The Issuer believes that the following factors may affect its ability to fulfil its obligations under the ETP Securities issued under the Programme. Some of these factors describe potential events which may or may not occur and the Issuer is not in a position to express a view on the likelihood of any such contingency occurring.
Factors which the Issuer believes may be material for the purpose of assessing the market risks associated with ETP Securities issued under the Programme are also described below.
The Issuer believes that the factors described below represent the principal risks inherent in investing in ETP Securities issued under the Programme, but the inability of the Issuer to pay any amounts on or in connection with any ETP Securities may occur for other reasons and the Issuer does not represent that the statements below regarding the risks of holding any ETP Securities are exhaustive. Before making an investment decision, prospective purchasers of ETP Securities should consider carefully, in the light of their own financial circumstances and investment objectives, all the detailed information set out elsewhere in this document and, in particular, the considerations set forth below in order to reach their own views prior to making any investment decision.
This Base Prospectus identifies in general terms certain information that a prospective investor should consider prior to making an investment in the ETP Securities. However, a prospective investor should, without any reliance on the Issuer, the Margin Account Provider or any Authorised Participant or any of their respective Affiliates, conduct its own thorough analysis (including its own accounting, legal and tax analysis) prior to deciding whether to invest in any ETP Securities issued under the Programme.
Any evaluation of the suitability for an investor of an investment in ETP Securities issued under the Programme depends upon a prospective investor’s particular financial and other circumstances, as well as on specific terms of the relevant ETP Securities and, if it does not have experience in financial, business and investment matters sufficient to permit it to make such a determination, it should consult with its financial adviser prior to deciding whether or not to make an investment in the ETP Securities.
The ETP Securities may not be a suitable investment for all investors
Each potential investor in the ETP Securities must determine the suitability of that investment in light of its own circumstances and should consult with its legal, business, tax advisers and such other advisers as it deems appropriate to determine the consequences of an investment in the ETP Securities and to arrive at its own evaluations of the investment.
In particular, each potential investor should:
(a) be financially sophisticated in that it either (i) has the requisite knowledge and experience in financial, business and investment matters and of investing in investments offering a similar economic exposure to the ETP Securities, and access to, and knowledge of, appropriate resources, to evaluate the information contained in this document and the relevant Final Terms and the merits and risks of an investment in the ETP Securities in the context of such investors’ financial position and circumstances; or (ii) if it does not have such knowledge, experience and access, have consulted with appropriate advisers who do have such knowledge, experience and access;
(b) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the ETP Securities and the impact the ETP Securities will have on its overall investment portfolio;
(c) understand thoroughly the terms of the ETP Securities and be familiar with the behaviour of the market of the Component Security and the Index relating to a particular Series of ETP Securities and any relevant indices and financial markets;
(d) have an asset base sufficiently substantial as to enable it to sustain any loss that they might suffer as a result of an investment in the ETP Securities and have sufficient financial resources and liquidity to bear all of the risks of an investment in the ETP Securities including, without limitation, any currency exposure arising from the currency for payments being different to the prospective investor’s currency.
If a prospective investor is in any doubt as to whether the ETP Securities are a suitable investment for it, it should consult with an appropriate independent financial advisor prior to deciding whether or not to make an investment in the ETP Securities.
This Base Prospectus is not, and does not purport to be, investment advice, and none of the Issuer, the Authorised Participants or the Margin Account Provider makes any recommendation as to the suitability of the ETP Securities as an investment.
The provision of this Base Prospectus to prospective investors is not based on any prospective investor’s individual circumstances and should not be relied upon as an assessment of suitability for any prospective investor in the ETP Securities. Even if the Issuer, any of the Authorised Participants, the Margin Account Provider or any of their respective Affiliates possess limited information as to the objectives of any prospective investor in relation to any transaction, series of transactions or trading strategy, this will not be deemed sufficient for any assessment of suitability for such person of the ETP Securities.
Any trading or investment decisions a prospective investor takes are in reliance on its own analysis and judgment and/or that of its advisers and not in reliance on the Issuer, the Authorised Participants, the Margin Account Provider or any of their respective Affiliates.
In particular, each prospective investor in the ETP Securities must determine, based on its own
independent review and such professional advice as it deems appropriate under the circumstances, that its acquisition of the ETP Securities (i) is fully consistent with its (or, if it is acquiring the ETP Securities in a fiduciary capacity, the beneficiary’s) financial needs, objectives and condition, (ii) complies and is fully consistent with all investment policies, guidelines and restrictions applicable to it (whether acquiring the ETP Securities as principal or in a fiduciary capacity) and (iii) is a fit, proper and suitable investment for it (or, if it is acquiring the ETP Securities in a fiduciary capacity, for the beneficiary), notwithstanding the clear
and substantial risks inherent in investing in or holding the ETP Securities.
Each prospective investor in ETP Securities should have sufficient financial resources and liquidity to bear all of the risks of an investment in the relevant ETP Securities, including, without limitation, where the currency for payments is different from the potential investor’s currency, the associated currency exposure. See “Exchange rate risks and exchange controls” below.
Investment activities of certain investors are subject to investment laws and regulations or review or regulation by certain authorities. Each prospective investor should therefore consult its legal advisers to determine whether and to what extent (i) the ETP Securities are legal investments for it, (ii) if relevant, the ETP Securities can be used as underlying securities for various types of borrowing and (iii) other restrictions apply to its purchase or, if relevant, pledge, of any ETP Securities. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of ETP Securities under any applicable risk-based capital or similar rules.
Risk factors relating to the ETP Securities
Market price of the ETP Securities
The ETP Securities may have a long term and the only means through which an investor will be able to realise value from an ETP Security prior to its Final Redemption Settlement Date will be to sell it at its then market price in a secondary transaction. While each Authorised Participant appointed in respect of the Programme and/or a Series of ETP Securities intends to make a market for the relevant Series of ETP Securities in respect of which it is appointed as an Authorised Participant, no Authorised Participant is obliged to make a market for any Series of ETP Securities (including any Series in respect of which it is appointed as an Authorised Participant) and an Authorised Participant may discontinue making a market at any time.
General movements in local and international markets and factors that affect the investment climate and investor sentiment could all affect the level of trading and, therefore, the market price of the ETP Securities. Investors should note that general movements in markets and factors that affect the investor climate and investor sentiment may have different effects on each Series of ETP Securities. The ETP Security Value and/or market price of the ETP Securities may be volatile and may fall rapidly and an investor may not be able to sell its ETP Securities quickly and/or at a price such that the investor is able to prevent or minimise any loss of its investment.
The market price of the ETP Securities of a Series will be affected by a number of factors, including, but not limited to:
(i) the value and volatility of the Index referenced by such Series of ETP Securities and the assets underlying that Index;
(ii) the degree of leverage applicable to such Series of ETP Securities;
(iii) market perception, interest rates, yields and foreign exchange rates;
(iv) whether or not any market disruption is subsisting;
(v) the nature and value of any Collateral Assets relating to such Series of ETP Securities;
(vi) the creditworthiness of the Custodian and any Sub-Custodian; and
(vii) the liquidity in the ETP Securities.
Prospective investors should be aware that the ETP Security Value and the secondary market price of the ETP Securities can go down as well as up throughout the term of the ETP Securities.
Certain indices may be more volatile than other indices, and the secondary market price of the ETP Securities linked to such index may demonstrate similar volatility. Prospective investors should be aware that the ETP SecurityValue and market price of any ETP Securities on any Valuation Date may not reflect their prior or future performance. There can be no assurance as to the future value and market price of any ETP Securities.
AN INVESTMENT IN ETP SECURITIES INVOLVES A SIGNIFICANT DEGREE OF RISK AND AN
INVESTOR MAY LOSE THE VALUE OF ITS ENTIRE INVESTMENT OR PART OF IT.
Market-making by Authorised Participants
The price (if any) provided by an Authorised Participant for the purchase or sale of ETP Securities in the secondary market (whether in an on-exchange or off-exchange transaction), and the number of ETP Securities subject to any such offer, will be determined at the absolute discretion of that Authorised Participant by reference to such factors as it sees fit.
An Authorised Participant may maintain such bid/offer spread as it determines in its absolute discretion.
The bid/offer spread is the difference between the bid price (i.e. the price at which a holder can sell ETP Securities to the Authorised Participant) and the offer price (i.e. the price at which a holder can buy ETP Securities from the Authorised Participant). Any price provided by an Authorised Participant or other secondary market price may take into account fees (including any dealing order fees charged by the Issuer to such Authorised Participant), charges, duties, taxes, commissions, liquidity, market spreads and/or other factors.
Prospective investors should note that:
(i) not all market participants and Authorised Participants will determine the price of the ETP Securities of a Series in the same manner, and the variation between such valuations and prices quoted may be substantial;
(ii) the number of ETP Securities of a Series subject to any offer made by an Authorised Participant or otherwise in the secondary market may be affected by market demand for the ETP Securities of that Series, the number of ETP Securities of that Series in issue, whether the Margin Account Provider has requisite capacity to enter into margin account agreements in respect of any new ETP Securities, whether subscriptions can be processed and prevailing market conditions;
(iii) they may not be able to sell their ETP Securities quickly, easily or at prices that will provide them with a yield comparable to other similar investments;
(iv) any price at which the ETP Securities of a Series may be sold prior to the Final Redemption Date may be at a discount, which could be substantial, to the price at which such ETP Securities were acquired by the relevant investor; and
(v) illiquidity may have a severely adverse effect on the ETP Security Value. Furthermore, because each Series of ETP Securities provides leveraged exposure to a single security, the impact of illiquidity of such security – particularly during an environment with significant price declines – is intensified due to the concentrated nature of the exposure of the ETP Securities.
Prospective investors should be aware that ETP Securities requested for issue and subscribed for by an Authorised Participant may be held on an inventory basis by such Authorised Participant and offered for sale and/or sold over a period of time. Investors should not assume that ETP Securities will automatically be placed with investors by the relevant Authorised Participant(s) immediately upon issue. To the extent that the Authorised Participants hold ETP Securities at any time, they may exercise their rights under them in such manner as they see fit in their own interests and need not have regard to the interests of other holders of ETP Securities or any other person. In particular, an Authorised Participant that is a holder of
ETP Securities may vote at any meeting of holders of such ETP Securities or approve any resolution of such holders as it sees fit (including with respect to any changes to the terms of the ETP Securities proposed by the Issuer).
Foreign exchange risk
Prospective investors should be aware that in case the Component Security of the relevant Index for a Series of ETP Securities is denominated in a currency other than the currency in which the ETP Securities are listed, correlation risks may apply. These correlation risks depend on the degree of dependency of the currency fluctuations of the foreign currency of the Component Security of the relevant Index for a Series of ETP Securities to the currency in which the ETP Security Value or the Redemption Amount of such Series of ETP Securities is calculated. Hedging transactions, if any, of the ETP Securities may not exclude these
Each Series of ETP Securities provide leveraged exposure to a single security (the Component Security of the relevant Index for such Series of ETP Securities). Due to this concentrated leveraged exposure to a single security, prospective investors should be aware that there are risks deriving from such concentration, the most significant of which is the impact on the liquidity and the volatility of the ETP Securities.
In respect of liquidity, a concentrated leveraged exposure to a single security heightens the impact of the illiquidity of such security on the ETP Securities – particularly during an environment with significant price declines. Furthermore, the volatility of the ETP Securities is also intensified due to their concentrated leveraged exposure, as there is no other reference asset to counterbalance potential volatile movements on the Component Security of the relevant Index for a Series of ETP Securities.
Prospective investors should also be aware that leveraged exposure to the Component Security has a high degree of idiosyncratic (i.e., company-specific) risk, relative to a more diversified investment. Examples of idiosyncratic risk include, but are not limited to: company management expertise, capital allocation, labour and/or supply chain disruptions, theft, lawsuits and natural disasters.
Furthermore, because each ETP Security provides exposure to a single Component Security, the potential impact of corporate actions is more significant than in a diversified investment. Certain corporate actions, such as a merger or acquisition, could result in the eventual liquidation of an ETP Security.
Tracking error in relation to Component Security
At any time, the price at which any Series of ETP Securities trade on the London Stock Exchange (or any other exchange or market on which they may be quoted or traded) may not reflect accurately the leveraged changes in the return of the Component Security which the relevant Index of such Series seeks to track.
The application and redemption procedures for any Series of ETP Securities and the role of the Authorised Participant(s) as market-makers are intended to minimise this potential difference. However, such price at which any Series of ETP Securities trade will be a function of supply and demand amongst investors wishing to buy and sell such Series and the bid/offer spread that market-makers are willing to quote for such Series.
The Issuer’s ability to issue new ETP Securities of a Series is subject to the Margin Account Provider’s ability to increase the amount of margin provided under the Margin Account Agreement in connection with such Series. In the relevant Margin Account Agreement, the Margin Account Provider will agree limits on, amongst other things, the amount of margin to be provided in relation to each Series of ETP Securities and each Index. Such capacity limits will reference the Margin Account Provider’s exposure, pursuant to all Margin Account Agreements entered into by the Issuer with the Margin Account Provider in connection with
any Series of ETP Securities, to the relevant Index, and accordingly the capacity limits for each Series of ETP Securities that reference the same Index will be interdependent.
The Issuer will notify the ETP Securityholders on the Issuer’s website of the then applicable Margin Account Provider capacity limits following the written request of any ETP Securityholder.
If the Issuer is unable to issue new ETP Securities of a Series due to Margin Account Provider capacity limits being breached, and there is high market demand for ETP Securities of such Series, then such ETP Securities may trade at a significant premium to their ETP Security Value. An investor who buys any such ETP Securities in such circumstances may incur a significant loss should either market demand fall, or should the Margin Account Provider agree to increase its capacity limits with respect to the relevant Index in order that further ETP Securities of such Series may be issued. Such significant loss can even occur where the ETP Security Value has increased during the period of that investor’s holding of such ETP
In addition, each Series of ETP Securities has a principal protection component (the “Principal Protection Amount”) which is not reflected in the Index that such Series of ETP Securities seeks to track. Because the Leverage Factor for such Series of ETP Securities will not be applied to this Principal Protection Amount, the Leverage Factor of such Series will be marginally less than the Index Leverage Factor and will therefore contribute to daily tracking error.
Issuer’s right to vary fees
The fees that are taken into account in calculating the ETP Security Value in respect of a Series on any Valuation Date (comprising the Arranger Fee and the Daily Margin Interest Rate applicable to such ETP Securities) may be varied upon the Issuer giving notice to the ETP Securityholders. Potential investors should note that the Issuer is not required to consider the interests of the ETP Securityholders in making any such variation.
Index Sponsor’s right to make funding adjustments in the relevant Index
Each Series of ETP Securities reference an Index whose methodology may take into account specific funding adjustments. Depending on market conditions, the Index Sponsor for the relevant Index may vary its funding adjustments from time to time without regard to the interests of the ETP Securityholders. Potential investors should note that the Issuer shall have no obligation to adjust the ETP Security Value, the calculation or the methodology of the relevant Series of ETP Securities so as to eliminate or reduce the impact of the funding adjustments made in the underlying Index of such Series of ETP Securities.
Issuer’s right to make funding adjustments in the relevant Series of ETP Securities
Each Series of ETP Securities take into account specific funding adjustments, which may be varied by agreement between the Issuer and the relevant Margin Account Provider. Potential investors should note that the Issuer and the Margin Account Provider are not required to consider the interests of the ETP Securityholders in making any such variation.
Issuer’s right to replace agents and providers
The Issuer reserves the right to replace the Margin Account Provider, the Portfolio Administrator, the Custodian, the Trustee (only in accordance with the Trust Deed), the Issuing and Paying Agent, the Registrar, the CREST Settlement Agent and any other agents or providers herein at its sole discretion in order to ensure the efficient operation of this Programme.
Only Authorised Participants may deal with the Issuer in subscribing for or requiring the Issuer to redeem outstanding ETP Securities, save in relation to Optional Redemptions at any time following notification by the Issuer that redemption requests from ETP Securityholders which are not Authorised Participants will be permitted.
Prospective purchasers should note that the Optional Redemption Amount payable by the Issuer to an ETP Securityholder in respect of an ETP Security will be reduced on account of any amounts owing to the Margin Account Provider. As such, the amount due to an ETP Securityholder in respect of each ETP Security held by it on the Optional Redemption Settlement Date may be less than the ETP Security Value in respect of such ETP Securities.
The amount of any Optional Redemption is subject to the Maximum Daily Redemption Limit, being a maximum limit (if applicable) on the redemption number of ETP Securities of a Series on any Optional Redemption Pricing Date, as may be amended by the Margin Account Provider from time to time in accordance with the terms of the Operating Procedures Agreement.
Prospective investors should be aware that it is possible that the Maximum Daily Redemption Limit could cause the ETP Securities to trade at a higher premium or result in a discount to the ETP Security Value.
An investor who buys ETP Securities in such circumstances may incur a significant loss should market demand change. Significant loss could occur even where the ETP Security has increased in price during the investor’s holding period. The Maximum Daily Redemption Limit could also lead to higher trading spreads for the ETP Securities in the secondary market, which could increase the execution costs for an investor purchasing the ETP Securities in the secondary market.
In the event that an investor is not able to immediately redeem their ETP Securities due to a breach of the Maximum Daily Redemption Limit, such investor will be subject to market risk (i.e. that the value of the ETP Securities will decline prior to redemption and therefore reduce the redemption amount). As a result, it is possible that the redemption amount could be reduced due to a decline in the price of the Component Security (which would consequently impact the value of the ETP Securities).
In addition, prospective investors should be aware that if trading in the Component Securities in respect of a Series of ETP Securities is suspended, any Optional Redemption would be delayed. As a result, any redemption request relating to the relevant ETP Securities placed on the day upon which the relevant Component Security is suspended from trading would be delayed and such suspension from trading of the relevant Component Securities could ultimately lead to a Disruption Event Redemption. Investors would therefore be subject to market risk (i.e. that the value of the ETP Securities will decline prior to redemption
and therefore reduce the redemption amount). As a result, it is possible that the redemption amount could be reduced due to a decline in the price of the Component Security (which would consequently impact the value of the ETP Securities).
Risks relating to the Indices
The ETP Securities are index-linked securities. Prospective investors should note that the amount payable on the redemption of the ETP Securities of any Series will be linked to the daily performance of the Index referenced by that Series.
Prospective investors should be aware that the level of an Index can go down as well as up and that the past performance of an Index will not be indicative of its future performance. There can be no assurance as to the future performance of any Index to which the ETP Securities are linked. The ETP Securities may trade differently from the performance of the Index and changes in the level of the Index may not result in a comparable change in the market value of the ETP Securities or in the ETP Security Value.
Prospective investors should be aware that, in addition to any Arranger Fees or other expenses deducted in the calculation of the ETP Security Value, fees and other adjustments may be deducted in the calculation of the level of the Index by the relevant Index Sponsor. Prospective investors should carry out their own detailed review of the composition and calculation of the applicable Index and the rules relating thereto and ensure that they understand the fees and adjustments and any other amounts deducted from (or added to) the Index, the impact such fees may have on the level of the Index and the circumstances in which any such fees and adjustments may change.
Accordingly, before investing in any ETP Securities, prospective investors should carefully consider whether an investment based on the performance of the applicable Index is suitable for them and in all cases an investor in ETP Securities should carry out its own detailed review of the applicable Index and the rules relating thereto.
Each Series of ETP Securities provide leveraged exposure to the daily performance of a single equity security and therefore is subject to general and specific market movements and changes in the market rates or prices such as interest rates, credit spreads, foreign exchange rates, commodities and equity prices.
Purpose of the Index
The purpose of the Index in respect of each Series of ETP Securities is to provide leveraged exposure to the Component Security of such Index, which will be adjusted daily in accordance with the performance of the Component Security. As such, any negative or positive changes in the price of such Component Security will be multiplied by the applicable Index Leverage Factor for the relevant Series of ETP Securities.
Based on the daily leveraged valuation of the Component Security provided by the Index and in accordance with the Leverage Factor for the relevant Series of ETP Securities, Collateral Assets will be acquired or disposed from the Margin Account. Potential Investors should note that they will have no entitlement to the relevant Index or the Component Security of such Index, but solely to the proceeds from the liquidation of the Collateral Assets (after deduction of all costs and expenses incurred by the Issuer in connection with the liquidation of such Collateral Assets and repayment of a pro rata proportion of the Margin Loan (and any interest accrued thereon) held in the Margin Account.
Risks associated with indices generally
Factors affecting the performance of indices may adversely affect the value of the ETP Securities
The performance of an Index in respect of each Series of ETP Securities is dependent upon the
macroeconomic factors relating to the share that comprises such Index, which may include interest rates and price levels on the capital markets, currency developments, political factors and company-specific factors such as earnings position, market position, risk situation, shareholder structure and distribution policy.
The returns on the ETP Securities may not reflect a direct investment in the assets comprised in the applicable Index
The return payable on ETP Securities linked to an Index may not reflect the return an investor would realise if it actually owned the relevant Component Security of such Index. For example, holders of the ETP Securities linked to an Index will not receive any dividends paid on the
Component Security of the relevant Index and will not participate in the return on those dividends other than through the effect that these dividends might have on the Redemption Amount of the ETP Securities, as any dividends held in the Margin Account in respect of a Series of ETP Securities would increase the Collateral Assets in respect of such Series. Similarly, the holders of such ETP Securities will not have any voting rights in the Component
Security of such Index. Accordingly, investors in ETP Securities may receive a lower payment upon settlement or redemption of such ETP Securities than such investor would have received if it had invested in the Component Security of the Index to which such ETP Securities are linked.
The actions of the Index Sponsor, including any change in the composition or discontinuance of an Index, could adversely affect the market value of the ETP Securities referencing such Index
The sponsor of each Index is responsible for the calculation and maintenance of that Index. The sponsor of any Index can make methodological changes that could affect the composition, calculation and/or maintenance of such Index, which would affect the payments made by the Issuer to the investors in the ETP Securities referencing such Index. The sponsor of any Index may effect intraday rebalancing of the Index due to volatility of the relevant Component Security of such Index, which may make the Index Level differ from the market price of the Component Security multiplied by the relevant Index Leverage Factor. The sponsor of any such Index may also alter, discontinue or suspend calculation or dissemination of such Index. The sponsor of an Index will have no involvement in the offer and sale of the ETP Securities and will have no obligation to any investor in such ETP Securities. The sponsor of an Index may take any actions in respect of such Index without regard to the interests of the investor in the ETP Securities, and any of these actions could adversely affect the market value of the ETP Securities.
The Issuer is not affiliated with the sponsor of any Index in any way (except for the agreements and licensing arrangements described in this Base Prospectus) and has no ability to control or predict their actions, including any errors in or discontinuation of disclosure regarding its methods or policies relating to the calculation of any Index or related Indices. ETP Securityholders will have no recourse against the sponsor of any Index, or the underlying components of such Index.
Disruption Events/Adjustment Events/Change in Law
Any Valuation Date of a Series of ETP Securities may become subject to disruption due to occurrence of certain events including, without limitation:
(i) any applicable Exchange or Related Exchange failing to open for its regular trading session, or suspends or limits trading of any components of such index, or an event occurs that impairs trading or valuation on the Exchange of, any components of such index;
(ii) the performance of an Index falling overnight by more than the applicable threshold;
(iii) the performance of an Index falling within a day by more than the applicable threshold;
(iv) the Index Sponsor permanently cancelling the Index;
(v) the Index Sponsor announcing that it will make a material change in the formula for, or the methodof, calculating the Index or in any other way materially modifying the Index;
(vi) the Index Sponsor failing to calculate and announce the level of the Index; or
(vii) a change in any applicable law or regulation that causes it to become illegal for the Margin Account Provider to hold, acquire or dispose of hedging transactions in respect of its obligations under a Margin Account Agreement, or causing the Margin Account Provider to incur materially increased costs in maintaining or hedging its obligations under a Margin Account Agreement.
The consequences of such events may include, variously, disruptions or delays to pricing of ETP Securities, the postponement of subscriptions for, and redemptions of, ETP Securities, adjustments to the terms of the ETP Securities and the designation of a Successor Index. Ultimately, the occurrence of any such event may trigger the mandatory redemption of the affected Series of ETP Securities. In this eventuality, the amount which an ETP Securityholder may receive in respect of each ETP Security subject to such redemption may be lower than the ETP Security Value.
Pursuant to the European Referendum Act 2015, a referendum on the United Kingdom’s membership of the EU (the “UK’s EU Referendum”) was held on 23 June 2016 with the majority voting to leave the EU. On 29 March 2017, the UK Government exercised its right under Article 50 of the Lisbon Treaty to leave the EU.
Deteriorating business, consumer or investor confidence could lead to (i) reduced levels of business activity; (ii) higher levels of default rates and impairment; and (iii) mark to market losses in trading portfolios resulting from changes in credit ratings, share prices and solvency of counterparties.
No assurance can be given that such matters would not adversely affect the market value and/or the liquidity of the ETP Securities in the secondary market.
Reform of LIBOR, EURIBOR and other “benchmarks”
The London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) and other interest rates or other types of rates and indices which are deemed to be “benchmarks” are the subject of ongoing national and international regulatory reform, including the implementation of the European regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, which entered into force on June 30, 2016 as well as proposals such as the IOSCO Principles for Financial Market Benchmarks (July 2013). Following the implementation of any such potential reforms, the manner of administration of benchmarks may change, with the result that they may perform differently than in the past, or benchmarks could be eliminated entirely, or there could be other consequences which cannot be predicted. On July 27, 2017, the UK Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021, and indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.
The potential elimination of the LIBOR benchmark or any other benchmark, or changes in the manner of administration of any benchmark, could result in the applicable interest rate for any calculation that are linked to LIBOR (including the calculation of the Daily Margin Interest Rate) or another benchmark becoming fixed or other adverse consequences which could adversely affect the return on the ETP Securities, the value of the ETP Securities and the trading market for the ETP Securities. At this time, no consensus exists as to what rates or indices may become accepted alternatives to LIBOR or other benchmarks and it is impossible to predict the effect that any such alternative may have on the value of the ETP Securities that are linked to existing benchmarks. Any such consequence could have a material adverse effect on the return on, value of and market for the ETP Securities.
Risks relating to an investment in leveraged ETP Securities
For an explanation of the risks covered here and some simulated numerical examples, see the Section of this Base Prospectus titled “Economic Overview of the ETP Securities – Daily return and simulated examples”.
Tracking error in relation to the Index
At any given time, the price at which any Series of ETP Securities trade in the secondary market may be significantly different from the Index Level of the relevant Index of such Series. Additionally, the performance of any Series of ETP Securities may significantly differ from the performance of the relevant Index of such Series.
Accordingly, there is a risk that the return on any Series of ETP Securities may differ from the actual return that investors would obtain from the relevant Index tracked by such Series. Therefore, investors may receive a return under the ETP Securities that is significantly lower than the return that they would receive if it was possible for investors to invest in the relevant Index directly.
Each Series of ETP Securities seek to achieve a return which is a multiple of the daily return of the Component Security of the relevant Index for such Series (excluding the effects of any applicable fees and adjustments). Thus the ETP Securities will magnify losses in market environments adverse to their objective compared to similar exchange traded products that are not leveraged. In addition, losses will be magnified as the amount of leverage increases.
Investing in ETP Securities is not the same as being long in the Component Security or in the relevant Index and is different from a long futures position.
Investing in ETP Securities is not the same as making a leveraged investment in the Component Security of the relevant Index. The return from holding ETP Securities is not the same as the return from buying the Component Security of the relevant Index, and is not the same as being long in a comparable position in futures contracts related to such Component Security.
The return from holding ETP Securities is not the same as the return generated from the relevant Index, and is not the same as being long in a comparable position in futures contracts related to such Index.
Due to the ETP Securities’ daily investment goal, an ETP Security’s return over holding periods longer than one day will likely differ from the return of the relevant Index, and this difference will become more significant as the holding period increases in length.
The return on ETP Securities over a period longer than one day is the result of the return for each day compounded over all days in that period and the effects of daily rebalancing. As a consequence of the daily leverage exposure of ETP Securities, over periods longer than one day, the redemption entitlement of an ETP Security will fall if the relevant Index’s performance is flat (i.e. has a zero or close to zero return).
Factors affecting leverage risk
Higher leverage, higher volatility and longer holding periods will increase the risk from investing in ETP Securities.
Risk of regulatory intervention
Government or regulatory intervention in the financial markets could result in the Issuer being unable to enter into, or maintain, transactions in relation to any Series of ETP Securities. If, due to a change in any applicable law or regulation, it becomes illegal for the Issuer or the Margin Account Provider to perform its obligations under a Margin Account Agreement, that Margin Account Agreement will terminate. If the Issuer is unable to enter into a replacement margin account agreement the ETP Securities of the relevant Series will fall for mandatory early redemption.
Risks relating to the early redemption of the ETP Securities
Issuer call option
The Issuer may at any time, in its sole and absolute discretion, elect to redeem all or some only of the ETP Securities of a Series. In exercising such discretion, the Issuer will have no regard to the interests of the ETP Securityholders, and ETP Securityholders may receive less, or substantially less, than their initial investment.
Mandatory Redemption Events and Events of Default
The ETP Securities of a Series may become due and payable prior to their Final Redemption Date, as further described in Conditions 8.7 and 12, in connection with the occurrence of an Event of Default (including an event of default with respect to the Issuer or the Margin Account Provider under any applicable Margin Account Agreement) or a Mandatory Redemption Event.
Consequences of a Mandatory Redemption Event or an Event of Default
Following the occurrence, in respect of a Series of ETP Securities, of:
(i) a Mandatory Redemption Event, each ETP Security of such Series will become due and payable on the relevant Mandatory Redemption Settlement Date at its Mandatory Redemption Amount (equal to the greater of (a) the Principal Protection Amount of such ETP Security and (b) the Prorata Liquidation).
(ii) an Event of Default, the Trustee may, and will, if so directed in writing by the holders of at least a majority of the ETP Securities, declare such ETP Securities immediately due and payable at their Final Redemption Amount.
Risk of intraday rebalancing
As defined in the Index methodology in respect of a Series of ETP Securities, there is a possibility of intraday rebalancing in the event of a significant decline in the price of the relevant Component Security for such Series. On a day in which an intraday rebalance is triggered, the daily return of the relevant Series of ETP Securities will not be equal to the Leverage Factor of such Series multiplied by the daily return of the respective Component Security. Such intraday adjustment seeks to protect the holder of Leveraged ETP
Securities in the event of extreme market movements on any single Valuation Date (since the last Price per ETP Security was calculated) by crystallising the losses incurred up to that point.
As a result of the intraday rebalancing, a Series of ETP Securities may not track what an investor might expect on such day. If the price of the relevant Component Security was to reverse its fall after the intraday rebalancing, then the holder of the relevant ETP Security will not benefit from the reversal of the price of the Component Security to the same extent that it might have if the intraday rebalancing had not occurred. However, if the price of the relevant Component Security continues to fall, then the holder of such ETP Security will not suffer a loss to the same extent as if the intraday rebalancing had not occurred.
At the end of a Valuation Date on which an intraday rebalancing occurs, the relevant ETP Security will rebalance once more as if it were the end of a normal Valuation Date.
Recognition of Security in other jurisdictions
The laws of certain jurisdictions may affect some or all of the assets comprising the Collateral Assets. In the event that the laws of a jurisdiction do not recognise the security granted by the Trust Deed, such security may not be effective in relation to assets deemed located in that jurisdiction and/or such assets may be subject to claims which would otherwise rank after claims secured by the Trust Deed.
Enforcement of the Security
The obligations of the Issuer in respect of a Series of ETP Securities are secured by the Trust Deed in respect of such Series of ETP Securities. Pursuant to such Trust Deed, the Issuer will create security in respect of that Series in favour of the Trustee (for the benefit of the Secured Creditors) over (i) all of the Issuer’s rights, title, interest and benefit present and future in, to and under the Programme Documents to the extent that they relate to the ETP Securities; (ii) all sums held now or in the future by or on behalf of the Issuer (including, without limitation, by the Issuing and Paying Agent and/or the Registrar and/or the CREST Settlement Agent) to meet payments due in respect of the obligations and duties of the Issuer under the Trust Deed and the ETP Securities, (iii) the Collateral Assets and any sums of money, securities, financial instruments or other property received or receivable now or in the future by or on behalf of the
Issuer under the Margin Account Agreement and the Portfolio Administration Agreement and
(iv) all of the Issuer’s rights as against the Margin Account Provider, the Custodian and/or any Sub-Custodian in respect of any sum or property now or in the future standing to the credit of the relevant accounts of the Issuer with the Custodian or of the Custodian (on behalf of the Issuer) with any Sub-Custodian relating to the ETP Securities, in each case, to the extent that they relate to the ETP Securities.
The claims of ETP Securityholders are subordinated upon enforcement of the Security
Following the enforcement of the security, the Trustee will apply the proceeds derived from the realisation of the assets that are the subject of the security constituted by a Trust Deed in the applicable order of priority under which amounts due to the ETP Securityholders will be subordinated to all costs, fees, expenses and all other amounts including (without limitation) the costs of enforcing and/or realising any security due to the Trustee itself and any receiver(s), and amounts arising to the Margin Account Provider, in each case in relation to the ETP Securities.
Limited recourse obligations, non-petition and related risks
In respect of the ETP Securities of any Series, the Secured Creditors will have recourse only to the Secured Property in respect of such ETP Securities, subject always to the Security, and not to any other assets of the Issuer. If, following realisation in full of the Secured Property (whether by way of liquidation or enforcement) and application of available cash in accordance with the applicable orders of priority and the Trust Deed, any outstanding claim against the Issuer in respect of the Secured Obligations remains unpaid, then such outstanding claim will be extinguished and no debt, liability or obligation will be owed by the Issuer in respect thereof. Following such extinguishment, none of the Programme Parties, the ETP Securityholders of any relevant Series or any other person acting on behalf of any of them or any other person acting on behalf of any of them will be entitled to take any further steps against the Issuer or any of its officers, shareholders, corporate service providers or directors to recover any further sum in respect of the extinguished claim and no debt, liability or obligation will be owed to any such persons by the Issuer in respect of such further sum.
None of the Programme Parties, the ETP Securityholders or any person acting on behalf of any of them may, at any time, bring, institute or join with any other person in bringing, instituting or joining insolvency, administration, bankruptcy, winding-up, examinership or any other similar proceedings (whether courtbased or otherwise) in relation to the Issuer or any of its assets, and none of them will have any claim arising with respect to the sums, assets and/or property attributable to any other securities issued by the Issuer (save for any further securities which form a single Series with the ETP Securities).
There is also the risk that the Issuer may become subject to claims or other liabilities (whether or not in respect of the ETP Securities) which are not themselves subject to limited recourse or non-petition limitations.
No person other than the Issuer will be obliged to make payments on the ETP Securities of any Series and the ETP Securities issued under the Programme will not be guaranteed by, or be the responsibility of, any other entity. In particular, the ETP Securities (i) do not represent an interest in and will not be obligations of, or insured or guaranteed by, any Programme Party or any Affiliate or any company associated with any of them, (ii) will not have the status of a bank deposit and will not be within the scope of any deposit protection scheme and (iii) are not insured or guaranteed by any government, government agency or other body.
Meetings of ETP Securityholders, resolutions, modification, waivers and substitution
Meetings of the holders of a Series of ETP Securities may be convened to consider any matter affectingtheir interests. These provisions permit specified majorities of the ETP Securityholders attending orrepresented at any such meeting to pass resolutions binding all holders of such Series of ETP Securities, including holders who did not attend or vote at such meeting, or who voted against the passing of such resolutions.
ETP Securityholder directions
The Conditions of each Series of ETP Securities permit the holders of a majority or more of the outstanding number of ETP Securities of a Series following the occurrence of an Event of Default, certain events which would, upon delivery of the requisite notice, constitute Mandatory Redemption Events and at any time after the Security has become enforceable to direct the Trustee in writing to deliver a notice or take such other action in accordance with the Conditions, whereupon each ETP Security of such Series will become due and payable at its Final Redemption Amount or Mandatory Redemption Amount (as applicable) immediately upon the delivery of such notice (in the case of an Event of Default) or on the Mandatory
Redemption Settlement Date (in the case of a Mandatory Redemption Event) and/or the Security will be enforced by the Trustee, as applicable. The Trustee will not however be obliged to take any step or action or to act in accordance with any such direction unless the Trustee has been pre-funded and/or secured and/or indemnified to its satisfaction by one or more ETP Securityholders in accordance with the Trust Deed.
Amendment and waiver without the consent of the ETP Securityholders
The Trustee may agree, without the consent of the ETP Securityholders to (i) any modification to theConditions, any Trust Deed, a Margin Account Agreement and/or any other Programme Document to which it is a party which is of a formal, minor or technical nature or is made to correct a manifest error, and (ii) any other modification, and any waiver or authorisation of any breach or proposed breach of the Conditions, any Trust Deed, a Margin Account Agreement and/or any other Programme Document that is in the opinion of the Trustee not materially prejudicial to the interests of the ETP Securityholders.
Risk factors relating to the Issuer and the legal structure
The Issuer is a special purpose vehicle
The Issuer is a special purpose vehicle with the sole business of issuing ETP Securities. The contracts which may be entered into by the Issuer (such as any Margin Account Agreement entered into by the Issuer in relation to one or more Series of ETP Securities) and the payments of the Issuer and the parties thereunder are structured to have the capacity to provide the Issuer with funds to service payments due and payable in respect of the ETP Securities and on any redemption by the Issuer of the ETP Securities.
The Issuer has, and will have, no assets other than (i) the small sums of money raised by issuing shares in relation to its incorporation, (ii) such fees (if any) as are payable to it in connection with the issue or redemption of any Series of ETP Securities from time to time and (iii) any rights, property, sums or other assets on which any Series of ETP Securities issued under the Programme are secured.
Regulation of the Issuer by any regulatory authority
The Issuer is not required to be licensed or authorised under any current securities, commodities or banking laws of its jurisdiction of incorporation and will operate without supervision by any authority in any jurisdiction. There is no assurance, however, that regulatory authorities in one or more jurisdictions would not take a contrary view regarding the applicability of any such laws to the Issuer. The taking of a contrary view by such regulatory authority could have an adverse impact on the Issuer or the holders of the ETP Securities.
The Issuer has agreed not to engage in activities other than the issue of ETP Securities and related and incidental matters. Any issue of ETP Securities must be on terms that provide for the claims of the ETP Securityholders and the Programme Parties in respect of such ETP Securities to be limited to the proceeds of the assets on which such ETP Securities are secured (see “Risk factors relating to the early redemption of the ETP Securities – Limited recourse obligations, non-petition and related risks” above). In addition, there are restrictions on the ETP Securityholders and Programme Parties bringing insolvency proceedings against the Issuer. If such provisions are upheld, it would be unlikely that the Issuer could become insolvent.
However, notwithstanding the restrictions described in Condition 7 and the limited recourse and nonpetition provisions, should the Issuer have outstanding liabilities to third parties which it is unable to discharge or should the limited recourse or non-petition provisions be found to be non-enforceable in a particular jurisdiction and as a result the Issuer becomes or is declared insolvent according to the law of any country having jurisdiction over it or any of its assets, the insolvency laws of that country may determine the validity of the claims of ETP Securityholders and may prevent ETP Securityholders from enforcing their rights with respect to any ETP Securities held by it or delay such enforcement.
In particular, depending on the jurisdiction concerned and the nature of the assets and security, the Security created in favour of the Trustee in respect of such Series of ETP Securities may be set aside or ranked behind certain
other creditors and the assets subject to such Security may be transferred to another person free of such Security.
In addition, certain jurisdictions have procedures designed to facilitate the survival of companies in financial difficulties. In such jurisdictions, the rights of the Trustee or of the Issuer to enforce the Security created pursuant to any Security Document may be limited or delayed by such procedures.
Preferred Creditors under Irish Law and Floating Charges
If the Issuer becomes subject to an insolvency proceeding and the Issuer has obligations to creditors that are treated under Irish law as creditors that are senior relative to its secured creditors including the ETP Securityholders, the ETP Securityholders (and other secured creditors) may suffer losses as a result of their subordinated status during such insolvency proceedings. In particular, under Irish law, upon an insolvency of an Irish company, such as the Issuer, when applying the proceeds of assets subject to fixed security which may have been realised in the course of a liquidation or receivership, the claims of a limited category of preferential creditors will take priority over the claims of creditors holding the relevant fixed
security. These preferred claims include the remuneration, costs and expenses properly incurred by any examiner of the company (which may include any borrowings made by an examiner to fund the company’s requirements for the duration of his appointment) which have been approved by the relevant Irish courts (see “Examinership” below).
The holder of a fixed security over the book debts of an Irish tax resident company (which would include the Issuer) may be required by the Irish Revenue Commissioners, by notice in writing from the Irish Revenue Commissioners, to pay to them sums equivalent to those which the holder received in payment of debts due to it by the company.
Where the holder of the security has given notice to the Irish Revenue Commissioners of the creation of the security within 21 days of its creation, the holder’s liability is limited to the amount of certain outstanding Irish tax liabilities of the company (including liabilities in respect of VAT) arising after the issuance of the Irish Revenue Commissioners’ notice to the holder of fixed security.
The Irish Revenue Commissioners may also attach any debt due to an Irish tax resident company by another person in order to discharge any liabilities of the company in respect of outstanding tax whether the liabilities are due on its own account or as an agent or trustee. The scope of this right of the Irish Revenue Commissioners has not yet been considered by the Irish courts and it may override the rights of holders of security (whether fixed or floating) over the debt in question. In relation to the disposal of assets of any Irish tax resident company which are subject to security, a
person entitled to the benefit of the security may be liable for tax in relation to any capital gains made by the company on a disposal of those assets on exercise of the security. The essence of a fixed charge is that the person creating the charge does not have liberty to deal with the assets which are the subject matter of the security in the sense of disposing of such assets or expending or appropriating the moneys or claims constituting such assets and accordingly, if and to the extent that such liberty is given to the Issuer any charge constituted by the Trust Deed may operate as a floating, rather than a fixed charge.
In particular, the Irish courts have held that in order to create a fixed charge on receivables it is necessary to oblige the chargor to pay the proceeds of collection of the receivables into a designated bank account and to prohibit the chargor from withdrawing or otherwise dealing with the moneys standing to the credit of such account without the consent of the chargee.
Depending upon the level of control actually exercised by the chargor, there is therefore a possibility that the fixed security over the relevant charged assets would be regarded by the Irish courts as a floating charge.
Floating charges have certain weaknesses, including the following:
(a) they have weak priority against purchasers (who are not on notice of any negative pledge
contained in the floating charge) and the chargees of the assets concerned and against lien
holders, execution creditors and creditors with rights of set-off;
(b) as discussed above, they rank after certain preferential creditors, such as claims of employees and certain taxes on winding-up;
(c) they rank after certain insolvency remuneration expenses and liabilities;
(d) the examiner of a company has certain rights to deal with the property covered by the floating charge; and
(e) they rank after fixed charges.
Centre of Main Interests
The Issuer has its registered office in Ireland. As a result there is a rebuttable presumption that its centre of main interest (“COMI”) in Ireland and consequently that any main insolvency proceedings applicable to it would be governed by Irish law. In the decision by the Court of Justice of the European Union (“CJEU”) in relation to Eurofood IFSC Limited, the CJEU restated the presumption in Council Regulation (EC) No. 1346/2000 of 29 May 2000 on Insolvency Proceedings, that the place of a company’s registered office is
presumed to be the company’s COMI and stated that the presumption can only be rebutted if “factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at the registered office is deemed to reflect”. As the Issuer has its registered office in Ireland, has Irish directors, is registered for tax in Ireland and has an Irish corporate services provider, the Issuer does not believe that factors exist that would rebut this presumption, although this would ultimately be a matter for the relevant court to decide, based on the circumstances existing at the time when it was asked to make that decision. If the Issuer’s COMI is not located in Ireland, and is held to be in a different jurisdiction within the European Union, main insolvency proceedings may not
be opened in Ireland.
Examinership is a court procedure available under the Companies Act 2014 to facilitate the survival of Irish companies in financial difficulties. Where a company, which has its COMI in Ireland is, or is likely to be unable to pay its debts an examiner may be appointed on a petition to the relevant Irish court under Section 509 of the Companies Act 2014.
The Issuer, the directors of the Issuer, a contingent, prospective or actual creditor of the Issuer, or shareholders of the Issuer holding, at the date of presentation of the petition, not less than one-tenth of the voting share capital of the Issuer are each entitled to petition the court for the appointment of an examiner.
The examiner, once appointed, has the power to set aside contracts and arrangements entered into by the company after this appointment and, in certain circumstances, can avoid a negative pledge given by the company prior to this appointment. Furthermore, the examiner may sell assets, the subject of a fixed charge. However, if such power is exercised the examiner must account to the holders of the fixed charge for the amount realised and discharge the amount due to the holders of the fixed charge out of the proceeds of the sale.
During the period of protection, the examiner will formulate proposals for a compromise or scheme of arrangement to assist the survival of the company or the whole or any part of its undertaking as a going concern. A scheme of arrangement may be approved by the relevant Irish court when at least one class of creditors has voted in favour of the proposals and the relevant Irish court is satisfied that such proposals are fair and equitable in relation to any class of members or creditors who have not accepted the proposals and whose interests would be impaired by implementation of the scheme of arrangement.
In considering proposals by the examiner, it is likely that secured and unsecured creditors would form separate classes of creditors. In the case of the Issuer, if the Trustee represented the majority in number and value of claims within the secured creditor class, the Trustee would be in a position to reject any proposal not in favour of the ETP Securityholders. The Trustee would also be entitled to argue at the relevant Irish court hearing at which the proposed scheme of arrangement is considered that the proposals are unfair and inequitable in relation to the ETP Securityholders, especially if such proposals included a writing down to the value of amounts due by the Issuer to the ETP Securityholders.
The fact that the Issuer is a special purpose vehicle and that all of its liabilities should be of a limited recourse nature means that it is unlikely that an examiner would be appointed to the Issuer.
However, if, for any reason, an examiner were appointed while any amounts due by the Issuer under the ETP Securities were unpaid, the primary risks to the ETP Securityholders are as follows: (a) the potential for a compromise or scheme of arrangement being approved involving the writing down or rescheduling of the debt due by the Issuer to the ETP Securityholders as secured by the Trust Deed;
(b) the Trustee, acting for and on behalf of the secured creditors, would not be able to enforce rights against the Issuer during the period of examinership;
(c) the potential for the examiner to seek to set aside any negative pledge in the ETP Securities
prohibiting the creation of security or the incurring of borrowings by the Issuer to enable the
examiner to borrow to fund the Issuer during the protection period; and
(d) in the event that a scheme of arrangement is not approved and the Issuer subsequently goes into liquidation, the examiner’s remuneration and expenses (including certain borrowings incurred by the examiner on behalf of the Issuer and approved by the relevant Irish court) will take priority over the moneys and liabilities which from time to time are or may become due, owing or payable by the Issuer to each of the secured creditors under the ETP Securities or the Programme Documents.
Tax consequences of an investment in the ETP Securities
None of the Issuer or any Programme Party make any representation or warranty as to the tax
consequences to any investor of the acquisition, holding or disposal of the ETP Securities. The tax consequences for each investor in the ETP Securities can be different and therefore investors are advised to consult with their tax advisers as to their specific consequences.
Prospective investors’ attention is also drawn to the section of this Base Prospectus headed “Tax Considerations”.
Taxation and no gross-up
Each ETP Securityholder will assume and be solely responsible for any and all Taxes of any jurisdiction or governmental or regulatory authority, including, without limitation, any state or local Taxes or other like assessment or charges that may be applicable to any payment to it in respect of the ETP Securities. In the event that any withholding or deduction for or on account of Tax is imposed on payments on the ETP Securities, the ETP Securityholders will be subject to such Tax or deduction and will not be entitled to receive amounts to compensate for such withholding or deduction. No Event of Default will occur as a result of any such withholding or deduction.
The Issuer may become liable for Tax charges whether by direct assessment or withholding. If any such event occurs as a result of a change in law or regulation that materially increases the cost to the Issuer of performing its obligations under the ETP Securities or the Margin Account Agreement or makes it illegal for the Issuer to do the same or to hold, acquire or dispose of the Collateral Assets, the ETP Securities may become subject to early redemption.
Change of law
The Conditions of the ETP Securities are governed by English law in effect as at the date of issue of the relevant ETP Securities. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of issue of the relevant ETP Securities.
Legality of purchase
None of the Issuer, the Arranger, the Trustee, the Margin Account Provider, the Authorised Participants or any Affiliate of such persons have or assume responsibility for the lawfulness of the acquisition of the ETP Securities by a prospective purchaser of the ETP Securities (whether for its own account or for the account of any third party), whether under the laws of the jurisdiction of its incorporation or the jurisdiction in which it operates (if different), or for compliance by that prospective purchaser (or any such third party) with any law, regulation or regulatory policy applicable to it.
The Issuer has been advised that, for United Kingdom regulatory purposes, the ETP Securities are treated as debt securities with a minimum repayment amount and do not take the form of a collective investment scheme. The ETP Securities described in this document are not units in an authorised collective investment scheme for the purposes of the FSMA. There can be no assurance that the courts or regulatory authorities in any jurisdiction would not recharacterise the ETP Securities as units in a collective investment scheme. Any recharacterisation of the ETP Securities as units in a collective investment scheme may have adverse consequences (including, without limitation, adverse tax consequences) for an investor.
Prospective investors should consult their professional advisers on the implications, and in particular the tax and accounting implications, of investment in the ETP Securities and the risk that the ETP Securities may be recharacterised as contracts for differences for United Kingdom regulatory purposes.
Undertakings for Collective Investment in Transferable Securities (UCITS)
Prospective investors comprising a scheme which is an undertaking for collective investment in transferable securities subject to the Council Directive of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to Undertakings for Collective Investment in Transferable Securities (No 85/611/EEC) (the “UCITS Directive”), as amended, need to satisfy themselves that an investment in the ETP Securities would comply with any regulations and/or guidelines applicable to them pursuant to the UCITS Directive and any laws, regulations or guidelines of their jurisdiction of incorporation and would be in
line with their individual investment objectives.
Alternative Investment Fund Managers Directive
EU Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”) provides, among other things, that all alternative investment funds (“AIFs”) must have a designated alternative investment fund manager (“AIFM”) with responsibility for portfolio and risk management.
The requirements of AIFMD have, in general, taken effect from 22 July 2013. If, AIFMD were to apply to the Issuer, the Issuer would need to be appropriately regulated. AIFMD and any other changes to the regulation or regulatory treatment of the ETP Securities for some or all investors may negatively impact the regulatory position of individual investors and, in addition, have a negative impact on the price and liquidity of the ETP Securities affected by such rules in the secondary market.
Risks related to the Margin Account Provider and the Collateral Assets
Risks relating to the Margin Account Provider
Under the terms of the Margin Account Agreement entered into by the Issuer in connection with a Series of ETP Securities, the Issuer will pay the entire proceeds from the issue of such Series of ETP Securities to the Margin Account Provider upon receipt and the Margin Account Provider will extend moneys by way of credit to the Issuer which will be invested, in accordance with the Portfolio Administration Agreement, in securities which will be held in the Margin Account in order to replicate (to the degree practicable) the return on the Index referenced by such Series. On a daily basis the Margin Account will be reconstituted, in accordance with the Portfolio Administration Agreement, in order to track the performance of the Index, by the purchase of additional securities or the sale of existing securities held in the Margin Account. If additional securities are required to be purchased, the Margin Account Provider will extend moneys by way of credit to the Issuer in order to fund such purchases. Successful daily tracking will therefore be dependent upon the credit of the Margin Account Provider.
ETP Securityholders have no direct ownership interest or right to delivery of the Collateral Assets
Investing in the ETP Securities will not make an investor the owner of any Collateral Assets. Any amounts payable on the ETP Securities will be made in cash and the holders of the ETP Securities will have no right to receive delivery of any Collateral Assets at any time.
Provision of information
None of the Issuer, any Programme Party or any Affiliate of any such persons makes any representation as to the credit quality of the Margin Account Provider or any Collateral Assets.
Any of such persons may have acquired, or during the term of the ETP Securities may acquire, non-public information in relation to the Margin Account Provider and/or the Collateral Assets. None of such persons are under any obligation to make such information directly available to ETP Securityholders. None of the Issuer, any Programme Party or any Affiliate of any such persons are under any obligation to make available any information relating to, or keep under review on the ETP Securityholders’ behalf, the business, financial conditions, prospects,
creditworthiness or state of affairs of the Margin Account Provider or any issuer/obligor in relation to any Collateral Assets or conduct any investigation or due diligence thereon or to monitor such Margin Account
Business relationships and capacity of the Margin Account Provider
The Margin Account Provider and any of its Affiliates may have existing or future business relationships with any Authorised Participant (including, but not limited to, lending, depository, risk management, advisory and banking relationships) and will pursue actions and take steps that they deem or it deems necessary or appropriate to protect their or its interests arising therefrom without regard to the consequences for an ETP Securityholder. In addition, the Margin Account Provider and any of its Affiliates may make a market or hold positions in respect of any of the ETP Securities. From time to time, the Margin Account Provider and its Affiliates may own significant amounts of ETP Securities issued under the Programme.
There are no restrictions on the future business operations or activities of the Margin Account Provider, and, accordingly, the ability of the Margin Account Provider to meet its obligations under the Margin Account Agreement may be adversely affected depending on such future business operations or activities.
The Margin Account Provider and/or any of its Affiliates may engage in trading for their proprietary accounts, for other accounts under their management or to facilitate transactions, including block transactions, on behalf of customers relating to one or more assets that underlie the Index to which a Series of ETP Securities is linked. Any of these activities in which the Margin Account Provider and/or its Affiliates engage could have an adverse impact on the value of the ETP Securities by affecting the price of such constituent assets(s).
The Margin Account Provider and its Affiliates may actively trade futures contracts and options on assets that underlie the Indices linked to Series of ETP Securities, over-the-counter contracts on those assets and other instruments and derivative products based on such assets. Any such trading by the Margin Account Provider and its Affiliates and unaffiliated third parties could adversely affect the value of the Indices to which certain Series of ETP Securities are linked, which could in turn affect the return on, and the value of, such Series of ETP Securities.
The Margin Account Provider and/or its Affiliates may also issue or underwrite other securities or financial or derivative instruments linked to the commodity indices or equity indices referenced by certain Series of ETP Securities, which might compete with the ETP Securities of such Series. By introducing competing products into the marketplace in this manner, the Margin Account Provider and/or its Affiliates could adversely affect the market value of certain ETP Securities, and therefore the amount payable on such ETP Securities on the stated maturity date or any early redemption date, as applicable, and the value of such ETP Securities before that date. To the extent that the Margin Account Provider and/or its Affiliates serve
as issuer, agent or underwriter of, or as margin account providers in relation to, those securities or other similar instruments, their interests with respect to those products may be adverse to the interests of an ETP Securityholder. The Margin Account Provider and its Affiliates may in the future publish research reports with respect to some or all of the Indices linked to certain Series of ETP Securities or the assets underling such Indices.
This research may be modified from time to time without notice and may express opinions or provide= recommendations that are inconsistent with purchasing or holding the ETP Securities. The research should not be viewed as a recommendation or endorsement of the ETP Securities in any way and investors must make their own independent investigation of the merits of this investment. Any of these activities by the Margin Account Provider or any of its Affiliates may affect the market price of the Indices to which certain Series of ETP Securities are linked or their components and the value of such commodity indices or such equity indices and, therefore, the market value of such ETP Securities.
The Margin Account Provider and its Affiliates may act in a number of capacities in respect of ETP Securities issued under the Programme including, without limitation, Portfolio Administrator. The Margin Account Provider and its Affiliates acting in such capacities in connection with such ETP Securities will have only the duties and responsibilities expressly agreed to by such entities in the relevant capacity and will not, by virtue of acting in any other capacity, be deemed to have other duties or responsibilities or be deemed to hold a standard of care other than as expressly provided with respect to each such capacity. The Margin Account Provider and its Affiliates in their various capacities in connection with the ETP Securities may enter into business dealings, from which they may derive revenues and profits in addition to any fees, without any duty to account therefor.
Risks relating to the Custodian
Collateral Assets in the form of cash or transferable securities will be held in an account of the Custodian in the name of the Issuer. Where the Collateral Assets consist of assets other than cash or transferable securities, it may be held in the name of the Issuer or under the control of the Custodian.
The ability of the Issuer to meet its obligations with respect to the ETP Securities may be dependent upon receipt by the Issuer of payments from the Custodian under the Portfolio Administration Agreement for the Series (if the Collateral is so held). Consequently, the ETP Securityholders are relying not only on the creditworthiness of the Collateral Assets, but also on the creditworthiness of the Custodian in respect of the performance of its obligations under the Portfolio Administration Agreement for such Series of ETP Securities.
Any cash deposited with the Custodian by the Issuer and any cash received by the Custodian for the account of the Issuer in relation to a Series of ETP Securities will be held by the Custodian as broker and not as trustee. Accordingly, such cash will not be held as client money and will represent only an unsecured claim against the Custodian’s assets.
Sub-Custodians, depositaries and clearing systems
Under the Margin Account Agreement the Issuer authorises the Custodian to hold the Collateral Assets in the Custodian’s account or accounts with any Sub-Custodian (other than a Clearing System) properly appointed for the safe-keeping, administration, clearance and settlement of the Collateral Assets. Where the Collateral Assets are held with a Sub-Custodian that is an affiliate of the Custodian, the Consequently, the ETP Securityholders are relying not only on the creditworthiness of the Collateral Assets and the Custodian in respect of the performance of its obligations under the Portfolio Administration Agreement and the Margin Account Agreement for such Series of ETP Securities (and any obligations of any Sub- Custodian under or pursuant to the Margin Account Agreement or otherwise), but also on the creditworthiness of any Sub-Custodian.
Lien/Right of set-off
Pursuant to their terms of engagement, Sub-Custodians may have liens or rights of set-off with respect to the Collateral Assets held with them in relation to any of their fees and/or expenses. If, for whatever reason, the Custodian fails to pay such fees and/or expenses, the relevant Sub-Custodian may exercise such lien or right of set-off, which may result in the Issuer failing to receive any payments due to it in respect of the Collateral Assets, and thereby adversely affecting the ability of the Issuer to meet its obligations with respect to the Series of ETP Securities.
Therefore, the ability of the Issuer to meet its obligations with respect to the Series of ETP Securities will not only be dependent upon receipt by the Issuer of payments from the Custodian under the Portfolio Administration Agreement for the Series of ETP Securities (if the Collateral Assets are so held) but will also be dependent on any Sub-Custodian not exercising any lien or right of set-off in respect of any Collateral Assets that it holds. Consequently, the ETP Securityholders are relying not only on the creditworthiness of the Collateral Assets, but also on the creditworthiness of the Custodian in paying when due any fees or expenses of such Sub-Custodian (or the ability of the Issuer to pay such amounts due to the Custodian and/or the Sub-Custodians).
Risks related to other Programme Parties
Other business activities of Authorised Participants
The Authorised Participants and/or their respective Affiliates may be active traders in equities and/or commodities markets, including in the physical markets for commodities, in the futures markets and the over-the-counter markets. These trading activities may present a conflict between the interests of holders of the ETP Securities and the interests of the Authorised Participants and their respective Affiliates may have in their proprietary accounts, in facilitating transactions, including options and other derivatives transactions, for their customers and in accounts under their management.
These trading activities, if they influence the value of an Index to which a Series of ETP Securities is linked, could be adverse to the interests of the ETP Securityholders. The Authorised Participants and their respective Affiliates may also issue or underwrite additional securities or trade other products the return on which is linked to the value of an Index linked to a Series of ETP Securities or other similar strategies. An increased level of investment in these products may negatively affect the level of an Index to which a Series of ETP Securities is linked and therefore the amount payable in respect of such Series of ETP Securities on their stated maturity date or any prior redemption date, as applicable, and the market value of such ETP Securities.
These activities could give rise to conflicts of interest which are adverse to the interests of the ETP Securityholders and could adversely affect the market value of such ETP Securities. With respect to any of the activities described above, none of the Authorised Participants or any of their respective Affiliates has any obligation to the Issuer to take the needs of any buyers, sellers or holders of the ETP Securities into consideration at any time.
In its role as Determination Agent under the ETP Securities, SEI Global Services, Inc. will, pursuant to the provisions of the Determination Agency Agreement, the Operating Procedures Agreement and the Conditions, make various non-discretionary calculations, that affect the ETP Securities, including calculating, among other things, the ETP Security Value and the Final Redemption Amount, the Optional Redemption Amount or the Mandatory Redemption Amount. The value of the ETP Securities could be adversely affected by such calculations.
In making such calculations the Determination Agent will depend upon timely and accurate provision of information and certain constituent values of the relevant formulae which are provided to the Determination Agent by various parties, including, but not limited to, the Margin Account Provider, the relevant Index Sponsor and the Issuer. Any consequent variation in the value of the amounts required to be calculated by the Determination Agent could result in a change to value of the ETP Securities.
In connection with the exercise of its functions, the Trustee will have regard to the interests of the ETP Securityholders as a class and will not have regard to the consequences of such exercise for individual ETP Securityholders and the Trustee will not be entitled to require, nor will any ETP Securityholder be entitled to claim, from the Issuer any indemnification or payment in respect of any tax consequence of any such exercise upon individual ETP Securityholders.
Exchange rate risks and exchange controls
The Issuer will satisfy its payment obligations in respect of the ETP Securities in the currency of determination of the ETP Securities. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than the specified currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the specified currency or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls.
An appreciation in the value of the Investor’s Currency relative to the specified currency
would decrease (a) the Investor’s Currency equivalent value of the payment payable on the ETP Securities and (b) the Investor’s Currency equivalent market value of the ETP Securities.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less payment than expected and may receive no payment.