with expiry dates at three month intervals. As defined by the Relevant Exchange each contract references the Nikkei Stock Average (Nikkei 225 Index), which provides a notional exposure equal to the product of the level of the Nikkei 225 Index and JPY1,000 (the “Nikkei Futures”).
2.3
The Non-Securities-based Constituents
The Index references the following Non-Securities-based Constituents: (i)
The S&P GSCITM Agriculture Excess Return Index is published daily on Bloomberg Ticker SPGCAGP Index (the “GSCI AG”);
7
(ii)
The S&P GSCITM Energy Excess Return Index is published daily on Bloomberg Ticker SPGCENP Index (the “GSCI EN”);
(iii)
The S&P GSCITM Industrial Metals Excess Return Index is published daily on Bloomberg Ticker SPGCINP Index (the “GSCI IM”); and
(iv)
The S&P GSCITM Precious Metals OC Excess Return Index is published daily on Bloomberg Ticker SPGCPMP Index (the “GSCI PM”).
2.4
Constituent Associated Currencies
In respect of any Weekdayt, for any Constituentc that is not denominated in USD, the Index Calculation Agent will, in accordance with Section 3.4, convert the returns associated with such Constituentc into USD using the FX Rate published on the FX Price Source at the Fixing Time in respect of such Weekday t. In respect of any Weekdayt for any Constituentc that is denominated in U.S. dollars, the FX Rate will be equal to 1. If any Weekday is an FX Disrupted Day, the Index Calculation Agent shall determine the FX Rate in respect of such Weekday taking into consideration all available information, that it, in good faith, deems relevant. Where: “FX Ratec,t” or “𝑓𝑥𝑐,𝑡 " means, in respect of any Constituentc and Weekdayt: (a) (b)
“USD / EUR” shall mean the “Mid” exchange rate expressed as a number of USD for one EUR as published on the FX Price Source at the Fixing Time in respect of such day; and “USD / JPY” shall mean the “Mid” exchange rate expressed as a number of USD for one JPY, determined by dividing 1 by the number of JPY for one USD as published on the FX Price Source at the Fixing Time in respect of such day;
“FX Price Source” means the Reuters Page as set forth in Table A below, or if the relevant rate is not published or announced by such FX Price Source at the relevant time the successor or an alternative price source or page/publication for the relevant rate as determined by the Index Calculation Agent, in its sole discretion; and “Fixing Time” means approximately 4:00 PM London, England time. Table A: The FX Rate and Reuters Page for each Constituent Constituentc FX Ratec,t Reuters Page 2 Year Note Futures 1 Not Applicable 10 Year Note Futures 1 Not Applicable Schatz Futures USD / EUR WMRSPOT05 Bund Futures USD / EUR WMRSPOT05 JGB Futures USD / JPY WMRSPOT12 S&P Futures DAX Futures Nikkei Futures GSCI AG GSCI EN GSCI IM
1 USD / EUR USD/ JPY 1 1 1
Not Applicable WMRSPOT05 WMRSPOT12 Not Applicable Not Applicable Not Applicable
GSCI PM
1
Not Applicable
8
3.
Index Calculation
3.1
The Index Level
3.1.1 Frequency of calculation Subject to the provisions of Section 6 regarding publication of the Index Level, the Index Calculation Agent shall calculate the Index Level (“Index Levelt” or “Indext”) in respect of each Weekdayt in accordance with the following formula: 𝐼𝑛𝑑𝑒𝑥𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑡−1 × (1 + 𝑈𝑆𝐷 𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 ) Where: “𝐼𝑛𝑑𝑒𝑥𝑡 ” means, in respect of each Weekdayt, the Index Level of the Index in respect of such Weekdayt. “𝐼𝑛𝑑𝑒𝑥𝑡−1” means, in respect of each Weekdayt, the Index Level of the Index in respect of the Weekday immediately preceding such Weekdayt; and “𝑈𝑆𝐷 𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 ” is defined in Section 3.2. If, in respect of any Weekdayt, the calculations referenced in this Section 3.1.1 would result in an Index Level that is less than or equal to zero, the Index Level for that Weekdayt and each subsequent Weekdayt shall be deemed to be zero. 3.1.2 Index Start Date and Base Level The Index was deemed to have commenced on 1 January 1999 (“Index Start Date”) at which point the level was 100 (“Base Level”). The “Live Date” of the Index is 17 April 2009. The Index Calculation Agent began calculating the Index on a live basis on the Live Date. 3.2
The Index USD Returns
In respect of any Weekdayt, the Index Calculation Agent will determine the daily return of the Index expressed in USD terms (“Index USD Returnst” or “USD Returnst”) in accordance with the following formula: 12
1 𝑈𝑆𝐷 𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 = × ∑(𝑈𝑆𝐷 𝑅𝑐,𝑡 × 𝑊𝑐,𝑡 × 𝐼𝑛𝑇𝑟𝑎𝑑𝑒𝑐,𝑡 ) 6 𝑐=1
Where: “𝑈𝑆𝐷 𝑅𝑐,𝑡 ” is defined in Section 3.4; “𝑊𝑐,𝑡 ” is defined in Section 3.5; and “𝐼𝑛𝑇𝑟𝑎𝑑𝑒𝑐,𝑡 ” is defined in Section 3.5.7. 3.3
Returns for each Constituent
3.3.1 Securities-based Constituents In respect of any Securities-based Constituentc and any Weekdayt, the Index Calculation Agent will determine the Daily Return of the Securities-based Constituents (“Daily Returnc,t” or “𝑅𝑐,𝑡 ”) in accordance with the following methodology: (a) if such a Weekdayt is a Scheduled Trading Dayc,t and is not a Disrupted Day in respect of such Securities-based Constituentc and such Weekdayt occurs in the period from, and including, the Roll Dayc in respect of the Second Near Futures Contract to, but excluding, the Expiry Last Trading Day of the First Near Futures Contract for such a Securities-based Constituentc: 𝑅𝑐,𝑡 =
9
𝑠𝑒𝑐𝑜𝑛𝑑 𝐹𝑐,𝑡 𝑠𝑒𝑐𝑜𝑛𝑑 𝐹𝑐,𝑡−1
−1
(b) if such a Weekdayt is a Scheduled Trading Dayc,t and is not a Disrupted Day in respect of such Securities-based Constituentc and such Weekdayt is prior to the Roll Dayc in respect of the Second Near Futures Contract: 𝑓𝑟𝑜𝑛𝑡 𝐹𝑐,𝑡 𝑅𝑐,𝑡 = 𝑓𝑟𝑜𝑛𝑡 − 1 𝐹𝑐,𝑡−1 (c) if such a Weekdayt is not a Scheduled Trading Dayc,t or is a Disrupted Day for such a Securities-based Constituentc: Where: 𝑓𝑟𝑜𝑛𝑡 “𝐹𝑐,𝑡 ”
𝑓𝑟𝑜𝑛𝑡
“𝐹𝑐,𝑡−1 "
𝑠𝑒𝑐𝑜𝑛𝑑 “𝐹𝑐,𝑡 "
𝑠𝑒𝑐𝑜𝑛𝑑 “𝐹𝑐,𝑡−1 "
𝑅𝑐,𝑡 = 0 means, in respect of Scheduled Trading Dayc,t that is not a Disrupted Day in respect of such Securities-based Constituentc, the Closing Price of the First Near Futures Contract for such Securities-based Constituentc published by the Relevant Exchange as of such Scheduled Trading Dayc,t,; means, in respect of Scheduled Trading Dayc,t that is not a Disrupted Day in respect of such Securities-based Constituentc, the Closing Price of the First Near Futures Contract for such Securities-based Constituentc published by the Relevant Exchange in respect of the Scheduled Trading Day that was not a Disrupted Day in respect of such Securities-based Constituentc immediately preceding such Scheduled Trading Dayc,t ; means, in respect of Scheduled Trading Dayc,t that is not a Disrupted Day in respect of such Securities-based Constituentc, the Closing Price of the Second Near Futures Contract for such Securities-based Constituentc published by the Relevant Exchange as of such Scheduled Trading Dayc,t; and means, in respect of Scheduled Trading Dayc,t that is not a Disrupted Day in respect of such Securities-based Constituentc, the Closing Price of the Second Near Futures Contract for such Securities-based Constituentc published by the Relevant Exchange in respect of the Scheduled Trading Day that was not a Disrupted Day in respect of such Securities-based Constituentc immediately preceding such Scheduled Trading Dayc,t.
3.3.2 Non-Securities-based Constituents In respect of any Non-Securities-based Constituentc and any Weekdayt, the Index Calculation Agent will determine the Daily Return of the Non-Securities-based Constituents (“Daily Returnc,t” or “𝑅𝑐,𝑡 ”) in accordance with the following methodology: (a) if Weekdayt is a Scheduled Trading Dayc,t and is not a Disrupted Day in respect of such Constituentc: 𝑅𝑐,𝑡 =
𝐶𝑚𝑑𝑡𝑐,𝑡 −1 𝐶𝑚𝑑𝑡𝑐,𝑡−1
(b) if Weekdayt is not a Scheduled Trading Dayc,t or is a Disrupted Day in respect of such Constituentc: 𝑅𝑐,𝑡 = 0 Where: “𝐶𝑚𝑑𝑡𝑐,𝑡 ”
means, in respect of a Scheduled Trading Dayc,t that is not a Disrupted Day in respect of such Constituentc, the Closing Price of such Non-Securities-based Constituentc as of such Scheduled Trading Dayc,t; and “𝐶𝑚𝑑𝑡𝑐,𝑡−1 ” means, in respect of a Scheduled Trading Dayc,t that is not a Disrupted Day in respect of such Constituentc, the Closing Price of such Non-Securities-based Constituentc in
10
respect of the Scheduled Trading Day that was not a Disrupted Day in respect of such Constituentc immediately preceding such Scheduled Trading Dayc,t. 3.4
Returns for each Constituent converted into USD
In respect of any Constituentc and any Weekdayt, the Index Calculation Agent will determine the Daily USD Return (“Daily USD Returnc,t” or “USD Rc,t”) by converting the Daily Returnc,t associated with each Constituentc into USD in accordance with the following formula: 𝑈𝑆𝐷 𝑅𝑐,𝑡 = 𝑅𝑐,𝑡 ×
𝑓𝑥𝑐,𝑡 𝑓𝑥𝑐,𝑡−1
Where: “Rc,t“ "𝑓𝑥𝑐,𝑡 ”
is defined in Section 3.3.1 or 3.3.2 (as the case may be); means, in respect of any Constituentc and any Weekdayt, the applicable FX Ratec,t as of such Weekdayt; and "𝑓𝑥𝑐,𝑡−1 ” means, in respect of any Constituentc and any Weekdayt, the applicable FX Ratec,t as of the Weekday immediately preceding such Weekdayt. If any Weekday is an FX Disrupted Day, the Index Calculation Agent shall determine the FX Rate in respect of such Weekday taking into consideration all available information, that it, in good faith, deems relevant. 3.5
Monthly Rebalancing
In respect of any Weekdayt and any Constituentc, the Index Calculation Agent shall rebalance the Index’s synthetic exposure to each Constituent on each Rebalancing Day (“Rebalancing Dayc,t”). In respect of each Constituentc and Weekdayt the Index Calculation Agent shall determine the Rebalancing Dayc,t in accordance with the following methodology: (a) If the first Weekdayt of any calendar month is a Scheduled Trading Dayc,t and is not a Disrupted Day for such Constituentc, such a Weekdayt shall be the Rebalancing Dayc,t for the given calendar month for such a Constituentc; and (b) if the first Weekdayt of any calendar month is not a Scheduled Trading Dayc,t or is a Disrupted Day for such Constituentc, such a Weekdayt shall not be the Rebalancing Dayc,t for such Constituentc for the given calendar month. 3.5.1 Calculating the Constituent Weights In respect of any Weekdayt and any Constituentc, the Index Calculation Agent will determine the allocated Constituent Weight (“Constituent Weightc,t” or “𝑊𝑐,𝑡 ”) in respect of each Constituentc based on the Trading Signalc,t determined in respect of such a Weekdayt. With respect to each Weekdayt and Constituentc and Rebalancing Dayc,t the Index Calculation Agent will determine 𝑊𝑐,𝑡 in accordance with the following methodology: (a)
if Weekdayt-1 is a Rebalancing Dayc,t for Constituentc: 𝑊𝑐,𝑡 = 𝐿𝑐,𝑅−2 × 𝜀𝑐,𝑅−2 ; and
(b)
if Weekdayt-1 is not a Rebalancing Dayc,t for Constituentc: 𝑊𝑐,𝑡 = 𝑊𝑐,𝑡−1
Where: "𝐿𝑐,𝑅−2 "
means the Constituent Leveragec,t as defined in Section 3.5.2 in respect of any Constituentc and the second Weekday immediately preceding the originally scheduled Rebalancing Dayc,t;
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"𝜀𝑐,𝑅−2 "
means the Trading Signalc,t as defined in Section 3.5.3 in respect of any Constituentc and the second Weekday immediately preceding the originally scheduled Rebalancing Dayc,t; "𝑊𝑐,𝑡−1 " means the corresponding Constituent Weightc,t any Constituentc on the Weekday immediately preceding such Weekdayt; and “Trading Signalc,t” shall have the meaning defined in Section 3.5.3 in respect of any Constituentc and Weekdayt.
3.5.2 Calculating the Constituent Leverages In respect of any Weekdayt and any Constituentc, the Constituent Leverage (“Constituent Leveragec,t” or “𝐿𝑐,𝑡 ”) is defined by the following formula: 𝜎 𝑙𝑖𝑚 𝐿𝑐,𝑡 = 𝜎𝑐,𝑡 Where: "𝜎 𝑙𝑖𝑚 ” means 7.75%; and "𝜎𝑐,𝑡 ” is defined in Section 3.5.6. If, in respect of any Weekdayt and any Constituentc, the Constituent Leveragec,t, calculated in accordance with the formula set forth in Section 3.5.2 of this Index Rules would result in a Constituent Leverage c,t that is equal to or more than 6000%, the Constituent Leveragec,t for that Weekdayt shall be deemed to be 6000%. 3.5.3 Trading Signal In respect of any Weekdayt and Constituentc, the Index Calculation Agent will determine the Trading Signal (the “Trading Signalc,t” or "εc,t ") for each Constituentc. If the specific Constituentc has a Rankc,t, determined in accordance with Section 3.5.5 (Ranking of Constituents) below, equal to or less than six (6) and the Cumulative Returnc,t, determined in accordance with Section 3.5.4 (Cumulative Return) below, is positive, then the Trading Signalc,t for each such Constituentc with respect to such a Weekdayt will be equal to 1, otherwise the Trading Signalc,t for such a Constituentc with respect to such a Weekdayt will be equal to 0. With respect to any Weekdayt and any Constituentc the Trading Signalc,t is defined by the following formula: 𝜀𝑐,𝑡 = 1 𝜀𝑐,𝑡 = 0
If Rankc,t ≤ 6 and 𝐶𝑅𝑐,𝑡 > 0 Otherwise
Where: “Rankc,t” is defined in section 3.5.5.; and “CRc,t“ is defined in Section 3.5.4. For the avoidance of doubt, in the event that two or more Constituents have identical Cumulative Returns in respect of a Weekdayt, then there may be more than six (6) Constituents with a non-zero Trading Signal. 3.5.4 Cumulative Return In respect of any Weekdayt and any Constituentc, the Index Calculation Agent will calculate the Cumulative Return (“Cumulative Returnc,t” or “𝐶𝑅𝑐,𝑡 ”) for each Constituentc, which is the sum of the Daily Returns in respect of each Weekday from, and including, Weekdayt-124 to, and including, Weekdayt, in accordance with the following formula: 𝑘=𝑡
𝐶𝑅𝑐,𝑡 =
∑ 𝑘=𝑡−124
12
𝑅𝑐,𝑘
Where: "𝑅𝑐,𝑘 ” means the Daily Return (as defined in Sections 3.3.1 and 3.3.2) for Constituent c; and “k”
denotes a day in respect of which calculations are performed.
3.5.5 Ranking of Constituents In respect of each Weekdayt, and Constituentc, the Index Calculation Agent will rank the Constituents from the Constituentc with the highest Cumulative Returnc,t to the Constituentc with the lowest Cumulative Returnc,t, assigning each such Constituentc a Rank ( “Rankc,t” ) in accordance with the following formula: one (1) plus the number of Constituents whose Cumulative Return is strictly greater than CRc,t (the Cumulative Return of such Constituentt in respect of Weekdayt). 3.5.6 Calculating the Constituent Volatility In respect of any Weekdayt and any Constituentc, the Index Calculation Agent will calculate the annualized volatility of each Constituent (“Constituent Volatilityc,t” or “ c,t ”) in accordance with the following formula:
√
𝜎𝑐,𝑡 =
252 × 124
( Where: 𝑅𝑐,𝑡 =
1 × 125
𝑘=𝑡
2
∑ (𝑅𝑐,𝑘 − 𝑅𝑐,𝑡 ) 𝑘=𝑡−124
)
𝑘=𝑡
∑
𝑅𝑐,𝑘
𝑘=𝑡−124
Where: "𝑅𝑐,𝑘 ”
means the Daily Return (as defined in Sections 3.3.1 and 3.3.2) for Constituentc; and
“k”
denotes a day in respect of which calculations are performed.
3.5.7 InTrade In respect of any Weekdayt and each Constituentc, the Index Calculation Agent will determine the value InTrade (“𝐈𝐧𝐓𝐫𝐚𝐝𝐞𝐜,𝐭 ") for each Constituentc.. Such determination will be implemented in accordance with the following steps and as further described in paragraphs (a), (b) and (c) below: (i)
observing whether the return of the Index Level has decreased by more than minus three percent over a period of time of five (5) Weekdays and if so, the Index will switch to a zero (0) weight position for that Constituentc as described in the methodology set out in paragraph (a) below (Determination of the Triggert) of this Section 3.5.7; and
(ii)
determining the number of Weekdays since the Triggert last triggered a change in the weight from one (1) to zero (0) in respect of that Constituentc, i as described in the methodology set out in paragraph (b) below (Determination of InTrade Change Days c,t ) of this Section 3.5.7.
The above steps are implemented in accordance with the following methodology: a) Determination of the Triggert In respect of any Weekdayt, the Index Calculation Agent will determine the “Triggert” in accordance with the following formula: if InTrade Returnt < −3.00%, Triggert = { if InTrade Returnt ≥ −3.00%,
1 0
Where: “InTrade Returnt”
means, in respect of any Weekdayt and Index Levelt, a return calculated in accordance with the following formula:
13
InTrade Returnt =
Index Levelt −1 Index Levelt−5
Where: “Index Levelt−5 ”
means, in respect of Weekdayt, the Index Level as of the 5th Weekday preceding such a day determined in accordance with Section 3.1.1; and
“Index Levelt ”
means, in respect of Weekdayt, the Index Level as of such a day determined in accordance with Section 3.1.1.
b) Determination of InTrade Change Daysc,t In respect of the Index Start Date, the InTrade Change Daysc for each Constituentc was set equal to six (6). In respect of any Weekdayt (other than the Index Start Date) and any Constituentc, the “InTrade Change Daysc,t” will be determined in the accordance with the methodology set out below. i)
Except as provided below, the InTrade Change Days c,t in respect of such Weekdayt will be determined in accordance with the following formula: InTrade Change Daysc,t = InTrade Change Daysc,t−1 + 1
ii)
Notwithstanding the foregoing, if all of the following conditions are satisfied then the InTrade Change Daysc,t in respect of such a Weekdayt and Constituentc will be equal to one (1): (a) the Weekday immediately preceding such Weekday t is a Scheduled Trading Dayc,t and is not a Disrupted Day for such a Constituentc; (b) the InTrade Change Daysc,t in respect of the immediately preceding Weekdayt is not equal to one (1); (c) the InTrade Change Daysc,t in respect of the immediately preceding Weekdayt is greater than or equal to five (5); and (d) the Triggert in respect of the third (3rd) immediately preceding Weekday is equal to one (1).
Where: “InTrade Change Daysc,t-1” means, in respect of such a Weekdayt, the InTrade Change Days in respect of the Weekday immediately preceding Weekday t. (c) Determination of InTradec,t In respect of any Weekdayt and Constituentc, InTradec,t will be determined in the following manner: i)
If the Weekday immediately preceding such Weekday t is a Disrupted Day for Constituentc or is not a Scheduled Trading Dayc,t, then InTradec,t in respect of such Weekdayt and Constituentc will be equal to InTradec,t in respect of the Weekday immediately preceding such Weekdayt.
ii)
If (a) the Weekday immediately preceding such Weekday t is a Scheduled Trading Dayc,t and not a Disrupted Day for Constituentc, and (b) the InTrade Change Daysc,t in respect of Weekdayt is less than or equal to the five (5), then the InTradec,t for Weekdayt will be equal to zero (0).
iii)
If (a) the Weekday immediately preceding such Weekday t is a Scheduled Trading Dayc,t and not a Disrupted Day for Constituentc and (b) the InTrade Change Daysc,t in respect of Weekdayt is greater than the five (5), then InTradec,t for Weekdayt will be equal to one (1). Where: “InTrade Change Daysc,t” shall have the meaning set forth in Part (b) of this Section 3.5.7.
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3.6
Roll Schedule for each Securities-based Constituent
Each Securities-based Constituentc rolls on its respective Roll Days (each such day, a “Roll Day”). Each such Roll Day shall be considered to be the Roll Day in respect of the futures contract that the exposure notionally rolls over to on such Roll Day, as set forth below: (i)
In respect of the 2 Year Note Futures, the exposure notionally rolls over from the nearest delivery quarterly 2 Year Note Futures to the following 2 Year Note Futures on the last trading day of the option on the nearest delivery 2 Year Note Futures in the month before which such nearest delivery quarterly 2 Year Note Futures expires;
(ii)
In respect of the 10 Year Note Futures, the exposure notionally rolls over from the nearest delivery quarterly 10 Year Note Futures to the following 10 Year Note Futures on the last trading day of the option on the nearest delivery 10 Year Note Futures in the month before which such nearest delivery quarterly 10 Year Note Futures expires;
(iii)
In respect of the Schatz Futures, the exposure notionally rolls over from the nearest delivery quarterly Schatz Futures to the following Schatz Futures on the fifth (5th) calendar day in the month on which such nearest delivery quarterly Schatz Futures is due to expire;
(iv)
In respect of the Bund Futures, the exposure notionally rolls over from the nearest delivery quarterly Bund Futures to the following Bund Futures on the fifth (5th) calendar day in the month on which such nearest delivery quarterly Bund Futures is due to expire;
(v)
In respect of the JGB Futures, the exposure notionally rolls over from the nearest delivery quarterly JGB Futures to the following JGB Futures on the tenth Weekday prior to delivery of the front JGB Futures in the month on which such nearest delivery quarterly JGB Futures is due to expire;
(vi)
In respect of the S&P Futures, the exposure notionally rolls over from the nearest delivery quarterly S&P Futures to the following S&P Futures on the third Weekday prior to the Expiry Last Trading Day of such nearest delivery quarterly S&P Futures;
(vii)
In respect of the DAX Futures, the exposure notionally rolls over from the nearest delivery quarterly DAX Futures to the following DAX Futures on the third Weekday prior to the Expiry Last Trading Day of such nearest delivery quarterly DAX Future; and
(viii)
In respect of the Nikkei Futures, the exposure notionally rolls over from the nearest delivery quarterly Nikkei Futures to the following Nikkei Futures on the second Weekday prior to the Expiry Last Trading Day of such nearest delivery quarterly Nikkei Futures.
In respect of any Roll Day where the immediately preceding Scheduled Trading Dayc,t (the “Original Scheduled Trading Day”) for Securities-based Constituentc was a Disrupted Day in respect of such Securities-based Constituentc (for these purposes, an “Affected Securities-based Constituentc”), then the relevant Roll Dayc for the Affected Securities-based Constituentc shall be deemed to be the first Weekday immediately following the first Scheduled Trading Dayc,t that is not a Disrupted Day for the Affected Securities-based Constituentc, after the Original Scheduled Trading Day, provided that if such Scheduled Trading Day that is not a Disrupted Day in respect of the Affected Securities-based Constituentc (the “Affected Constituent Determination Day”) falls on or after the Expiry Last Trading Day, then the Index Calculation Agent will determine the Daily Return in respect of the Affected Securities-based Constituentc and the Affected Constituent Determination Day pursuant to the formula set out Section 𝑓𝑟𝑜𝑛𝑡 𝑓𝑟𝑜𝑛𝑡 3.3.1(b), but using the Index Calculation Agent’s determination of 𝐹𝑐,𝑡 and 𝐹𝑐,𝑡−1 in respect of the First Near Futures Contract as such First Near Futures Contract is determined in respect of the Original Scheduled Trading Day, acting in good faith and using such information and/or methods as it determines, in its reasonable discretion, are appropriate. In the event that each of the ten (10) Scheduled Trading Days immediately following the scheduled Expiry Last Trading Day are Disrupted Days in respect of such Affected Securities-based Constituent, then in such case, that tenth (10th) Scheduled Trading Day shall be deemed to be the applicable Roll Day (notwithstanding that it is a Disrupted Day in respect of the Affected Securities-based Constituent), and then the Index Calculation Agent shall implement a roll in respect of the Affected Securities-based
15
Constituent acting in good faith using such information and/or methods as it determines, in its reasonable discretion, are appropriate.
4.
Publication of the Index Level
4.1
Amendments
Economic, market, regulatory, legal, financial or other circumstances may arise that may necessitate or make desirable an amendment of the Index Rules. Notwithstanding the foregoing, the Index Sponsor may amend the Index Rules as it deems appropriate. Such amendments may include (without limitation): (a) correcting or curing any errors, omission or contradictory provisions; or (b)
modifications to the methodology described in the Index Rules (including, without limitation, a change in the frequency of calculation of the Index Level) that are necessary or desirable in order for the calculation of the Index to continue notwithstanding any economic, market, regulatory, legal, financial or other circumstances as of the Live Date of the Index; or
(c)
modifications of a formal, minor or technical nature.
The Index Sponsor will notify the Index Calculation Agent (if a different entity than the Index Sponsor) before making an amendment pursuant to this Section 6.2. The Index Sponsor may, but is not obliged to, take into account the views of the Index Calculation Agent regarding any proposed amendment. Following any amendment, the Index Sponsor will make available (as soon as practicable) the amended version of the Index Rules and will include the effective date of such amendment in the new version of the Index Rules. However, the Index Sponsor is under no obligation to inform any person about any amendments to the Index (except as required by law). The Index Sponsor may, in its reasonable discretion, at any time and without notice, terminate the calculation and publication of the Index. 4.2
No Advice or offer of securities
The Rules do not constitute investment, taxation, legal, accounting or other advice, including within the meaning of Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 or investment advice within the meaning of Article 4(4) of the Markets in Financial Instruments Directive 2004/39/EC or otherwise. The Index Rules neither constitute an offer to purchase or sell securities nor constitute specific advice in whatever form (investment, tax, legal, accounting or regulatory) in respect of any investment that may be linked to the Index. 4.3
Publication timing
Subject to Section 6, the Index Level will be calculated and published in USD by the Index Calculation Agent in respect of each day that is a Weekday on Bloomberg page “JMOZUSD Index”. With respect to any Weekday that is not a Disrupted Day for any Constituent, the Index Calculation Agent shall publish (in a manner determined by the Index Calculation Agent from time to time) the Index Level calculated in respect of such Weekday in accordance with the Index Rules. If a Weekday is a Disrupted Day for any Constituent, the Index Level in respect of such Weekday will only be published in accordance with the provisions set forth in Section 6. Notwithstanding anything to the contrary, the Index Sponsor may cease calculation and publication of the Index Level at any time in its sole discretion and nothing in this document shall be construed as an agreement by the Index Sponsor to continue to calculate the Index Level if the Index Sponsor has elected to cease publication. 4.4
No obligation to calculate and publish
16
Neither the Index Sponsor nor the Index Calculation Agent is under no obligation to continue the calculation, publication and dissemination of the Index. 4.5
Rounding
The Index Level shall be expressed to at least two decimal places as determined by the Index Calculation Agent in a commercially reasonable manner. The Index Calculation Agent may maintain the Index to a greater degree of specification and may calculate the Index Level using such calculated levels. 5.
Calculation Agent and Index Sponsor
J.P. Morgan Securities plc is the sponsor of the Index (the “Index Sponsor”). The Index Sponsor is responsible for, among other things, the creation and design of the Index, the documentation of the Index Rules, and the appointment of the calculation agent of the Index (the "Index Calculation Agent"), which may be the Index Sponsor, a non-related third party or an affiliate or subsidiary of the Index Sponsor. The Index Sponsor may at any time and for any reason terminate the appointment of an Index Calculation Agent and appoint an alternative entity as the replacement Index Calculation Agent. The Index Calculation Agent is responsible for: a. b.
calculating the Index Level in respect of each Weekday in accordance with the Index Rules; and determining (subject to the prior agreement of the Index Sponsor) if a Market Disruption Event, Disrupted Day, Extraordinary Event (or other similar event as set out in these Rules) has occurred and the related consequences and adjustments in accordance with the Index Rules.
The Index Sponsor may delegate and/or transfer any of its obligations or responsibilities in connection with the Index to one or more entities which it determines are appropriate. The Index Calculation Agent must obtain written permission from the Index Sponsor prior to any delegation or transfer of its responsibilities or obligations in connection with the Index to a third party. 6.
Market Disruption Events
If a Weekdayt is a Disrupted Day in respect of a Constituentc and the corresponding Constituent Weightc,t (as defined in section 3.5.1) is not equal to 0 in respect of such Weekdayt, the Index Calculation Agent will not publish the Index Level with respect to such Weekdayt and the Index Calculation Agent will resume publishing the Index Level with respect to the immediately following Weekday that is not a Disrupted Day in respect of any such Constituentc. 7.
Extraordinary Events
7.1
Successor Constituents or Reference Data
If any of the Constituents, or any data or information referenced by a Constituent or the Index is (a) not calculated and announced by the applicable Constituent Sponsor or the sponsor or provider of such data or information but is calculated and announced by a successor sponsor or provider acceptable to the Index Calculation Agent, or (b) replaced by a successor Constituent, successor data or successor information using, in the determination of the Index Calculation Agent, the same or substantially similar formula for and method of calculation as used in the calculation or preparation of such Constituent, data, or information then such Constituent, data or information will be deemed to be the constituent, or reference data so calculated and announced by that successor sponsor or provider as the case may be with effect from a date determined by the Index Calculation Agent who may make such adjustments to the Index Rules of the Index as it determines appropriate to account for such change. 7.2
Change in Law
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Without prejudice to the ability of the Index Calculation Agent to amend the Rules (see Section 1) in respect of a Change in Law, the Index Calculation Agent may: (a)
exclude, or
(b)
substitute,
any Constituent or other any data or information referenced by a Constituent or the Index (i) following the occurrence (and/or continuation) of a Change in Law, or (ii) in circumstances where it considers it reasonably necessary to do so to reflect the objective of the Index, including (without prejudice to the generality of the foregoing) any perception among market participants generally that the published value of a Constituent or any data or information referenced by a Constituent or the Index is inaccurate (e.g., an exchange fails to correct such value of any affected futures contract ), and then the Index Calculation Agent may adjust the Rules as it determines in good faith to be appropriate to account for such exclusion or substitution on such date(s) selected by the Index Calculation Agent. 7.3
Material Change
On any Weekday, if any Constituent Sponsor or any non-affiliated third party person that provides any data or information referenced by a Constituent or the Index makes a material change in the formula for or the method of calculating or preparation of such Constituent, data or information, which affects the ability of the Index Calculation Agent to calculate the Index Level, then the Index Calculation Agent may make such adjustment(s) that it determines to be appropriate to any variable, calculation, methodology or detail in these Index Rules to account for such modification. Such adjustment may occur prior to, on or after the date of such material change, depending on when such change is announced and when the Index Calculation Agent determines such change has occurred. 7.4
Impairment of License or Other Rights
If, at any time, any relevant license or other right or ability of the Index Calculation Agent or the Index Sponsor (or any of their affiliates) to use any Constituent or relevant data or information or to refer to the level/price or other information in respect of any Constituent or relevant data or information (or other component of the Index or another matter that could affect the Index) terminates, becomes impaired, ceases or cannot be obtained or will cease to be available on commercially reasonable terms or the Index Calculation Agent’s right or ability to use (i) the Constituent for the purposes of the Index or (ii) the Index in connection with any other license or sub-license agreement is otherwise impaired, ceases or cannot be obtained or will cease to be available on commercially reasonable terms (for any reason), then Index Calculation Agent may remove such Constituent or any other relevant data or information from the Index or substitute a successor constituent, data or information and may make such adjustment to these Rules as it determines appropriate to account for such change(s) on such date(s) selected by the Index Calculation Agent including, without limitation, selecting a replacement constituent, index or reference asset having similar characteristics to such Constituent and the date such replacement is effective. 7.5
Successor currency or change to an underlying currency
If, at any time, any FX Currency is lawfully eliminated, converted, redenominated or exchanged for any successor currency, then such currency shall be deemed replaced by such successor currency. To the extent that any such elimination, conversion, redenomination or exchange results in two or more currencies that were formerly associated with the original currency, the Index Calculation Agent may modify these Index Rules to account for such elimination, conversion, redenomination or exchange. For example, the Index Calculation Agent may select one of the applicable currencies to be a successor currency or amend the formulas for calculating the Index to account for the new exchange rate, if any.
7.6
Non-Publication of a Constituent as a result of Cancellation of a Constituent
If a Constituent Sponsor or a relevant exchange (as the case may be) permanently cancels a Constituent (including, for the avoidance of doubt, amending the frequency or timing of the issuance of options/futures contracts, determined by reference to the frequency or timing as of the Live Date), and no successor index or contract exists that is acceptable to the Index Calculation Agent, the Index Calculation Agent shall either:
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(a)
make such adjustment(s) that it determines to be appropriate to any variable, calculation, methodology, valuation terms or any other rule in relation to the Index to account for such cancellation, including but not limited to excluding or substituting the affected Constituent; or
(b)
cease to calculate and publish the Index Level.
Such adjustment may occur prior to, on or after the date of such cancellation, depending on when such cancellation is announced and when the Index Calculation Agent becomes aware of such change. 8.
Corrections in respect of the Index
If any publicly available financial information (including, but not limited to, interest rates, spot exchange rates, index levels, futures contract prices and volatility levels) published by the relevant financial information source selected by the Index Calculation Agent and used in any calculation or determination herein is subsequently corrected, or if the Index Calculation Agent identifies an error or omission in any of its calculations or determinations in respect of the Index, the Index Calculation Agent may, if the Index Calculation Agent determines that such error, omission or correction (as the case may be) is material and it is practicable, adjust or correct the relevant calculation or determination to take into account such correction as soon as reasonably practicable to do so. 9.
Responsibility
The Index Calculation Agent shall act in good faith and in a commercially reasonable manner. Whilst these Rules are intended to be comprehensive, ambiguities may arise. In such circumstances the Index Calculation Agent shall resolve such ambiguities in a reasonable manner and, if necessary, amend these Rules to reflect such resolution. None of the Index Sponsor, the Index Calculation Agent or any of their respective affiliates or subsidiaries or any of their respective directors, officers, employees, representatives, delegates or agents (each, a “Relevant Person”) shall have any responsibility to any person (whether as a result of negligence or otherwise) for any determinations made or anything done (or omitted to be determined or done) in respect of the Index or publication of the Index Level (or failure to publish such level) and any use to which any person may put the Index or the Index Level. All determinations in respect of the Index and the Index Level shall be final, conclusive and binding and no person shall be entitled to make any claim against any of the Relevant Persons in respect thereof. Once a determination or calculation is made or action taken by the Index Calculation Agent in respect of the Index, neither the Index Calculation Agent or any other Relevant Person shall be under any obligation to revise any determination or calculation made or action taken for any reason. 10.
Miscellaneous
Except where expressly stated otherwise herein, any determination required to be made or action required to be taken in respect of the Index on a day that is not a Weekday, shall be made or taken (as the case may be) on the next following Weekday. 11.
Hypothetical Back-Tested Levels
Any Index Level prior to the Live Date is a hypothetical, back-tested level. Such levels should not be taken as an indication of future performance, and no assurance can be given as to the levels or performance of the Index on a future date. Back-tested results are achieved by means of a retroactive application of a back-tested model designed with the benefit of hindsight. The Index Calculation Agent, in calculating hypothetical back-tested index levels, may have applied the disruption provisions specified in these Index Rules differently than it otherwise would have applied such provisions in a “live” calculation scenario. Additionally, the precision and rounding of the levels of the Index or a Constituent (or other calculated values) may differ from the methodology applied on a going forward basis. In calculating the hypothetical back-tested levels, the Index Calculation Agent may have made certain assumptions in respect of the timing surrounding the publication of certain indicators and Index levels. These
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assumptions may have a material impact on the hypothetical back-tested levels occurring on or before the Live Date. No representation is made that any investment that references the Index will or is likely to achieve returns similar to any hypothetical back-tested returns. Alternative modelling techniques or assumptions might provide different results. Finally, hypothetical back-tested results of past performance are neither an indicator nor a guarantee of future performance or returns. Actual results and performance may vary compared to such hypothetical back-tested levels.
12.
Definitions
Terms not otherwise defined herein shall have the following meanings: “CBOT”
means the Chicago Board of Trade or any successor;
“CBOT 10 Year Future” or “10 Year Note Futures”
shall have the meaning set forth in Section 2.2;
“CBOT 2 Year Note Future” or “2 Year Note Future”
shall have the meaning set forth in Section 2.2;
“Change in Law” (a) (i)
means, on or after the Live Date: due to: the adoption of, or any change in, any applicable law, regulation, order or rule (including, without limitation, any tax law); or the promulgation of, or any change in, the announcement or statement of a formal or informal interpretation by any court, tribunal or regulatory authority (or any representative thereof) with competent jurisdiction of any applicable law, rule, regulation or order (including, without limitation, as implemented by the U.S. Commodity and Futures Trading Commission, the U.S. Securities and Exchange Commission or any exchange or trading facility), in each case, the Index Calculation Agent determines in good faith that (x) it is contrary to such law, rule, regulation or order for any market participants that are brokers or financial intermediaries (individually or collectively) to hold, acquire or dispose of (in whole or in part) a position or interest in or a transaction referencing or relating to the Index, any Constituent, or any component of the Index or any Constituent or, (y) holding a position or interest in or a transaction referencing or relating to the Index, any Constituent or any component of the Index or any Constituent is (or, but for the consequent disposal or termination thereof, would otherwise be) in excess of any allowable position limit(s) applicable to any market participants that are brokers or financial intermediaries (individually or collectively) under any such law, rule, regulation or order in relation to the Index, any Constituent or any component of the Index or any Constituent, including in any case traded on any exchange(s), market or other trading facility (including, without limitation, any Relevant Exchange); or the occurrence or existence of any: suspension or limitation imposed on trading futures contracts (including, without limitation, referencing the Non-Securities-based Constituents); or
(ii)
(b) (i)
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(ii)
any other event that causes trading in futures contracts (including, without limitation, referencing the Non-Securities-based Constituents) to cease; means (as the case may be) (i) the official settlement price in respect of a Securities-based Constituent as calculated and published by the applicable Constituent Sponsor and (ii) the official closing level in respect of the Non-Securities-based Constituent as calculated and published by the applicable Constituent Sponsor;
“Closing Price”
“CME”
means the Chicago Mercantile Exchange or any successor;
“CME S&P500 Index Future” or “S&P Future”
shall have the meaning set forth in Section 2.2;
“Constituent Sponsor”
means in respect of any Constituent the Relevant Exchange or any corporation or other entity that, as determined by the Index Calculation Agent: (a) is responsible for setting and reviewing the rules and procedures and the method of calculation and adjustments, if any, related to such Constituent and (b) announces (directly or through an agent) the level or price of such Constituent on a regular basis in respect of each Scheduled Trading Day;
“Constituents”
means together the Securities-based Constituent and the Non-Securities-based Constituents as described in Section 2 above;
“Cumulative Return”
shall have the meaning set forth in Section 3.5.4;
“Disrupted Day”
means, in respect of a Scheduled Trading Day and a Constituent, the occurrence or existence of a Market Disruption Event;
“Equity Index Futures Constituents”
see Section 2.2;
“EUR”
means the lawful currency of the member states of the European Union that have adopted and continue to retain a common single currency through monetary union in accordance with European Union treaty law (as amended from time tom time), subject to the terms set forth in Section 7.5;
“EUREX”
means the EUREX Exchange or any successor;
“EUREX Bund Futures Future” or “Bund Future”
shall have the meaning set forth in Section 2.2;
“EUREX DAX Index Future” or “DAX Future”
shall have the meaning set forth in Section 2.2;
“EUREX Schatz Futures Future” or “Schatz Future”
shall have the meaning set forth in Section 2.2;
“Expiry Last Trading Day”
means, in respect of a quarterly futures contract that is a Securities-based Constituent, the last Scheduled Trading Day for such contract as specified by the Relevant Exchange.
“First Near Futures Contract”
means, in respect of any Scheduled Trading Day t, the quarterly futures contract with the Expiry Last Trading Day that follows most closely such Scheduled Trading Dayt;
“Fixing Time”
shall have the meaning set forth in Section 2.4;
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“Future Delivery Month”
means, in respect of each futures contract, March, June, September and December;
“FX Currency”
means the USD, EUR or JPY;
“FX Currency Jurisdiction”
means, the European Union, the United States or Japan, or any political subdivision or regulatory authority thereof;
“FX Currency Pair”
means: (a) USD and EUR; and (b) USD and JPY;
“FX Disrupted Day”
means any applicable day where: (a) the FX Rate is not available on the FX Price Source at the Fixing Time; or (b) an FX Disruption Event has occurred or is continuing;
“FX Disruption Event”
means, in respect of any applicable day, the occurrence or continuation of any of the following events (as determined by the Index Calculation Agent): (a) a “Convertibility Event,” which is an event that, in effect, prevents, restricts or delays a market participant’s ability to: (i) convert an FX Currency in an FX Currency Pair into the other FX Currency in such FX Currency Pair through customary legal channels; or (ii) convert an FX Currency in an FX Currency Pair into the other FX Currency in such FX Currency Pair at a rate at least as favourable as the rate for domestic institutions located in an FX Currency Jurisdiction in such FX Currency Pair; (b) a “Deliverability Event,” which is an event that has the effect of preventing, restricting or delaying a market participant from delivering an FX Currency from accounts inside an FX Currency Jurisdiction to accounts outside of such FX Currency Jurisdiction; (c) a “Liquidity Event,” which is the imposition by the an FX Currency Jurisdiction (of any capital or currency controls (such as a restriction placed on the holding of assets in or transactions through any account in an FX Currency Jurisdiction by a nonresident of such FX Currency Jurisdiction) or the publication of any notice of an intention to do so, which the Index Calculation Agent determines is likely to materially affect an investment in an FX Currency Jurisdiction; (d) a “Taxation Event,” which is the implementation by an FX Currency Jurisdiction (or any political subdivision or regulatory authority thereof) or the publication of any notice of an intention to implement any changes to the laws or regulations relating to foreign investment in such FX Currency Jurisdiction (including, but not limited to, changes in tax laws and/or laws relating to capital markets and corporate ownership), which the Index Calculation Agent determines are likely to materially affect an investment in such FX Currency Jurisdiction; or (e) a “Discontinuity Event” which is the occurrence or continuation of the pegging of one FX Currency in
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an FX Currency Pair to the other FX Currency in such FX Currency Pair, or any other currency or the controlled appreciation or devaluation by an FX Currency Jurisdiction (or any political subdivision or regulatory authority thereof) of an FX Currency, or any other currency, as determined by the Index Calculation Agent; “FX Price Source”
shall have the meaning set forth in Section 2.4;
“FX Rate”
shall have the meaning set forth in Section 2.4
“Government Bond Futures Constituents”
shall have the meaning set forth in Section 2.2;
“GSCI AG / EN/ IM and PM”
shall have the meaning set forth in Section 2.3;
“Index”
means the J.P. Morgan MOZAIC Index (USD);
“Index Calculation Agent”
shall have the meaning set forth in Section 5;
“Index Level”
means the level of the Index as calculated in accordance with the provisions in Section 3.1;
“Index Sponsor”
shall have the meaning set forth in Section 5;
“JPY”
means the Japanese Yen, which is the lawful currency of the State of Japan, subject to the terms set forth in Section 7.5;
“Live Date”
means the date set forth in Section 3.1.2.
“Market Disruption Event”
means, in respect of a Scheduled Trading Day and a Constituent: (a) In respect of a Securities-based Constituent: the failure of by the relevant Constituent Sponsor to calculate and publish the Closing Price of such Securities-based Constituent; and (b)In respect of a Non-Securities-based Constituent the occurrence of any one or more of the following circumstances: (i) a material limitation, suspension, or disruption of trading in one or more of the futures contracts included in the NonSecurities-based Constituent which results in a failure by the exchange on which such futures contract is traded to report a closing price for such futures contract on the day on which such event occurs or any succeeding day on which it continues; (ii) the closing price for any futures contract included in the Non-Securities-based Constituent is a "limit price", which means that the closing price for such futures contract for a day has increased or decreased from the previous day's closing price by the maximum amount permitted under applicable exchange rules; (iii) a failure by the applicable exchange or other price source to announce or publish the closing price for any futures contract included in the Non-Securities-based Constituent; or
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(iv) the failure of by the relevant Constituent Sponsor to calculate and publish the Closing Price of such Non-Securities-based Constituent. “Non-Securities-based Constituents”
shall have the meaning set forth Section 2;
“Osaka JGB Futures” or “JGB Futures”
shall have the meaning set forth in Section 2.2;
“Osaka Nikkei Futures” or “Nikkei Futures”
shall have the meaning set forth in Section 2.2;
“OSE”
means the Osaka Stock Exchange or any successor;
“Relevant Exchanges”
means, in respect of: (a) the Bund Futures, the Schatz Futures and the DAX Futures, the EUREX (b) the 10 Year Note Futures and the 2 Year Note Futures, the CBOT; (c) the S&P, the CME; and (d) the JGB Futures and the Nikkei Futures, the OSE;
“Roll Day”
see Section 3.6;
“Scheduled Trading Day”
means (a) in respect of a Securities-based Constituent, a day on which the Relevant Exchange is scheduled to be open for trading for its regular trading session or in respect of any such exchange, any successor exchange thereof (broadly construed as occurring as a result of a merger, acquisition or otherwise); and (b) in respect of a Non-Securities-based Constituent, a day on which the relevant index sponsor is scheduled to publish the Closing Price for such Constituent;
“Second Near Futures Contract”
means, in respect of any Scheduled Trading Day t, the quarterly futures contract with the Expiry Last Trading Day that follows most closely Expiry Last Trading Day of the First Near Futures Contract;
“Securities-based Constituents”
shall have the meaning set forth Section 2;
“USD”
means the U.S. Dollar, which is the lawful currency of the United States of America, subject to the terms set forth in Section 7.5; and
“Weekday”
means any day other than a Saturday or Sunday.
13. Versions of the Index Rules and Index Adjustments Any amendment or adjustment to the Index Rules for the Index and the effective date of any such amendment or adjustment may but does not have to be reflected in a revised version of the Index Rules. Copies of the latest issue of the Index Rules and/or details of relevant adjustments (where not reflected in a revised version of the Index Rules) may be obtained free of charge on request to the Index Sponsor at its principal office in London, England. Version
Date
Release
1.0
21 August 2009
1st Release
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1.1
5 December 2012
2nd Release
1.2
6 June 2014
3rd Release
1.3
30 October 2014
4th Release
1.4
27 January 2015
5th Release
1.5
3 June 2015
6th Release
1.6
16 September 2015
7th Release
1.7
30 November 2016
8th Release
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Index Disclaimers S&P Index Disclaimers S&P GSCITM Agriculture OC Excess Return Index S&P GSCITM Precious Metals OC Excess Return Index S&P GSCITM Industrial Metals OC Excess Return Index S&P GSCITM Energy OC Excess Return Index (together, the “S&P GSCI Indices”) Each S&P GSCI® Index (Each, an “S&P GSCI® Index”) is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by JPMS plc and/or its affiliates (the “Licensee”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI. S&P® and S&P GSCI® are trademarks of S&P and have been licensed for use by SPDJI and its affiliates and sublicensed for certain purposes by Licensee. The S&P GSCI® Indices are not owned, endorsed, or approved by or associated with Goldman Sachs & Co. or its affiliated companies. Licensee’s Index is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates or third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices do not make any representation or warranty, express or implied, to counterparts to the Licensee’s Index or any member of the public regarding the advisability of investing in securities generally or in Licensee’s Index particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices’ only relationship to Licensee with respect to the S&P GSCI® Index is the licensing of the S&P GSCI® Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices. The S&P GSCI® Index is determined, composed and calculated by S&P Dow Jones Indices without regard to Licensee or the Licensee’s Index. S&P Dow Jones Indices have no obligation to take the needs of Licensee or the owners of or counterparts to the Index into consideration in determining, composing or calculating the S&P GSCI® Index. S&P Dow Jones Indices are not responsible for and have not participated in the determination or calculation of the Index. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of Licensee’s Index. There is no assurance that investment products based on the S&P GSCI® Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a futures contract within the S&P GSCI® Index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such contract, nor is it considered to be investment advice. Notwithstanding the foregoing, CME Group Inc. and its affiliates may independently issue and/or sponsor financial products unrelated to Licensee’s Index currently being maintained by Licensee, but which may be similar to and competitive with Licensee’s Index. In addition, CME Group Inc. and its affiliates may trade financial products which are linked to the performance of the S&P GSCI® Index. It is possible that this trading activity will affect the value of the S&P GSCI® Index and Licensee’s Index. S&P DOW JONES INDICES DO NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P GSCI® INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF OR COUNTERPARTS TO THE LICENSEE’S INDEX, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P GSCI® INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND LICENSEE, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES. FX Rates Disclaimers
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The FX Rates are provided by The WM Company plc in conjunction with Reuters Limited. The WM Company plc shall not be liable for any errors in or delays in providing or making available the data contained within this service or for any actions taken in reliance on the same, except to the extent that the same is directly caused by its or its employees’ negligence.
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