UBS has filed a registration statement (including a prospectus,
as supplemented by a product supplement for the Notes) with the Securities and Exchange Commission (the
“SEC”) for the offering to which this document relates. Before you invest, you should read these documents and any
other documents related to the Notes that UBS has filed with the SEC for more complete information about UBS and this offering.
You may obtain these documents for free from the SEC website at www.sec.gov. Our Central Index Key, or CIK, on the SEC website
is 0001114446. Alternatively, UBS will arrange to send you these documents if you so request by calling toll-free 1-877-387-2275.
References to “UBS”,
“we”, “our” and “us” refer only to UBS AG and not to its consolidated subsidiaries. In
this document, “Step Down Trigger Autocallable Notes” or the “Notes” refer to the Notes that are
offered hereby. Also, references to the “TAN product supplement” mean the UBS product supplement, dated September
30, 2016 and references
to “accompanying prospectus” mean the UBS prospectus, titled “Debt Securities and Warrants,” dated
April 29, 2016.
This document, together with the documents listed above, contains
the terms of the Notes and supersedes all other prior or contemporaneous oral statements as well as any other written materials
including all other prior pricing terms, correspondence, trade ideas, structures for implementation, sample structures, brochures
or other educational materials of ours. You should carefully consider, among other things, the matters set forth in “Key
Risks” beginning on page 4 and in “Risk Factors” in the TAN product supplement, as the Notes involve risks not
associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisors
before deciding to invest in the Notes.
UBS reserves the right
to change the terms of, or reject any offer to purchase, the Notes prior to their issuance. In the event of any changes to the
terms of the Notes, UBS will notify you and you will be asked to accept such changes in connection with your purchase. You may
also choose to reject such changes in which case UBS may reject your offer to purchase.
Issuer
|
UBS AG, London Branch
|
Principal
Amount
|
$10.00 per Note
|
Term
|
Approximately 24 months, subject to an automatic call. In the event that we make any change to the expected
trade date and settlement date, the calculation agent may adjust the observation dates, as well as the final valuation date and
maturity date to ensure that the stated term of the Notes remains the same.
|
Underlying
Assets
|
The iShares
®
Russell 2000 ETF, The SPDR
®
S&P
®
Regional Banking
ETF and The Technology Select Sector SPDR
®
Fund.
|
Automatic Call
Feature
|
UBS will automatically call the Notes if the closing level of each underlying asset on any observation date
(quarterly, beginning after 1 year) including the final valuation date, is equal to or greater than its call threshold level.
If the Notes are subject to an automatic call, UBS will pay
on the call settlement date a cash payment per Note equal to the call price for the relevant observation date. Following an automatic
call, no further payments will be made on the Notes.
|
Call Return
Rate
|
The call return rate will be between 6.85% and 7.35% per annum (the actual call return rate will be determined
on the trade date).
|
Call Return
|
The call return increases the longer the Notes are outstanding and is based upon the call return rate.
|
Call Price
|
The call price equals the principal amount per Note plus the applicable call return.
|
The table below assumes
a call return rate of 6.85% per annum (the bottom of the range specified on the cover hereof). The actual call return rate will
be determined on the trade date.
|
Observation
Date
(1)
|
Call
Settlement
Date
(1)(2)
|
Call
Return
|
Call
Price
(per Note)
|
December
20, 2018
|
December
24, 2018
|
6.8500%
|
$10.6850
|
March
15, 2019
|
March
19, 2019
|
8.5625%
|
$10.8563
|
June
17, 2019
|
June
19, 2019
|
10.2750%
|
$11.0275
|
September
16, 2019
|
September
18, 2019
|
11.9875%
|
$11.1988
|
Final
Valuation Date
|
Maturity
Date
|
13.7000%
|
$11.3700
|
|
|
|
|
(1)
Subject to the market disruption event provisions set forth under “General Terms of the Notes — Market Disruption Events” in the TAN product supplement.
|
(2)
Two business days following the relevant observation date, except that the call settlement
date for the final valuation date is the maturity date.
|
Payment at
Maturity (per Note)
|
If the Notes are not subject to an automatic call, then the final level of at least one underlying
asset is less than its downside threshold
and UBS will pay you a cash payment that is less than the principal amount, if anything,
equal to:
$10.00 x (1 + Underlying Return of the
Least Performing Underlying Asset)
In this scenario, you will suffer a percentage loss
on your initial investment equal to the underlying return of the least performing underlying asset, regardless of the underlying
return of any other underlying asset.
|
Least Performing Underlying Asset
|
The underlying asset with the lowest underlying return as compared to the other underlying assets.
|
Underlying Return
|
The quotient, expressed as a percentage of the following formula:
Final Level – Initial Level
Initial Level
|
Call Threshold Level
(1)
|
For each observation date prior to the final valuation date, a level of each underlying asset equal to its
initial level and, for the final valuation date, a level of each underlying asset equal to its downside threshold, each as determined
by the calculation agent.
|
Downside Threshold
(1)
|
For each underlying asset, a specified level that is less than its initial level, based on a percentage of the initial level as indicated on the cover hereof and as determined by the calculation agent.
|
Initial Level
(1)
|
The closing level of each underlying asset on the trade date, as determined by the calculation agent.
|
Final Level
(1)
|
The closing level of each underlying asset on the final valuation date, as determined by the calculation agent.
|
(1)
As may be adjusted in the case of certain adjustment events as described under “General Terms of the
Notes — Antidilution Adjustments for Notes Linked to an Underlying Equity or Equity Basket Asset” and “—
Reorganization Events for Notes Linked to an Underlying Equity or Equity Basket Asset”, in the TAN product supplement.
|
Trade Date
|
The initial level of each underlying asset is observed and the final terms of the Notes are set.
|
|
↓
|
|
|
Observation
Dates
(quarterly, callable after one year)
|
The Notes will be subject to an automatic call if the closing level of each underlying asset on any observation
date (quarterly, beginning after one year), including the final valuation date, is equal to or greater than its call threshold
level, which is higher for observation dates prior to the final valuation date.
If the Notes are subject to an automatic call, UBS will pay
on the call settlement date a cash payment per Note equal to the call price for the relevant observation date. Following an automatic
call, no further payments will be made on the Notes.
|
|
↓
|
|
|
Maturity Date
|
If the Notes are not subject to an automatic call, then the final level of at least one underlying
asset is less than its downside threshold
and UBS will pay you a cash payment that is less than the principal amount, if anything,
equal to:
$10.00 x (1 + Underlying Return of the
Least Performing Underlying Asset)
In this scenario, you will suffer a percentage loss
on your initial investment equal to the underlying return of the least performing underlying asset, regardless of the underlying
return of any other underlying asset.
|
|
Investing in the Notes involves significant risks. You may lose
a significant portion or all of your initial investment. Any payment on the Notes, including any repayment of principal, is subject
to the creditworthiness of UBS. If UBS were to default on its payment obligations, you may not receive any amounts owed to you
under the Notes and you could lose all of your initial investment.
If the Notes are not subject to an automatic call, you will lose
a significant portion or all of your initial investment because if the Notes are not subject to an automatic call, then the final
level of at least one underlying asset is less than its downside threshold. In this scenario, you will lose a percentage of your
initial investment equal to the underlying return of the least performing underlying asset and, in extreme situations, you could
lose all of your initial investment. You will be exposed to the market risk of each underlying asset on each observation date,
including the final valuation date, and any decline in the level of one underlying asset may negatively affect your return and
will not be offset or mitigated by a lesser decline or any potential increase in the level of any other underlying asset.
An investment in the offering of the Notes involves significant
risks. Investing in the Notes is not equivalent to a hypothetical investment in the least performing underlying asset or its underlying constituents. Some of the risks that apply to the Notes are summarized below, but we urge you to read the more detailed
explanation of risks relating to the Notes in the “Risk Factors” section of the TAN product supplement. We also urge
you to consult your investment, legal, tax, accounting and other advisors before you invest in the Notes.
|
¨
|
Risk of loss at maturity
— The Notes differ from ordinary debt securities in that UBS will not necessarily repay the principal amount
of the Notes at maturity. If the Notes are not subject to an automatic call, then the final level of at least one underlying asset
is less than its downside threshold and you will lose a percentage of your initial investment equal to the underlying return of
the least performing underlying asset and, in extreme situations, you could lose all of your initial investment.
|
|
¨
|
The contingent repayment of principal applies only at maturity
— You should be willing to hold your Notes to maturity. If you are able to sell your Notes prior to an automatic call or
maturity in the secondary market, you may have to sell them at a loss relative to your initial investment even if the level of
each underlying asset is equal to or greater than its downside threshold and call threshold level. All payments on the Notes are
subject to the creditworthiness of UBS.
|
|
¨
|
No interest payments
— UBS will not pay any interest with
respect to the Notes.
|
|
¨
|
Your potential return on the Notes is limited to the call return
and you will not participate in any appreciation of any underlying asset or underlying constituent
— The return potential of the Notes is limited to the pre-specified call return resulting from an automatic
call regardless of any appreciation of any underlying asset. Investors will not participate in any appreciation in the closing
level of any underlying asset from its initial level. The Notes will only be subject to an automatic call if the closing level
or the final level, as applicable, of each underlying asset is equal to or greater than its call threshold level
,
which is higher for observation dates prior to the final valuation date. In addition, because the call return increases the longer
the Notes have been outstanding, the call price payable with respect to earlier observation dates is less than the call price payable
with respect to later observation dates. The earlier a Note is subject to an automatic call, the lower your return will be. Because
the Notes may be subject to an automatic call as early as the first potential call settlement date, the total return on the Notes
could be less than if the Notes remained outstanding until maturity. Furthermore, if the Notes are not subject to an automatic
call, you will be subject to the decline in the level of the least performing underlying asset even though you cannot participate
in any appreciation in the level of any underlying asset. As a result, the return on an investment in the Notes could be less than the return on a hypothetical direct
investment in any or all of the underlying assets or underlying constituents. In addition, as an owner of the Notes, you will not
have applicable voting rights or any other applicable rights of a holder of any underlying asset or underlying constituent
.
|
|
¨
|
A higher call return rate or lower downside thresholds or call threshold
levels may reflect greater expected volatility of each underlying asset, and greater expected volatility generally indicates an
increased risk of loss at maturity
— The economic terms for the Notes, including the call return rate, call threshold levels and downside thresholds,
are based, in part, on the expected volatility of each underlying asset at the time the terms of the Notes are set. “Volatility”
refers to the frequency and magnitude of changes in the level of each underlying asset. The greater the expected volatility of
each underlying asset as of the trade date, the greater the expectation is as of that date that the closing level or the final
level, as applicable, of each underlying asset could be less than its call threshold level on any observation date (including the
final valuation date) and that the final level of each underlying asset could be less than its downside threshold on the final
valuation date and, as a consequence, indicates an increased risk of the Notes not being subject to an automatic call and an increased
risk of loss, respectively. All things being equal, this greater expected volatility will generally be reflected in a higher call
return rate than the yield payable on our conventional debt securities with a similar maturity or on otherwise comparable securities,
and/or lower downside thresholds and/or call threshold levels than those terms on otherwise comparable securities. Therefore, a
relatively higher call return rate may indicate an increased risk of loss. Further, relatively lower downside thresholds and/or
call threshold levels may not necessarily indicate that the Notes have a greater likelihood of a return of principal at maturity
and/or paying the call return. You should be willing to accept the downside market risk of the least performing underlying asset
and the potential to lose a significant portion or all of your initial investment.
|
|
¨
|
Reinvestment risk
— The Notes will be subject to an automatic
call if the closing level of each underlying asset is equal to or greater than its call threshold level on any observation date
set forth herein. Because the Notes could be subject to an automatic call as early as the first potential call settlement date,
the term of your investment may be limited. In the event that the Notes are subject to an automatic call, there is no guarantee
that you would be able to reinvest the proceeds at a comparable return and/or with a comparable call return rate for a similar
level of risk. In addition, to the extent you are able to reinvest such proceeds in an investment comparable to the Notes, you
may incur transaction costs such as dealer discounts and hedging costs built into the price of the new securities. Generally, however,
the longer the Notes remain outstanding, the less likely the Notes will be subject to an automatic call due to the decline in the
level of an underlying asset and the shorter time remaining for the level of any such underlying asset to recover. Such periods
generally coincide with a period of greater risk of principal loss on your Notes.
|
|
¨
|
You are exposed to the market risk of each underlying asset
— Your return on the Notes is not linked to a
basket consisting of the underlying assets. Rather, it will be contingent upon the performance of each individual underlying
asset. Unlike an instrument with a return linked to a basket of ETFs, common stocks or other underlying securities, in which
risk is mitigated and diversified among all of the components of the basket, you will be exposed equally to the risks related
to each underlying asset. Poor performance by any underlying asset over the term of the Notes will negatively affect your
return and will not be offset or mitigated by a positive performance by any other underlying asset. For instance, you will
receive a negative return on the Notes equal to the underlying return of the least performing underlying asset if the final
level of any underlying asset is less than its downside threshold, even if the underlying return of each other underlying
asset is positive or has not declined as much. Accordingly, your investment is subject to the market risk of each
underlying asset.
|
|
¨
|
Because the Notes are linked to the least performing underlying
asset, you are exposed to a greater risk of not receiving the call return and losing a significant portion or all of your initial
investment at maturity than if the Notes were linked to fewer underlying assets
— The risk that you will not receive
the call return and will lose a significant portion or all of your initial investment in the Notes is greater if you invest in
the Notes than the risk of investing in substantially similar securities that are linked to the performance of only one underlying
asset. With more underlying assets, it is more likely that the closing level of any underlying asset will be less than its call
threshold level on any observation date or decline to a final level that is less than its downside threshold than if the Notes
were linked to fewer underlying assets.
|
In addition, the lower the correlation is
between the performance of a pair of underlying assets, the more likely it is that one of the underlying assets will decline
in value to a closing level or final level, as applicable, that is less than its call threshold level and downside threshold
on any observation date or on the final valuation date. Although the correlation of the underlying assets’ performance
may change over the term of the Notes, the economic terms of the Notes, including the call return rate, downside thresholds
and call threshold levels are determined, in part, based on the correlation of the underlying assets’
performance calculated using our internal models at the time when the terms of the Notes are finalized. All things being
equal, a higher call return rate and lower downside thresholds and call threshold levels are generally associated with lower
correlation of the underlying assets. Therefore, if the performance of a pair of underlying assets is not correlated to each
other or is negatively correlated, the risk that you will not receive the call return and that the final level of any
underlying asset is less than its downside threshold will occur is even greater despite a lower call threshold level and
downside threshold. Therefore, it is more likely that you will not receive the call return and that you will lose a
significant portion or all of your initial investment at maturity.
|
¨
|
Credit risk of UBS
— The Notes are unsubordinated, unsecured
debt obligations of UBS and are not, either directly or indirectly, an obligation of any third party. Any payment to be made on
the Notes, including any repayment of principal, depends on the ability of UBS to satisfy its obligations as they come due. As
a result, UBS’ actual and perceived creditworthiness may affect the market value of the Notes. If UBS were to default on
its obligations, you may not receive any amounts owed to you under the terms of the Notes and you could lose all of your initial
investment.
|
|
¨
|
Market risk
— The return on the Notes, which may be negative, is directly linked to the performance of the underlying assets
and indirectly linked to the value of the underlying constituents. The levels of the underlying assets can rise or fall sharply
due to factors specific to each underlying asset or its underlying constituents and their issuers, such as stock or commodity price
volatility, earnings and financial conditions, corporate, industry and regulatory developments, management changes and decisions
and other events, as well as general market factors, such as general stock or commodity market levels and volatility, interest
rates and economic and political conditions.
|
|
¨
|
Fair value considerations.
|
|
¨
|
The issue price you pay for the Notes will exceed their estimated
initial value
— The issue price you pay for the Notes will exceed their estimated initial value as of the trade date due to
the inclusion in the issue price of the underwriting discount, hedging costs, issuance costs and projected profits. As of the close
of the relevant markets on the trade date, we will determine the estimated initial value of the Notes by reference to our internal
pricing models and the estimated initial value of the Notes will be set forth in the applicable pricing supplement. The pricing
models used to determine the estimated initial value of the Notes incorporate certain variables, including the levels of the underlying
assets and underlying constituents, the volatility of the underlying assets, any dividend rate paid on the underlying assets and
underlying constituents, if applicable, the correlation of the underlying assets, prevailing interest rates, the term of the Notes
and our internal funding rate. Our internal funding rate is typically lower than the rate we would pay to issue conventional fixed
or floating rate debt securities of a similar term. The underwriting discount, hedging costs, issuance costs, projected profits
and the difference in rates will reduce the economic value of the Notes to you. Due to these factors, the estimated initial value
of the Notes as of the trade date will be less than the issue price you pay for the Notes.
|
|
¨
|
The estimated initial value is a theoretical price; the actual price that you may be able to sell your Notes in any
secondary market (if any) at any time after the trade date may differ from the estimated initial value
— The value
of your Notes at any time will vary based on many factors, including the factors described above and in “— Market
risk” above and is impossible to predict. Furthermore, the pricing models that we use are proprietary and rely in part
on certain assumptions about future events, which may prove to be incorrect. As a result, after the trade date, if you
attempt to sell the Notes in the secondary market, the actual value you would receive may differ, perhaps materially,
from the estimated initial value of the Notes determined by reference to our internal pricing models. The estimated initial
value of the Notes does not represent a minimum or maximum price at which we or any of our affiliates would be willing to
purchase your Notes in any secondary market at any time.
|
|
¨
|
Our actual profits may be greater or less than the differential
between the estimated initial value and the issue price of the Notes as of the trade date —
We may determine the economic
terms of the Notes, as well as hedge our obligations, at least in part, prior to the trade date. In addition, there may be ongoing
costs to us to maintain and/or adjust any hedges and such hedges are often imperfect. Therefore, our actual profits (or potentially,
losses) in issuing the Notes cannot be determined as of the trade date and any such differential between the estimated initial
value and the issue price of the Notes as of the trade date does not reflect our actual profits. Ultimately, our actual profits
will be known only at the maturity of the Notes.
|
|
¨
|
Limited or no secondary market and secondary market price considerations.
|
|
¨
|
There may be little or no secondary market for the Notes
—
The Notes will not be listed or displayed on any securities exchange or any electronic communications network. UBS Securities LLC
and its affiliates intend, but are not required, to make a market for the Notes and may stop making a market at any time. If you
are able to sell your Notes prior to maturity, you may have to sell them at a substantial loss. Furthermore, there can be no assurance
that a secondary market for the Notes will develop. The estimated initial value of the Notes does not represent a minimum or maximum
price at which we or any of our affiliates would be willing to purchase your Notes in any secondary market at any time.
|
|
¨
|
The price at which UBS Securities LLC and its affiliates may offer
to buy the Notes in the secondary market (if any) may be greater than UBS’ valuation of the Notes at that time, greater than
any other secondary market prices provided by unaffiliated dealers (if any) and, depending on your broker, greater than the valuation
provided on your customer account statements —
For a limited period of time following the issuance of the Notes, UBS
Securities LLC or its affiliates may offer to buy or sell such Notes at a price that exceeds (i) our valuation of the Notes at
that time based on our internal pricing models, (ii) any secondary market prices provided by unaffiliated dealers (if any) and
(iii) depending on your broker, the valuation provided on customer account statements. The price that UBS Securities LLC may initially
offer to buy such Notes following issuance will exceed the valuations indicated by our internal pricing models due to the inclusion
for a limited period of time of the aggregate value of the underwriting discount, hedging costs, issuance costs and theoretical
projected trading profit. The portion of such amounts included in our price will decline to zero on a straight line basis over
a period ending no later than the date specified under “Supplemental Plan of Distribution (Conflicts of Interest); Secondary
Markets (if any).” Thereafter, if UBS Securities LLC or an affiliate makes secondary markets in the Notes, it will do so
at prices that reflect our estimated value determined by reference to our internal pricing models at that time. The temporary positive
differential relative to our internal pricing models arises from requests from and arrangements made by UBS Securities
|
LLC with the selling agents of structured debt
securities such as the Notes. As described above, UBS Securities LLC and its affiliates intend, but are not required, to make
a market for the Notes and may stop making a market at any time. The price at which UBS Securities LLC or an affiliate may
make secondary markets at any time (if at all) will also reflect its then current bid-ask spread for similar sized trades of
structured debt securities. UBS Financial Services Inc. and UBS Securities LLC reflect this temporary positive differential
on their customer statements. Investors should inquire as to the valuation provided on customer account statements provided
by unaffiliated dealers.
|
¨
|
Economic and market factors affecting the terms and market price
of Notes prior to maturity —
Because structured notes, including the Notes, can be thought of as having a debt component and a derivative
component, factors that influence the values of debt instruments and options and other derivatives will also affect the terms and
features of the Notes at issuance and the market price of the Notes prior to maturity. These factors include the level of each
underlying asset and the underlying constituents; the volatility of each underlying asset and the underlying constituents; any
dividend rate paid on the underlying assets and the underlying constituents, if applicable; the correlation of the underlying assets;
the time remaining to the maturity of the Notes; interest rates in the markets; geopolitical conditions and economic, financial,
political, force majeure and regulatory or judicial events; whether each underlying asset is currently or has been less than its
call threshold level; the availability of comparable instruments; the creditworthiness of UBS; the then current bid-ask spread for the Notes and the factors
discussed under“— Potential conflict of interest” below. These and other factors
are unpredictable and interrelated and may offset or magnify each other.
|
|
¨
|
Impact of fees and the use of internal funding rates rather than
secondary market credit spreads on secondary market prices
— All other things being equal, the use of the internal funding
rates described above under “—Fair value considerations” as well as the inclusion in the issue price of the underwriting
discount, hedging costs, issuance costs and any projected profits are, subject to the temporary mitigating effect of UBS Securities
LLC’s and its affiliates’ market making premium, expected to reduce the price at which you may be able to sell the
Notes in any secondary market.
|
|
¨
|
There can be no assurance that the investment view implicit in the
Notes will be successful
— It is impossible to predict whether and the extent to which the levels of the underlying assets will rise
or fall or, if the Notes are not subject to an automatic call, that the final level of each underlying asset will be equal to or
greater than its downside threshold. The levels of the underlying assets will be influenced by complex and interrelated political,
economic, financial and other factors that affect an issuer of an underlying constituent (an “underlying constituent issuer”).
You should be willing to accept the risks of owning equities in general and the underlying assets and underlying constituents in
particular, and the risk of losing a significant portion or all of your initial investment.
|
|
·
|
There are small-capitalization risks associated with the iShares
®
Russell 2000 ETF
— The Notes are linked to the iShares
®
Russell 2000 ETF (the “IWM Fund”)
and are subject to risks associated with small-capitalization companies. The IWM Fund invests in companies that may be considered
small-capitalization companies. These companies often have greater stock price volatility, lower trading volume and less liquidity
than mid- and large-capitalization companies and therefore the IWM Fund’s share price may be more volatile than that of funds
that invest a larger percentage of their assets in stocks issued by mid- and large-capitalization companies. Stock prices of small-capitalization
companies are also more vulnerable than those of mid- and large-capitalization companies to adverse business and economic developments,
and the stocks of small-capitalization companies may be thinly traded, making it difficult for the relevant fund to buy and sell
them. In addition, small-capitalization companies are typically less stable financially than mid- and large-capitalization companies
and may depend on a small number of key personnel, making them more vulnerable to loss of personnel. Small-capitalization companies
are often given less analyst coverage and may be in early, and less predictable, periods of their corporate existences. Such companies
tend to have smaller revenues, less diverse product lines, smaller shares of their product or service markets, fewer financial
resources and less competitive strengths than mid- and large-capitalization companies and are more susceptible to adverse developments
related to their products.
|
|
·
|
The Notes are subject to risks associated with the technology sector
—
The Technology Select Sector SPDR
®
Fund (the “XLK Fund”) seeks to track the performance of the Technology
Select Sector Index, which is comprised of the stocks of companies representing the technology sector of the S&P 500
®
Index. All or substantially all of the equity securities included in the XLK Fund are issued by companies whose primary line of
business is directly associated with the technology sector. Market or economic factors impacting technology companies and companies
that rely heavily on technological advances could have a major effect on the value of the Fund's investments. The value of stocks
of technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology
product cycles, rapid product obsolescence, government regulation and competition, both domestically and internationally, including
competition from non-U.S. competitors with lower production costs. Stocks of technology companies and companies that rely heavily
on technology, especially those of smaller, less-seasoned companies, tend to be more volatile than the overall market. Technology
companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect
profitability. Additionally, companies in the technology sector may face dramatic and often unpredictable changes in growth rates
and competition for the services of qualified personnel.
|
|
·
|
The Notes are subject to risks associated with the banking sector
—
The Notes are linked to the linked to the The SPDR
®
S&P
®
Regional Banking ETF (the “KRE
Fund”) and are subject to risks associated with the regional banking sector. The KRE Fund seeks to track the performance
of the S&P
®
Regional Banks Select Industry Index, which is comprised of the stocks of companies representing
the banking sector of the S&P Total Markets Index. All or substantially all of the equity securities tracked by the KRE Fund
are issued by companies whose primary lines of business are directly associated with the banking sector, which means the KRE Fund
will be more affected by the performance of the banking sector versus a fund that is more diversified. The performance of bank
stocks may be affected by extensive governmental regulation which may limit both the amounts and types of loans and other financial
commitments they can make, and the interest rates and fees they can charge and the amount of capital they must maintain. The regional
banking sector is highly competitive and profitability is largely dependent on the availability and cost of capital funds, and
can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers can negatively
impact the sector. Banks may also be subject to severe price competition.
|
|
·
|
The Notes are subject to risks associated with the financial sector
—
Notes linked to the KRE Fund are subject to risks associated with the financial sector. Financial services companies are subject
to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments they can
make, the interest rates and fees they can charge, the scope of their activities, the prices they can charge and the amount of
capital they must maintain. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate
significantly when interest rates change or due to increased competition. In addition, deterioration of the credit markets generally
may cause an adverse impact in a broad range of markets, including U.S. and international credit and interbank money markets generally,
thereby affecting a wide range of financial institutions and markets. Certain events in the financial sector may cause an unusually
high degree of volatility in the financial markets, both domestic and foreign, and cause certain financial services companies to
incur large losses. Securities of financial services companies may experience a dramatic decline in value when such companies experience
substantial declines in the valuations of their assets, take action to raise capital (such as the issuance of debt or equity
|
|
|
securities),
or cease operations. Credit losses resulting from financial difficulties of borrowers and financial losses associated with investment
activities can negatively impact the sector. Insurance companies may be subject to severe price competition. Adverse economic,
business or political developments affecting real estate could have a major effect on the value of real estate securities (which
include real estate investment trusts (“REITs”)). Declining real estate values could adversely affect financial institutions
engaged in mortgage finance or other lending or investing activities directly or indirectly connected to the value of real estate.
|
|
·
|
The underlying assets are ETFs and their values may not completely track the
values of their underlying constituents —
Although the trading characteristics and valuations of ETFs such as the underlying
assets will usually mirror the characteristics and valuations of the underlying constituents, their values may not completely track
the values of their underlying constituents. The values of the underlying assets will reflect transaction costs and fees that the
underlying constituents do not have. In addition, although the underlying assets may be currently listed for trading on an exchange,
there is no assurance that an active trading market will continue for such underlying assets or that there will be liquidity in
the trading market.
|
|
·
|
Fluctuation of NAV —
The net asset values (the “NAV”)
of the underlying assets may fluctuate with changes in the market value of the underlying constituents. The market prices of the
underlying assets may fluctuate in accordance with changes in NAV and supply and demand on the applicable stock exchanges. Furthermore,
the underlying constituents may be unavailable in the secondary market during periods of market volatility, which may make it difficult
for market participants to accurately calculate the intraday NAV per share of the underlying assets and may adversely affect the
liquidity and prices of the underlying assets, perhaps significantly. For any of these reasons, the market price of the underlying
assets may differ from their NAV per share and may trade at, above or below their NAV per share.
|
|
·
|
Failure of an underlying asset to track the level of its target index —
While each underlying asset is designed and intended to track the level of a specific index (each, a “target index”),
various factors, including fees and other transaction costs, will prevent the underlying assets from correlating exactly with changes
in the level of their respective target index. Accordingly, the performance of each underlying asset will not be equal to the performance
of its target index during the term of the Notes.
|
|
·
|
The underlying assets utilize a passive indexing investment approach —
The underlying assets are not managed according to traditional methods of “active” investment management, which involve
the buying and selling of securities based on economic, financial and market analysis and investment judgment. Instead, the underlying
assets, each utilizing a “passive” or indexing investment approach, attempt to approximate the investment performance
of their respective target indexes by investing in a portfolio of stocks that generally replicate such indexes. Therefore, unless
a specific stock is removed from such indexes, the underlying assets generally would not sell a stock because the stock’s
issuer was in financial trouble. In addition, the underlying assets are each subject to the risk that the investment strategy of
their respective investment advisers may not produce the intended results.
|
|
·
|
The calculation agent can make antidilution and reorganization adjustments
that affect the payment to you at maturity —
For antidilution and reorganization events affecting an underlying asset,
the calculation agent may make adjustments to its initial level, downside threshold and/or final level, as applicable, and any
other term of the Notes. However, the calculation agent will not make an adjustment in response to every corporate event that could
affect an underlying asset. If an event occurs that does not require the calculation agent to make an adjustment, the market value
of the Notes and the payment at maturity may be materially and adversely affected. In addition, all determinations and calculations
concerning any such adjustments will be made by the calculation agent. You should be aware that the calculation agent may make
any such adjustment, determination or calculation in a manner that differs from that discussed in the TAN product supplement or
this document as necessary to achieve an equitable result. Following a delisting, discontinuance or other suspension from trading
of the underlying asset, the determination as to whether the Notes are subject to an automatic call or the amount you receive at
maturity may be based on a share of another exchange traded fund or a replacement basket. The occurrence of these events and the
consequent adjustments may materially and adversely affect the value of the Notes and your payment at maturity, if any. Regardless
of any of the events discussed above, any payment on the Notes is subject to the creditworthiness of UBS. For more information,
see the sections “General Terms of the Notes — Antidilution Adjustments for Notes Linked to an Underlying Equity or
Equity Basket Asset” and “—Reorganization Events for Notes Linked to an Underlying Equity or Equity Basket Asset”
in the TAN product supplement.
|
|
·
|
There is no affiliation between the underlying asset issuers or any underlying
constituent issuer and UBS, and UBS is not responsible for any disclosure by such issuers —
We and our affiliates may
currently or from time to time in the future engage in business with the underlying asset issuers or any underlying constituent
issuer. However, we are not affiliated with the underlying asset issuers or any underlying constituent issuer and are not responsible
for such issuers’ public disclosure of information, whether contained in SEC filings or otherwise. You, as an investor in
the Notes, should conduct your own investigation into the underlying assets and the underlying asset issuers and each underlying
constituent. Neither the underlying asset issuers nor any underlying constituent issuer is involved in the Notes offered hereby
in any way and has no obligation of any sort with respect to your Notes. The underlying asset issuers and any underlying constituent
issuers have no obligation to take your interests into consideration for any reason, including when taking any corporate actions
that might affect the value of your Notes.
|
|
¨
|
Potential UBS impact on an underlying asset or any underlying constituent
— Trading or transactions by UBS or its affiliates in an underlying asset or any underlying constituent,
listed and/or over-the-counter options, futures, exchange-traded funds or other instruments with returns linked to the performance
of that underlying asset or any underlying constituent, may adversely affect the market price(s) or level(s) of that underlying
asset on any observation date, including the final valuation date and, therefore, the market value of the Notes, any payout pursuant
to an automatic call or at maturity.
|
|
¨
|
Potential conflict of interest
— UBS and its affiliates
may engage in business with any underlying constituent issuer, which may present a conflict between the obligations of UBS and
you, as a holder of the Notes. There are also potential conflicts of interest between you and the calculation agent, which will
be an affiliate of UBS and which will make potentially subjective judgments. The calculation agent will determine whether the Notes
are subject to an automatic call and the payment at maturity of the Notes, if any, based on observed levels of the underlying
assets. The calculation agent can postpone the determination of the initial level, closing level or final level of any
underlying asset (and therefore the related settlement date, call settlement date or maturity date, as applicable), on the
trade date or any observation date, including the final valuation date, respectively. As UBS determines the economic terms of
the Notes, including the call return rate, call threshold levels and downside thresholds, and such terms include the
underwriting discount, hedging costs, issuance costs and projected profits, the Notes represent a package of economic terms.
There are other potential conflicts of interest insofar as an investor could potentially get better economic terms if that
investor entered into exchange-traded and/or OTC derivatives or other instruments with third parties, assuming that such
instruments were available and the investor had the ability to assemble and enter into such instruments.
|
|
¨
|
Potentially inconsistent research, opinions or recommendations by
UBS
— UBS and its affiliates publish research from time to time on financial markets and other matters that may influence
the value of the Notes, or express opinions or provide recommendations that are inconsistent with purchasing or holding the Notes.
Any research, opinions or recommendations expressed by UBS or its affiliates may not be consistent with each other and may be modified
from time to time without notice. Investors should make their own independent investigation of the merits of investing in the Notes
and the underlying assets to which the Notes are linked.
|
|
¨
|
Dealer incentives
— UBS and its affiliates act in various capacities with respect to the Notes. We and our affiliates may act
as a principal, agent or dealer in connection with the sale of the Notes. Such affiliates, including the sales representatives,
will derive compensation from the distribution of the Notes and such compensation may serve as an incentive to sell these Notes
instead of other investments. We will pay total underwriting compensation in an amount equal to the underwriting discount listed
on the cover hereof per Note to any of our affiliates acting as agents or dealers in connection with the distribution of the Notes.
Given that UBS Securities LLC and its affiliates temporarily maintain a market making premium, it may have the effect of discouraging
UBS Securities LLC and its affiliates from recommending sale of your Notes in the secondary market.
|
|
¨
|
Under certain circumstances, the Swiss Financial Market Supervisory
Authority (“FINMA”) has the power to take actions that may adversely affect the Notes
— Pursuant to article
25 et seq. of the Swiss Banking Act, FINMA has broad statutory powers to take measures and actions in relation to UBS if it (i)
is overindebted, (ii) has serious liquidity problems or (iii) fails to fulfill the applicable capital adequacy provisions after
expiration of a deadline set by FINMA. If one of these prerequisites is met, the Swiss Banking Act grants significant discretion
to FINMA to open restructuring proceedings or liquidation (bankruptcy) proceedings in respect of, and/or impose protective measures
in relation to, UBS. In particular, a broad variety of protective measures may be imposed by FINMA, including a bank moratorium
or a maturity postponement, which measures may be ordered by FINMA either on a stand-alone basis or in connection with restructuring
or liquidation proceedings. In a restructuring proceeding, the resolution plan may, among other things, (a) provide for the transfer
of UBS’ assets or a portion thereof, together with debts and other liabilities, and contracts of UBS, to another entity,
(b) provide for the conversion of UBS’ debt and/or other obligations, including its obligations under the Notes, into equity
and/or (c) potentially provide for haircuts on obligations of UBS, including its obligations under the Notes. Although no precedent
exists, if one or more measures under the revised regime were imposed, such measures may have a material adverse effect on the
terms and market value of the Notes and/or the ability of UBS to make payments thereunder.
|
|
¨
|
Uncertain tax treatment
— Significant aspects of the tax
treatment of the Notes are uncertain. You should consult your tax advisor about your tax situation.
|
Hypothetical Examples of How the Notes Might Perform
|
The below examples are based on hypothetical terms. The actual
terms will be set on the trade date and will be indicated on the cover of the applicable pricing supplement.
The examples below illustrate the payment upon a call or at
maturity for a $10.00 Note on a hypothetical offering of the Notes, with the following assumptions (amounts may have been rounded
for ease of reference):
Principal Amount:
|
$10.00
|
Term:
|
Approximately 2 years
|
Call return rate:
|
6.00% per annum (or 1.50% per quarter)
|
Observation Dates:
|
Quarterly (callable after one year)
|
Initial Level:
|
|
Underlying Asset A:
|
$75
|
Underlying Asset B:
|
$100
|
Underlying Asset C:
|
$40
|
Call Threshold:
|
|
Underlying Asset A:
|
•
|
For each observation date prior to the final valuation date:
$75 (which is 100% of the Initial Level)
|
|
•
|
For the final valuation date: $45 (which is
60.00% of the Initial Level)
|
Underlying Asset B:
|
•
|
For each observation date prior to the final valuation date: $100 (which is 100% of the Initial Level)
|
|
•
|
For the final valuation date: $60 (which is 60.00% of the Initial Level)
|
Underlying Asset C:
|
•
|
For each observation date prior to the final valuation date: $40 (which is 100% of the Initial Level)
|
|
•
|
For the final valuation date: $24 (which is 60.00% of the Initial Level)
|
Downside Threshold:
|
|
Underlying Asset A:
|
$45 (which is 60.00% of the Initial Level)
|
Underlying Asset B:
|
$60 (which is 60.00% of the Initial Level)
|
Underlying Asset C:
|
$24 (which is 60.00% of the Initial Level)
|
Example 1 — The Closing Level of each Underlying
Asset is equal to or greater than its Call Threshold Level on the Observation Date corresponding to the first Potential Call Settlement
Date.
Date
|
Closing
Level
|
Payment
(per Note)
|
First Observation Date
|
Underlying Asset A: $80 (
equal to or greater than
Call Threshold Level)
Underlying Asset B: $110 (
equal to or greater than
Call Threshold Level)
Underlying Asset C: $45 (
equal to or greater than
Call Threshold Level)
|
$10.60 (Call Price)
|
|
Total Payment
|
$10.60 (6.00% total return)
|
Because the Notes are subject to an automatic call on the first potential call settlement date (which is approximately
one year after the trade date), UBS will pay on the call settlement date a total of $10.60 per Note (reflecting your principal
amount plus the applicable call return), a 6.00% total return on the Notes. You will not receive any further payments on the Notes.
Example 2 — The Closing Level of each Underlying
Asset is equal to or greater than its Call Threshold Level on the Observation Date corresponding to the third Potential Call Settlement
Date.
Date
|
Closing
Level
|
Payment
(per Note)
|
First Observation Date
|
Underlying Asset A: $70 (
less than
Call Threshold Level)
Underlying Asset B: $95 (
less than
Call Threshold
Level)
Underlying Asset C: $38 (
less than
Call Threshold Level)
|
$0
|
Second Observation Date
|
Underlying Asset A: $80 (
equal to or greater than
Call
Threshold Level)
Underlying Asset B: $95 (
less than
Call Threshold
Level)
Underlying Asset C: $45 (
equal to or greater than
Call Threshold Level)
|
$0
|
Third Observation Date
|
Underlying Asset A: $80 (
equal to or greater than
Call
Threshold Level)
Underlying Asset B: $110 (
equal to or greater than
Call
Threshold Level)
Underlying Asset C: $45 (
equal to or greater than
Call
Threshold Level)
|
$10.90 (Call Price)
|
|
Total Payment
|
$10.90 (9.00% total return)
|
Because the Notes are subject to an automatic call on the third potential call settlement date (which is approximately
eighteen months after the trade date), UBS will pay on the call settlement date a total of $10.90 per Note (reflecting your principal
amount plus the applicable call return), a 9.00% total return on the Notes. You will not receive any further payments on the Notes.
Example 3 — The Final Level of each Underlying Asset is equal to or greater than its Call Threshold Level on the Final
Valuation Date.
Date
|
Closing
Level
|
Payment
(per Note)
|
First
Observation Date
|
Underlying
Asset A: $70 (
less than
Call Threshold Level)
Underlying
Asset B: $95 (
less than
Call Threshold Level)
Underlying Asset C: $35 (
less than
Call Threshold
Level)
|
$0
|
Second
Observation Date
|
Underlying
Asset A: $70 (
less than
Call Threshold Level)
Underlying
Asset B: $105 (
equal to or greater than
Call Threshold Level)
Underlying Asset C: $38 (
less than
Call Threshold Level)
|
$0
|
Third
Observation Date
|
Underlying
Asset A: $72 (
less than
Call Threshold Level)
Underlying
Asset B: $98 (
less than
Call Threshold Level)
Underlying Asset C: $35 (
less than
Call Threshold
Level)
|
$0
|
Fourth
Observation Date
|
Underlying
Asset A: $80 (
equal to or greater than
Call Threshold Level)
Underlying
Asset B: $95 (
less than
Call Threshold Level)
Underlying Asset C: $40 (
equal to or greater than
Call Threshold Level)
|
|
Final
Valuation Date
|
Underlying
Asset A: $75 (
equal to or greater than
Call Threshold Level and Downside
Threshold)
Underlying
Asset B: $95 (
equal to or greater than
Call Threshold Level and Downside Threshold)
Underlying Asset C:
$30 (
equal to or greater than
Call Threshold Level and Downside Threshold)
|
$11.20
(Payment at Maturity)
|
|
Total
Payment
|
$11.20
(12.00% total return)
|
Because the Notes are subject to an
automatic call on the final valuation date (which is approximately two years after the trade date), UBS will pay on the call
settlement date (which is the maturity date) a total of $11.20 per Note (reflecting your principal amount plus the applicable
call return), a 12.00% total return on the Notes.
Example 4 — The Notes are NOT
subject to an Automatic Call and the Final Level of an Underlying Asset is less than its Downside Threshold.
Date
|
Closing
Level
|
Payment
(per Note)
|
First
Observation Date
|
Underlying
Asset A: $70 (
less than
Call Threshold Level)
Underlying
Asset B: $95 (
less than
Call Threshold Level)
Underlying Asset C: $38 (
less than
Call Threshold
Level)
|
$0
|
Second
Observation Date
|
Underlying
Asset A: $72 (
less than
Call Threshold Level)
Underlying
Asset B: $102 (
equal to or greater than
Call Threshold Level)
Underlying Asset C: $45 (
equal to or
greater than
Call Threshold Level)
|
$0
|
Third
Observation Date
|
Underlying
Asset A: $68 (
less than
Call Threshold Level)
Underlying
Asset B: $85 (
less than
Call Threshold Level)
Underlying Asset C: $42 (
equal to or greater than
Call Threshold Level)
|
$0
|
Fourth
Observation Date
|
Underlying
Asset A: $65 (
less than
Call Threshold Level)
Underlying
Asset B: $70 (
less than
Call Threshold Level)
Underlying Asset C: $37 (
less than
Call Threshold
Level)
|
$0
|
Final
Valuation Date
|
Underlying
Asset A: $50 (
equal to or greater than
Call Threshold Level and Downside
Threshold)
Underlying
Asset B: $40 (
less than
Call Threshold Level and Downside Threshold)
Underlying Asset C: $35 (
equal
to or greater than
Call Threshold Level and Downside Threshold)
|
$10.00
x (1 + Underlying Return of the Least Performing Underlying Asset)
=
$10.00 x [$1 + (-60%)]
=
$10.00 x 0.40
=
$4.00 (Payment at Maturity)
|
|
Total
Payment
|
$4.00
(60.00% loss)
|
Because the Notes are not subject to an automatic call, the final level of an underlying asset (Underlying
Asset B) is less than its downside threshold, you will be exposed to the underlying return of the least performing underlying asset
and, on the maturity date, UBS will pay you $4.00 per Note, a loss of 60.00% on the Notes.
We make no representation or warranty as to which of the underlying assets will be the least performing underlying
asset for the purposes of calculating your actual payment at maturity.
Investing in the Notes involves significant risks. The Notes differ from ordinary debt securities in that
UBS is not necessarily obligated to repay the full amount of your initial investment. If the Notes are not subject to an automatic
call, you will lose a significant portion or all of your initial investment because if the Notes are not subject to an automatic
call, then the final level of at least one underlying asset is less than its downside threshold. In this scenario, you will lose
a percentage of your initial investment equal to the underlying return of the least performing underlying asset and, in extreme
situations, you could lose all of your initial investment.
You will be exposed to the market risk of each
underlying asset on each observation date, including the final valuation date, and any decline in the level of one underlying
asset may negatively affect your return and will not be offset or mitigated by a lesser decline or any potential increase in
the level of any other underlying asset. Any payment on the Notes, including any payments in respect of an automatic call or
any repayment of principal, is subject to the creditworthiness of UBS. If UBS were to default on its payment obligations, you
may not receive any amounts owed to you under the Notes and you could lose all of your initial investment.
Information About the Underlying Assets
|
iShares
®
Russell 2000 ETF
We have derived
all information contained herein regarding the iShares
®
Russell 2000 ETF (the “IWM Fund”) from publicly
available information. Such information reflects the policies of, and is subject to changes by, BlackRock Fund Advisors (“BFA”),
the investment advisor of the IWM Fund. UBS has not undertaken an independent review or due diligence of any publicly available
information regarding the IWM Fund.
The IWM Fund is
one of the investment portfolios that constitute the iShares Trust. The IWM Fund seeks investment results that correspond generally
to the price and yield performance, before fees and expenses of the Russell 2000 Index (the “Russell 2000”). The Russell
2000 measures the performance of the small-capitalization sector of the U.S. equity market and is provided by Russell Investment
Group, an organization that is independent of the IWM Fund and BFA. The Russell Investment Group is under no obligation to continue
to publish, and may discontinue or suspend the publication of the Russell 2000 at any time.
The Russell 2000
is a float-adjusted capitalization-weighted index of equity securities issued by the approximately 2,000 smallest issuers in the
Russell 3000 Index. The IWM Fund invests in a representative sample of securities included in the Russell 2000 that collectively
has an investment profile similar to the Russell 2000. The securities selected are expected to have, in the aggregate, investment
characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as
return variability and yield), and liquidity measures similar to those of the Russell 2000. Due to the use of representative sampling,
the IWM Fund may or may not hold all of the securities that are included in the Russell 2000.
As of September
30, 2017, ordinary operating expenses of the IWM Fund are expected to accrue at an annual rate of 0.20% of the IWM Fund’s
average daily net asset value. Expenses of the IWM Fund reduce the net asset value of the assets held by the IWM Fund and, therefore,
reduce the value of the shares of the IWM Fund.
As
of September 30, 2017, the IWM Fund held stocks of U.S. companies in the following industry sectors: Financials (18.02%),
Information Technology (16.79%) , Health Care (15.72%), Industrials (15.07%), Consumer Discretionary (11.90%), Real Estate
(7.22%), Materials (4.41%), Energy (3.71%), Utilities (3.60%), Consumer Staples (2.68%), Telecommunications (0.83%) &
Other (0.04%).
In making your
investment decision you should review the prospectus related to the IWM Fund, dated May 26, 2017 (the “IWM Fund Prospectus”)
available at: sec.gov/Archives/edgar/data/1100663/000119312517185292/d399316d485apos.htm
In addition, the
IWM Fund Prospectus is available on the IWM Fund’s website as indicated below. In making your investment decision you should
pay particular attention to the sections of the IWM Fund Prospectus entitled “A Further Discussion of Principal Risks”
and “A Further Discussion of Other Risks.” UBS has not undertaken an independent review or due diligence of any publicly
available information regarding the IWM Fund Prospectus, and such information is not incorporated by reference in, and should
not be considered part of, this document or any accompanying prospectus.
The IWM Fund’s
website is us.ishares.com/product_info/fund/overview/IWM.htm. Shares of the IWM Fund are listed on the NYSE Arca under ticker
symbol “IWM.”
Information filed
by iShares Trust with the SEC can be found by reference to its SEC file numbers: 333-92935 and 811-09729.
Information from
outside sources is not incorporated by reference in, and should not be considered part of, this document or any accompanying prospectus.
UBS has not conducted any independent review or due diligence of any publicly available information with respect to the IWM Fund.
Historical Information
The following table sets forth the quarterly high and low closing levels for
the IWM Fund, based on the daily closing levels as reported by Bloomberg Professional
®
service (“Bloomberg”),
without independent verification. UBS has not conducted any independent review or due diligence of publicly available information
obtained from Bloomberg. The closing level of the IWM Fund on December 8, 2017 was $151.41 (the “hypothetical initial level”
for the IWM Fund). The actual initial level will be the closing level of the IWM Fund on the trade date.
Past performance
of the IWM Fund is not indicative of the future performance of the IWM Fund.
Quarter
Begin
|
Quarter
End
|
Quarterly
Closing High
|
Quarterly
Closing Low
|
Quarterly
Close
|
1/3/2012
|
3/30/2012
|
$84.41
|
$74.56
|
$82.85
|
4/2/2012
|
6/29/2012
|
$83.79
|
$73.64
|
$79.65
|
7/2/2012
|
9/28/2012
|
$86.40
|
$76.68
|
$83.46
|
10/1/2012
|
12/31/2012
|
$84.69
|
$76.88
|
$84.29
|
1/2/2013
|
3/28/2013
|
$94.80
|
$86.65
|
$94.26
|
4/1/2013
|
6/28/2013
|
$99.51
|
$89.58
|
$97.16
|
7/1/2013
|
9/30/2013
|
$107.10
|
$98.08
|
$106.62
|
10/1/2013
|
12/31/2013
|
$115.31
|
$103.67
|
$115.31
|
1/2/2014
|
3/31/2014
|
$119.83
|
$108.64
|
$116.34
|
4/1/2014
|
6/30/2014
|
$118.81
|
$108.88
|
$118.81
|
7/1/2014
|
9/30/2014
|
$120.02
|
$109.35
|
$109.35
|
10/1/2014
|
12/31/2014
|
$121.08
|
$104.30
|
$119.67
|
1/2/2015
|
3/31/2015
|
$126.03
|
$114.69
|
$124.35
|
4/1/2015
|
6/30/2015
|
$129.01
|
$120.85
|
$124.86
|
7/1/2015
|
9/30/2015
|
$126.31
|
$107.53
|
$109.20
|
10/1/2015
|
12/31/2015
|
$119.85
|
$109.01
|
$112.51
|
1/4/2016
|
3/31/2016
|
$110.62
|
$94.80
|
$110.62
|
4/1/2016
|
6/30/2016
|
$118.43
|
$108.69
|
$114.97
|
7/1/2016
|
9/30/2016
|
$125.70
|
$113.69
|
$124.21
|
10/03/2016
|
12/30/2016
|
$138.31
|
$115.00
|
$134.85
|
1/3/2017
|
3/31/2017
|
$140.36
|
$133.75
|
$137.48
|
4/3/2017
|
6/30/2017
|
$142.10
|
$133.72
|
$140.92
|
7/3/2017
|
9/29/2017
|
$148.18
|
$134.83
|
$148.18
|
10/2/2017
|
12/8/2017*
|
$153.65
|
$145.63
|
$151.41
|
* The above table only includes data
through this date. Accordingly, the “Quarterly Closing High,” “Quarterly Closing Low” and “Quarterly
Close” data indicated are for this shortened period only and do not reflect complete data for this calendar quarter.
The graph below illustrates the performance of the IWM
Fund from January 3, 2007 through December 8, 2017, based on information from Bloomberg. The dotted green line represents a hypothetical
call threshold level of $151.41 applicable for each call observation date prior to the final valuation date and the dotted blue
line represents a hypothetical call threshold level (applicable on the final valuation date) and a hypothetical downside threshold
of $90.85, which are equal to 100% and 60.00%, respectively, of its hypothetical initial level. The actual call threshold levels
and downside threshold will be determined on the trade date.
Past performance of the
IWM Fund is not
indicative of the future performance of the IWM Fund.
SPDR
®
S&P
®
Regional Banking ETF
We
have derived all information contained herein regarding the SPDR
®
S&P
®
Regional Banking ETF
(the “KRE Fund”) from publicly available information. Such information reflects the policies of, and is subject to
changes by, SSGA Funds Management, Inc. the investment adviser of the KRE Fund.
The
KRE Fund is a separate, non-diversified series of the Trust (each, a “Sector SPDR Fund”) that constitute the Trust.
Each Sector SPDR Fund is an “index fund” that invests in a particular sector or group of industries represented by
a specified Select Sector Index. The companies included in each Sector Index are selected on the basis of industry or sub-industry
classification from a universe of companies defined by the S&P Total Markets Index (“S&P TMI”). The Sector
Indices upon which the Sector Funds are based together comprise all of the companies in the S&P TMI, subject to certain market
capitalization and liquidity thresholds. The KRE Fund seeks to provide investment results that, before expenses, correspond generally
to the price and yield performance of publicly traded equity securities of companies in the S&P
®
Regional Banks
Select Industry Index (the “target index”) that meet the market capitalization and liquidity thresholds.
In
seeking to track the performance of the target index, the KRE Fund employs a replication strategy, which means that the KRE Fund
typically invests in substantially all of the securities represented in the target index in approximately the same proportions
as the target index. Under normal market conditions, the KRE Fund generally invests substantially all, but at least 80%, of its
total assets in the securities comprising the target index.
The
target index includes companies from the regional banking sub-industry.
As
of September 30, 2017, ordinary operating expenses of the KRE Fund are expected to accrue at an annual rate of 0.35% of the KRE
Fund’s daily net asset value. Expenses of the KRE Fund reduce the net value of the assets held by the KRE Fund and, therefore,
reduce the value of each unit of the KRE Fund.
As
of September 30, 2017, the KRE Fund’s top 10 holding by weight were: Comerica Incorporated. (2.82%), Citizens Financial
Group Inc. (2.76%), SVB Financial Group (2.75%), Regions Financial Corporation (2.75%), SunTrust Banks Inc. (2.73%), Huntington
Bancshares Incorporated (2.71%), Zions Bancorporation (2.71%), KeyCorp (2.71%), CIT Group Inc. (2.69%) and M&T Bank Corporation
(2.67%).
In
making your investment decision you should review the prospectus related to the KRE Fund, dated October 31, 2017 filed by the
SPDR
®
Series Trust (the “SPDR Regional Banking ETF Prospectus”) available at:
sec.gov/Archives/edgar/data/1064642/000119312517323271/d413018d485bpos.htm#c02c1b0f-3be4-465c-9ae8-8c3bf6a2f8ae_1
In
addition, the SPDR Regional Banking ETF Prospectus is available on the KRE Fund’s website as indicated below. In making
your investment decision you should pay particular attention to the sections of the SPDR Regional Banking ETF Prospectus entitled
“Principal Risks of Investing in the Fund” and “Additional Risk Information.” UBS has not undertaken an
independent review or due diligence of any publicly available information regarding the SPDR Regional Banking ETF Prospectus,
and such information is not incorporated by reference in, and should not be considered part of, this document or any accompanying
prospectus.
The
KRE Fund’s website is us.spdrs.com/en/product/fund.seam?ticker=KRE. Shares of the KRE Fund are listed on the NYSE Arca under
ticker symbol “KRE.”
Information
filed by the KRE Fund with the SEC can be found by reference to its SEC file numbers: 333-57793 and 811-08839.
Information from outside sources
is not incorporated by reference in, and should not be considered part of, this document or any accompanying prospectus. UBS has
not conducted any independent review or due diligence of any publicly available information with respect to the KRE Fund.
Historical Information
The following table sets forth the quarterly high and low closing levels for KRE Fund, based on the daily
closing levels as reported by Bloomberg, without independent verification. UBS has not conducted any independent review or due
diligence of publicly available information obtained from Bloomberg. The closing level of the KRE Fund on December 8, 2017 was
$59.29 (the “hypothetical initial level” for the KRE Fund
).
The actual initial level will be the closing level of the KRE Fund on the trade date
.
Past performance of the KRE Fund is not
indicative of the future performance of the KRE Fund.
Quarter
Begin
|
Quarter
End
|
Quarterly
Closing High
|
Quarterly
Closing Low
|
Quarterly
Close
|
1/3/2012
|
3/30/2012
|
$29.10
|
$25.00
|
$28.47
|
4/2/2012
|
6/29/2012
|
$28.71
|
$24.94
|
$27.38
|
7/2/2012
|
9/28/2012
|
$29.95
|
$26.43
|
$28.64
|
10/1/2012
|
12/31/2012
|
$29.20
|
$26.25
|
$27.97
|
1/2/2013
|
3/28/2013
|
$31.91
|
$28.93
|
$31.80
|
4/1/2013
|
6/28/2013
|
$33.97
|
$29.91
|
$33.88
|
7/1/2013
|
9/30/2013
|
$37.54
|
$34.49
|
$35.65
|
10/1/2013
|
12/31/2013
|
$40.77
|
$35.04
|
$40.61
|
1/2/2014
|
3/31/2014
|
$42.47
|
$36.84
|
$41.38
|
4/1/2014
|
6/30/2014
|
$42.16
|
$37.30
|
$40.32
|
7/1/2014
|
9/30/2014
|
$41.14
|
$37.61
|
$37.86
|
10/1/2014
|
12/31/2014
|
$41.18
|
$36.05
|
$40.70
|
1/2/2015
|
3/31/2015
|
$41.58
|
$36.54
|
$40.83
|
4/1/2015
|
6/30/2015
|
$45.37
|
$40.78
|
$44.16
|
7/1/2015
|
9/30/2015
|
$45.03
|
$38.56
|
$41.18
|
10/1/2015
|
12/31/2015
|
$45.93
|
$40.47
|
$41.92
|
1/4/2016
|
3/31/2016
|
$40.89
|
$32.89
|
$37.64
|
4/1/2016
|
6/30/2016
|
$41.98
|
$35.51
|
$38.35
|
7/1/2016
|
9/30/2016
|
$43.09
|
$36.85
|
$42.27
|
10/3/2016
|
12/30/2016
|
$56.46
|
$41.71
|
$55.57
|
1/3/2017
|
3/31/2017
|
$59.36
|
$52.59
|
$54.61
|
4/3/2017
|
6/30/2017
|
$55.75
|
$51.71
|
$54.95
|
7/3/2017
|
9/29/2017
|
$56.76
|
$49.59
|
$56.76
|
10/2/2017
|
12/8/2017*
|
$60.35
|
$54.35
|
$59.29
|
* The above table only includes data
through this date. Accordingly, the “Quarterly Closing High,” “Quarterly Closing Low” and “Quarterly
Close” data indicated are for this shortened period only and do not reflect complete data for this calendar quarter.
The graph below illustrates
the performance of the KRE Fund from January 3, 2007 through December 8, 2017, based on information from Bloomberg. The dotted
green line represents a hypothetical call threshold level of $59.29 applicable for each call observation date prior to the final
valuation date and the dotted blue line represents a hypothetical
call
threshold level (applicable on the final valuation date) and a hypothetical downside threshold of $35.57, which are equal to 100%
and 60.00%, respectively, of its hypothetical initial level. The actual call threshold levels and downside threshold will be determined
on the trade date
.
Past performance of the
KRE
Fund is not indicative of the future performance of the KRE Fund.
Technology Select Sector SPDR
®
Fund
We have derived all information contained herein regarding The Technology
Select Sector SPDR
®
Fund (the “XLK Fund”) from publicly available information. Such information reflects
the policies of, and is subject to change by, SSgA Funds Management, Inc., the investment adviser of the XLK Fund. UBS has not
undertaken an independent review or due diligence of any publicly available information regarding the XLK Fund.
The XLK Fund is one of the separate investment portfolios (each, a “Select
Sector SPDR Fund”) that constitute The Select Sector SPDR
®
Trust. Each Select Sector SPDR Fund is an “index
fund” that invests in a particular sector or group of industries represented by a specified Select Sector Index. The companies
included in each Select Sector Index are selected on the basis of general industry classification from a universe of companies
defined by the S&P 500
®
Index (“S&P 500”). The Select Sector Indices upon which the Select Sector
SPDR Funds are based together comprise all of the companies in the S&P 500. The XLK Fund seeks to provide investment results
that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies
in the Technology Select Sector Index (the “target index”).
In seeking to track the performance of the target index, the XLK Fund employs
a replication strategy, which means that the XLK Fund typically invests in substantially all of the securities represented in the
target index in approximately the same proportions as the target index. Under normal market conditions, the XLK Fund generally
invests substantially all, but at least 95%, of its total assets in the securities comprising the target index.
The target index includes companies from the following industries: technology
hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors
& semiconductor equipment; internet software & services; IT services; electronic equipment, instruments & components;
and wireless telecommunication services. The target index is one of the Select Sector Indices developed and maintained in accordance
with the following criteria: (1) each of the component securities in a Select Sector Index is a constituent company of the S&P
500 and (2) each Select Sector Index is calculated by Standard & Poor’s using a modified “market capitalization”
methodology, which means that modifications may be made to the market capitalization weights of single stock concentrations in
order to conform to the requirements of the Internal Revenue Code of 1986, as amended.
As of September 30, 2017, ordinary operating expenses of the XLK Fund are
expected to accrue at an annual rate of 0.14% of the XLK Fund’s average daily net asset value. Expenses of the XLK Fund reduce
the net value of the assets held by the XLK Fund and, therefore, reduce the value of each share of the XLK Fund. As of September
30, 2017, the XLK Fund’s top ten holdings included Apple Inc. (14.45%), Microsoft Corporation (10.42%), Facebook Inc. Class
A (7.35%), Alphabet Inc. Class A (5.27%), Alphabet Inc. Class C (5.26%), AT&T Inc. (4.37%), Visa Inc. Class A (3.51%), Intel
Corporation (3.26%), Cisco Systems Inc. (3.07%) and Verizon Communications Inc. (3.03%).
In making your investment decision you should review the prospectus related
to the XLK Fund, dated January 31, 2017 (as amended May 1, 2017), filed by The Select Sector SPDR
®
Trust (the “XLK
Fund Prospectus”) available at:
January 31, 2017
sec.gov/Archives/edgar/data/1064641/000119312517021995/d281803d485bpos.htm#e42babff-fd21-4e13-ba3f-caac85eb5cc5_1
May 1, 2017
sec.gov/Archives/edgar/data/1064641/000119312517152121/d387698d497.htm
In addition, the XLK Fund Prospectus is available on the XLK Fund’s
website as indicated below. In making your investment decision you should pay particular attention to the sections of the XLK Fund
Prospectus entitled “Principal Risks of Investing in the Fund” and “Additional Risk Information.” UBS has
not undertaken an independent review or due diligence of any publicly available information regarding the XLK Fund Prospectus,
and such information is not incorporated by reference in, and should not be considered part of, this document or any accompanying
prospectus.
The XLK Fund’s website is spdrs.com/product/fund.seam?ticker=XLK.
Shares of the XLK Fund are listed on the NYSE Arca under ticker symbol “XLK.”
Information filed by The Select Sector SPDR
®
Trust with
the SEC can be found by reference to its SEC file numbers: 333-57791 and 811-08837.
Information from outside sources is not incorporated by reference in, and should not be considered part of, this document or any accompanying prospectus. UBS has not conducted any independent review or due diligence of any publicly available information with respect to the XLK Fund.
Historical Information
The following table sets forth the quarterly high and low closing levels for
the XLK Fund, based on the daily closing levels as reported by Bloomberg, without independent verification. UBS has not conducted
any independent review or due diligence of publicly available information obtained from Bloomberg. The closing level of the XLK
Fund on December 8, 2017 was $63.60 (the “hypothetical initial level” for the XLK Fund). The actual initial level will
be the closing level of the XLK Fund on the trade date.
Past performance of the XLK Fund is not indicative of the future
performance of the XLK Fund.
Quarter
Begin
|
Quarter
End
|
Quarterly
Closing High
|
Quarterly
Closing Low
|
Quarterly
Close
|
1/3/2012
|
3/30/2012
|
$30.44
|
$25.81
|
$30.15
|
4/2/2012
|
6/29/2012
|
$30.48
|
$27.20
|
$28.75
|
7/2/2012
|
9/28/2012
|
$31.66
|
$27.90
|
$30.83
|
10/1/2012
|
12/31/2012
|
$31.05
|
$27.62
|
$28.95
|
1/2/2013
|
3/28/2013
|
$30.43
|
$29.21
|
$30.27
|
4/1/2013
|
6/28/2013
|
$32.20
|
$29.31
|
$30.59
|
7/1/2013
|
9/30/2013
|
$32.80
|
$30.75
|
$32.03
|
10/1/2013
|
12/31/2013
|
$35.74
|
$31.53
|
$35.74
|
1/2/2014
|
3/31/2014
|
$36.65
|
$34.09
|
$36.35
|
4/1/2014
|
6/30/2014
|
$38.42
|
$35.20
|
$38.35
|
7/1/2014
|
9/30/2014
|
$40.60
|
$38.42
|
$39.91
|
10/1/2014
|
12/31/2014
|
$42.49
|
$37.21
|
$41.35
|
1/2/2015
|
3/31/2015
|
$43.43
|
$39.90
|
$41.44
|
4/1/2015
|
6/30/2015
|
$43.78
|
$41.36
|
$41.40
|
7/1/2015
|
9/30/2015
|
$43.67
|
$37.70
|
$39.50
|
10/1/2015
|
12/31/2015
|
$44.57
|
$39.52
|
$42.83
|
1/4/2016
|
3/31/2016
|
$44.45
|
$38.71
|
$44.36
|
4/1/2016
|
6/30/2016
|
$44.70
|
$41.42
|
$43.36
|
7/1/2016
|
9/30/2016
|
$47.91
|
$43.15
|
$47.78
|
10/3/2016
|
12/30/2016
|
$49.17
|
$46.02
|
$48.36
|
1/3/2017
|
3/31/2017
|
$53.43
|
$48.79
|
$53.31
|
4/3/2017
|
6/30/2017
|
$57.44
|
$52.37
|
$54.72
|
7/3/2017
|
9/29/2017
|
$59.10
|
$54.34
|
$59.10
|
10/2/2017
|
12/8/2017*
|
$64.71
|
$59.19
|
$63.60
|
*The above table only includes data through this date. Accordingly, the “Quarterly Closing High,” “Quarterly Closing Low” and “Quarterly Close”
data indicated are for this shortened period only and do not reflect complete data for this calendar quarter.
The graph below illustrates the
performance of the XLK Fund from January 3, 2007 through December 8, 2017, based on information from Bloomberg. The dotted green
line represents a hypothetical call threshold level of $63.60 applicable for each call observation date prior to the final valuation
date and the dotted blue line represents a hypothetical call threshold level (applicable on the final valuation date) and a hypothetical
downside threshold of $38.16, which are equal to 100% and 60.00%, respectively, of its hypothetical initial level. The actual call
threshold levels and downside threshold will be determined on the trade date.
Past performance of the XLK Fund is not indicative
of the future performance of the XLK Fund.
Correlation
of the Underlying Assets
|
The graph below illustrates the daily performance of the iShares
®
Russell 2000 ETF, the shares
of the SPDR
®
S&P
®
Regional Banking ETF and the shares of The Technology Select Sector SPDR
®
Fund from January 3, 2007 through December 8, 2017. For comparison purposes, each underlying asset has been normalized to have
a closing level of 100 on January 3, 2007 by dividing the closing level of that underlying asset on each trading day by the closing
level of that underlying asset on January 3, 2007 and multiplying by 100. We obtained the closing levels used to determine the
normalized closing levels set forth below from Bloomberg, without independent verification.
The closer the relationship of the daily returns of the underlying
assets over a given period, the more positively correlated those underlying assets are. The lower (or more negative) the correlation
among the underlying assets, the less likely it is that those underlying assets will move in the same direction and therefore,
the greater the potential for one of those underlying assets to close below its call threshold level on any observation date and
below its downside threshold on the final valuation date. This is because the less positively correlated the underlying assets
are, the greater the likelihood that at least one of the underlying assets will decrease in value. However, even if the underlying
assets have a higher positive correlation, one or more of the underlying assets might close below its call threshold level on any
observation date and below its downside threshold on the final valuation date, as the underlying assets may decrease in value together.
Although the correlation of the underlying assets’ performance may change over the term of the Notes, the correlations referenced
in setting the terms of the Notes are calculated using UBS’ internal models at the time when the terms of the Notes are set
and are not derived from the daily returns of the underlying assets over the period set forth below. A higher call return rate
is generally associated with lower correlation of the underlying assets, which reflects a greater potential that the Notes will
not be subject to an automatic call and that you will suffer a loss on your investment at maturity. See “Key Risks —
A higher call return rate or lower downside thresholds or call return rates may reflect greater expected volatility of each underlying
asset, and greater expected volatility generally indicates an increased risk of loss at maturity”, “— You are
exposed to the market risk of each underlying asset” and “—Because the Notes are linked to the least performing
underlying asset, you are exposed to a greater risk of not receiving the call return and losing a significant portion or all of
your initial investment at maturity than if the Notes were linked to fewer underlying assets” herein.
Past performance of the underlying assets is not indicative
of the future performance of the underlying assets.
What are the Tax Consequences of the Notes?
|
The U.S. federal income tax consequences of your investment in the Notes are uncertain. Some of these tax
consequences are summarized below, but we urge you to read the more detailed discussion in “Supplemental U.S. Tax Considerations”
of the TAN product supplement
, particularly in respect of the
“constructive ownership” rules under Section 1260 of the Internal Revenue Code of 1986, as amended (the “Code”),
as described in the TAN product supplement, and to discuss the tax consequences of your particular situation with your tax advisor
.
U.S. Tax Treatment.
No statutory, judicial or administrative
authority directly discusses how your Notes should be treated for U.S. federal income tax purposes. Pursuant to the terms of the
Notes, UBS and you agree, in the absence of an administrative or judicial ruling to the contrary, to characterize the Notes as
a pre-paid derivative contract with respect to the underlying assets. If your Notes are so treated, you should generally recognize
capital gain or loss upon the sale, exchange, automatic call, redemption or maturity of your Notes in an amount equal to the difference
between the amount you receive at such time and the amount you paid for your Notes. Subject to the constructive ownership rules, discussed below, gain or loss should generally be long-term
capital gain or loss if you have held your Notes for more than one year (otherwise such gain or loss would be short-term capital
gain or loss if held for one year or less). The deductibility of capital losses is subject to limitations.
Because the underlying assets would
be treated as a “pass-thru entity” for purposes of Section 1260 of the Code, it is possible that the Notes could be
treated as a constructive ownership transaction under Section 1260 of the Code. If the Notes were treated as a constructive ownership
transaction certain adverse U.S. federal income tax consequences could apply (i.e., all or a portion of any long-term capital gain
that you recognize upon the sale, exchange, automatic call, redemption or maturity of your Notes could be recharacterized as ordinary
income and you could be subject to an interest charge on deferred tax liability with respect to such recharacterized gain). We
urge you to read the discussion concerning the possible treatment of the Notes as a constructive ownership transaction under “Supplemental
U.S. Tax Considerations - Alternative Treatments” of the TAN product supplement.
In the opinion of our counsel, Cadwalader, Wickersham & Taft LLP, it would be reasonable to treat your
Notes in the manner described above. However, because there is no authority that specifically addresses the tax treatment of the
Notes, it is possible that your Notes could alternatively be treated for tax purposes as a single contingent payment debt instrument,
or pursuant to some other characterization, (including possible treatment as a “constructive ownership” transaction
under Section 1260 of the Code), such that the timing and character of your income from the Notes could differ materially from
the treatment described above, as described further under “Supplemental U.S. Tax Considerations — Alternative Treatments”
of the TAN product supplement, as described in such product supplement. The risk that the Notes may be recharacterized for U.S.
federal income tax purposes as instruments giving rise to current ordinary income (even before receipt of any cash) and short-term
capital gain or loss (even if held for more than one year), is higher than with other equity-linked securities that do not guarantee
full repayment of principal.
Notice 2008-2.
In 2007, the U.S. Treasury
Department and the Internal Revenue Service (“IRS”) released a notice requesting comments on the U.S. federal
income tax treatment of “prepaid forward contracts” and similar instruments, which might include the Notes.
Notice 2008-2 focuses in particular on whether to require holders of these instruments to accrue income over the term of
their investment. It also asks for comments on a number of related topics, including the character of income or loss with
respect to these instruments and the relevance of factors such as the nature of the underlying property to which the
instruments are linked. While the notice requests comments on appropriate transition rules and effective dates, any U.S.
Treasury Department regulations or other guidance promulgated after consideration of these issues could materially and
adversely affect the tax consequences of an investment in the Notes, possibly with retroactive effect. You should consult
your tax advisor regarding the U.S. federal income tax consequences of an investment in the Notes, including possible
alternative treatments and the issues presented by this notice. Non-US holders should consult their own tax advisors
regarding the U.S. federal income tax consequences of investing in the Notes.
Medicare Tax on Net Investment Income
. U.S. holders that are
individuals, estates, and certain trusts are subject to an additional 3.8% tax on all or a portion of their “net investment
income,” which may include any income or gain realized with respect to the Notes, to the extent of their net investment income
that when added to their other modified adjusted gross income, exceeds $200,000 for an unmarried individual, $250,000 for a married
taxpayer filing a joint return (or a surviving spouse), or $125,000 for a married individual filing a separate return. The 3.8%
Medicare tax is determined in a different manner than the income tax. U.S. holders should consult their tax advisors with respect
to their consequences with respect to the 3.8% Medicare tax.
Specified Foreign Financial Assets.
Certain U.S. holders
that own “specified foreign financial assets” in excess of an applicable threshold may be subject to reporting obligations
with respect to such assets with their tax returns, especially if such assets are held outside the custody of a U.S. financial
institution. You are urged to consult your tax advisor as to the application of this legislation to your ownership of the Notes.
Non-U.S. Holders
. The U.S. federal income tax
treatment of the contingent payments is unclear. Subject to Section 871(m) of the Code and FATCA, as discussed below, if you are
a non-U.S. holder, you should generally not be subject to U.S. withholding tax with respect to payments on your Notes or to generally
applicable information reporting and backup withholding requirements with respect to payments on your Notes if you comply with
certain certification and identification requirements as to your non-U.S. status, including providing us (and/or the applicable
withholding agent) with a fully completed and validly executed applicable IRS Form W-8. Subject to Section 871(m) and Section 897
of the Code, discussed below, gain from the sale, exchange, automatic call, redemption or maturity of a Note generally should not
be subject to U.S. tax unless such gain is effectively connected with a trade or business conducted by the non-U.S. holder in the
U.S. or unless the non-U.S. holder is a non-resident alien individual and is present in the U.S. for 183 days or more during the
taxable year of such taxable disposition and certain other conditions are satisfied, or has certain other present or former connections
with the U.S.
Section 897. We will not attempt to ascertain whether any underlying constituent
issuer would be treated as a “United States real property holding corporation” (“USRPHC”) within the meaning
of Section 897 of the Code. We also have not attempted to determine whether the Notes should be treated as “United States
real property interests” as defined in Section 897 of the Code. If an underlying constituent issuer and the Notes were so
treated, certain adverse U.S. federal income tax consequences could possibly apply, including subjecting any gain to a non-U.S.
holder in respect of a Note upon a sale, exchange, automatic call or other taxable disposition of the Note to the U.S. federal
income tax on a net basis, and the proceeds from such a taxable disposition to a 15% withholding tax. Non-U.S. holders should consult
their tax advisors regarding the potential treatment of the underlying constituent issuer for their Notes as a USRPHC and the Notes
as United States real property interests.
Section 871(m).
A 30% withholding tax (which may be
reduced by an applicable income tax treaty) is imposed under Section 871(m) of the Code on certain “dividend
equivalents” paid or deemed paid to a non-U.S. holder with respect to a “specified equity-linked
instrument” that references one or more dividend-paying U.S. equity securities or indices containing U.S. equity
securities. The withholding tax can apply even if the instrument does not provide for payments that reference dividends.
Treasury regulations provide that the withholding tax applies to all dividend equivalents paid or deemed paid on specified
equity-linked instruments that have a delta of one (“delta one specified equity-linked instruments”) issued after
2016 and to all dividend equivalents paid or deemed paid on all other specified equity-linked instruments issued after
2018.
Based on our determination that the Notes are not “delta-one”
with respect to any underlying asset or any U.S. underlying constituent, our counsel is of the opinion that the Notes should
not be delta one specified equity-linked instruments and thus should not be subject to withholding on dividend equivalents. Our
determination is not binding on the IRS, and the IRS may disagree with this determination. Furthermore, the application of Section
871(m) of the Code will depend on our determinations made upon issuance of the Notes. If withholding is required, we will not make
payments of any additional amounts.
Nevertheless, after issuance, it is possible that your Notes could
be deemed to be reissued for tax purposes upon the occurrence of certain events affecting the underlying assets, underlying constituents or your Notes, and following such occurrence your Notes could be treated as delta one specified equity-linked instruments
that are subject to withholding on dividend equivalents. It is also possible that withholding tax or other tax under Section 871(m)
of the Code could apply to the Notes under these rules if a non-U.S. holder enters, or has entered, into certain other transactions
in respect of the underlying assets, underlying constituents or the Notes. A non-U.S. holder that enters, or has entered,
into other transactions in respect of the underlying assets, underlying constituents or the Notes should consult its tax
advisor regarding the application of Section 871(m) of the Code to its Notes in the context of its other transactions.
Because of the uncertainty regarding the application of the 30%
withholding tax on dividend equivalents to the Notes, you are urged to consult your tax advisor regarding the potential application
of Section 871(m) of the Code and the 30% withholding tax to an investment in the Notes.
Foreign Account Tax Compliance Act.
The Foreign Account Tax
Compliance Act (“FATCA”) was enacted on March 18, 2010, and imposes a 30% U.S. withholding tax on “withholdable
payments” (i.e., certain U.S.-source payments, including interest (and OID), dividends, other fixed or determinable annual
or periodical gain, profits, and income, and on the gross proceeds from a disposition of property of a type which can produce U.S.-source
interest or dividends) and “passthru payments” (i.e., certain payments attributable to withholdable payments) made
to certain foreign financial institutions (and certain of their affiliates) unless the payee foreign financial institution agrees
(or is required), among other things, to disclose the identity of any U.S. individual with an account of the institution (or the
relevant affiliate) and to annually report certain information about such account. FATCA also requires withholding agents making
withholdable payments to certain foreign entities that do not disclose the name, address, and taxpayer identification number of
any substantial U.S. owners (or do not certify that they do not have any substantial United States owners) to withhold tax at a
rate of 30%. Under certain circumstances, a holder may be eligible for refunds or credits of such taxes.
Pursuant to final and temporary Treasury regulations and other IRS
guidance, the withholding and reporting requirements under FATCA will generally apply to certain “withholdable payments”
made on or after July 1, 2014, certain gross proceeds on a sale or disposition occurring after December 31, 2018, and certain foreign
passthru payments made after December 31, 2018 (or, if later, the date that final regulations defining the term “foreign
passthru payment” are published). If withholding is required, we (or the applicable paying agent) will not be required to
pay additional amounts with respect to the amounts so withheld. Foreign financial institutions and non-financial foreign entities
located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different
rules.
Investors should consult their own advisors about the application
of FATCA, in particular if they may be classified as financial institutions (or if they hold their Notes through a foreign entity)
under the FATCA rules.
Proposed Legislation.
In 2007, legislation was introduced in
Congress that, if enacted, would have required holders of Notes purchased after the bill was enacted to accrue interest income
over the term of the Notes despite the fact that there will be no interest payments over the entire term of the Notes. It is not
possible to predict whether a similar or identical bill will be enacted in the future, or whether any such bill would affect the
tax treatment of your Notes.
Furthermore, in 2013, the House Ways and Means Committee released
in draft form certain proposed legislation relating to financial instruments. If enacted, the effect of this legislation generally
would have been to require instruments such as the Notes to be marked to market on an annual basis with all gains and losses to
be treated as ordinary, subject to certain exceptions. You are urged to consult your tax advisor regarding the draft legislation
and its possible impact on you.
Prospective purchasers of the Notes are urged to consult their
tax advisors concerning the application of U.S. federal income tax laws to their particular situations, as well as any tax consequences
of the purchase, beneficial ownership and disposition of the Notes arising under the laws of any state, local, non-U.S. or other
taxing jurisdiction.