Registration Statement
No. 333-264388
Filed Pursuant to Rule
424(b)(2)
Amendment No. 5 dated
June 22, 2023 to the Pricing Supplement dated August 17, 2021 to the Product Supplement dated August 17, 2021, the Prospectus dated May
26, 2022 and the Series G Senior Medium-Term Notes Prospectus Supplement dated May 27, 2021
![](https://content.edgar-online.com/edgar_conv_img/2023/06/26/0001214659-23-008825_microsectors.jpg)
Issued by Bank of Montreal
2,500,000 Notes
MicroSectorsTM FANG & Innovation -3X
Inverse Leveraged ETNs due June 28, 2041*
This pricing supplement relates to the MicroSectorsTM FANG
& Innovation -3X Inverse Leveraged Exchange Traded Notes due June 28, 2041 (the “notes”) that Bank of Montreal may issue
from time to time. The return on the notes is linked to a three times leveraged participation in the daily inverse performance of the
Solactive FANG Innovation Index (the “Index”), which is described in this pricing supplement. The Index is a total return
index that tracks the stock prices of 15 large capitalization U.S. technology stocks, including eight specific core components.
On June 22, 2023, the closing price of the notes on the NYSE Arca was
$7.56 per note, and the closing Indicative Note Value per note was $7.5521.
The notes do not guarantee any return of principal at maturity, call
or upon early redemption. Instead, you will receive a cash payment in U.S. dollars at maturity, a call by us or redemption at your option,
based on a three times leveraged participation in the inverse performance of the Index, less a Daily Investor Fee, any negative Daily
Interest and, upon early redemption, a Redemption Fee Amount (each as described below). We discuss in more detail below how the payments
on the notes will be calculated. Because these various fees may substantially reduce the amount of your investment at maturity, call or
upon redemption, the level of the Index must decrease significantly in order for you to receive at least the principal amount of your
investment at maturity, call or upon redemption, or if you sell your notes. You may lose some or all of your principal. Please see
the “Summary” section below for important information relating to the terms and conditions of the notes.
The notes are intended to be daily trading tools for sophisticated
investors to manage daily trading risks as part of an overall diversified portfolio. They are designed to achieve their stated investment
objectives on a daily basis. The notes are designed to reflect a 3x leveraged inverse exposure to the inverse performance of the Index
on a daily basis (as described below), before taking into account the negative effect of the Daily Investor Fee, any negative Daily Interest,
and the Redemption Fee Amount, if applicable. However, due to daily resetting leverage, the returns on the notes over different periods
of time can, and most likely will, differ significantly from three times the return on a direct short investment in the Index. Their performance
over longer periods of time can differ significantly from their stated daily objectives. The notes are riskier than securities that have
intermediate- or long-term investment objectives, and may not be suitable for investors who plan to hold them for a period other than
one day or who have a “buy and hold” strategy. Accordingly, the notes should be purchased only by knowledgeable investors
who understand the potential consequences of investing in the Index and of seeking compounding leveraged inverse investment results. Investors
should actively and continuously monitor their investments in the notes, even intra-day. It is possible that you will suffer significant
losses in the notes even if the long-term performance of the Index is negative. You should proceed with extreme caution in considering
an investment in the notes. Any payment on the notes is subject to the credit risk of Bank of Montreal.
The notes are unsecured and unsubordinated obligations of Bank of Montreal.
Each note has a principal amount of $25. The notes do not bear interest. The notes are listed on the NYSE Arca, Inc., under the ticker
symbol “BERZ.” The notes initially settled on August 20, 2021. The Investor Fee (based on a rate of 0.95% per annum) is deducted
from the closing indicative value on a daily basis. The Daily Interest (which is based on the US Federal Funds Effective Rate minus an
amount that will initially be 2.00%, but which may be increased to up to 4.00% per annum), if negative, will further reduce the closing
indicative value. If you elect for us to redeem your notes, your payment may be subject to a Redemption Fee Amount of 0.125%.
An investment in the notes involves significant risks and is not
appropriate for every investor. Investors should regularly monitor their holdings of the notes to ensure that they remain consistent with
their investment strategies. Any payment on the notes is subject to the credit risk of Bank of Montreal.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or passed upon the accuracy or the adequacy of this pricing supplement, the accompanying
product supplement, prospectus supplement and prospectus. Any representation to the contrary is a criminal offense.
Investing in the notes involves risks, including
those described in the “Risk Factors” section beginning on page PS-10 of this pricing supplement, and the “Risk Factors”
sections beginning on page PS-7 of the product supplement, page S-1 of the prospectus supplement and on page 8 of the prospectus.
The notes are our unsecured obligations and will not be savings
accounts or deposits that are insured by the United States Federal Deposit Insurance Corporation, the Deposit Insurance Fund, the Canada
Deposit Insurance Corporation or any other governmental agency or instrumentality or other entity.
BMO CAPITAL MARKETS
TABLE OF CONTENTS
Pricing Supplement
Page
SUMMARY |
PS-1 |
RISK FACTORS |
PS-10 |
HYPOTHETICAL EXAMPLES |
PS-21 |
INTRADAY VALUE OF THE INDEX AND THE NOTES |
PS-40 |
THE INDEX |
PS-42 |
SUPPLEMENTAL TAX CONSIDERATIONS |
PS-46 |
SUPPLEMENTAL PLAN OF DISTRIBUTION (CONFLICTS OF INTEREST) |
PS-48 |
VALIDITY OF THE NOTES |
PS-50 |
NOTICE OF EARLY REDEMPTION |
A-1 |
BROKER’S CONFIRMATION OF REDEMPTION |
B-1 |
You should read this pricing supplement together with the product supplement
ETN -2x-3x dated August 17, 2021, the prospectus supplement dated May 27, 2021, and the prospectus dated May 26, 2022. This pricing
supplement, together with the documents listed below, contains the terms of the notes and supersedes all other prior or contemporaneous
oral statements as well as any other written materials including preliminary or indicative pricing terms, correspondence, trade ideas,
structures for implementation, sample structures, fact sheets, brochures or other educational materials of ours or the agent. We urge
you to consult your investment, legal, tax, accounting and other advisers before you invest in the notes. The contents of any website
referred to in this pricing supplement are not incorporated by reference in this pricing supplement, the accompanying product supplement,
prospectus supplement or prospectus.
You may access these documents on the SEC website
at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant
date on the SEC website):
| · | Product supplement ETN -2x-3x dated August 17, 2021: |
https://www.sec.gov/Archives/edgar/data/927971/000121465921008756/g812211424b5.htm
| · | Prospectus supplement dated May 27, 2021: |
https://www.sec.gov/Archives/edgar/data/927971/000121465921006002/g526210424b5.htm
Since the date that the notes were initially issued, we have prepared a new “base” prospectus dated
May 26, 2022. Accordingly, please note that references in the prospectus supplement or the product supplement to the “prospectus”
shall be deemed to refer to the prospectus dated May 26, 2022.
Our Central Index Key, or CIK, on the SEC website
is 927971. As used in this pricing supplement, “we,” “us” or “our” refers to Bank of Montreal.
The notes described in this pricing supplement
are not appropriate for all investors, and involve important legal and tax consequences and investment risks, which should be discussed
with your professional advisers. You should be aware that the regulations of the Financial Industry Regulatory Authority, Inc., or FINRA,
and the laws of certain jurisdictions (including regulations and laws that require brokers to ensure that investments are suitable for
their customers) may limit the availability of the notes. This pricing supplement and the accompanying product supplement, prospectus
supplement and prospectus do not constitute an offer to sell or a solicitation of an offer to buy the notes in any circumstances in which
such offer or solicitation is unlawful.
SUMMARY
The information in this “Summary”
section is qualified by the more detailed information set forth in this pricing supplement, the product prospectus supplement, the prospectus
supplement, and the prospectus. You should read these documents in full, including the information in the “Risk Factors” sections,
before making an investment decision.
General
Issuer: |
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Bank of Montreal |
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Principal Amount: |
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$25 per note |
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Initial Trade Date: |
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August 17, 2021 |
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Aggregate Principal Amount: |
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2,500,000 notes outstanding as of June 23, 2023, representing an aggregate principal amount of $62,500,000. |
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Initial Issue Date: |
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August 20, 2021 |
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Term: |
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Approximately 19.5 years, subject to your right to require us to redeem your notes on any Redemption Date, our call right or our right to extend the maturity date, each as described below. |
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Maturity Date: |
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June 28, 2041, which is scheduled to be the third Business Day following the last Index Business Day in the Final Measurement Period. The Maturity Date for the notes may be extended at our option for up to two additional 5-year periods, as described in the product supplement. The Maturity Date is also subject to adjustment as described herein and under “Specific Terms of the Notes — Market Disruption Events” in the product supplement. |
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Listing: |
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The notes are listed on the NYSE Arca, Inc. (the “NYSE”)
under the ticker symbol listed below. The CUSIP and ISIN numbers, and the Intraday Indicative Value ticker symbol, for the notes are: |
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Ticker
Symbol |
CUSIP
Number |
ISIN
Number |
Intraday
Indicative Value
Symbol |
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BERZ |
063679591 |
US0636795918 |
BERZIV |
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If an active secondary market develops, we expect that investors will purchase and sell the notes primarily in this secondary market. |
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Index: |
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The return on the notes is linked to a three times leveraged participation
in the inverse performance of the Solactive FANG Innovation Index, compounded daily as described in this document, minus the applicable
fees. The Index tracks the stock prices of 15 large capitalization U.S. technology stocks, including eight specific core components, which
are: Alphabet Inc., Amazon.com, Inc., Apple Inc., Meta Platforms, Inc., Microsoft Corporation, Netflix, Inc., NVIDIA Corporation and Tesla,
Inc. The Index is a total return index. Please see the section below, “The Index,” for additional information as to the Index
and the methodology by which it is calculated.
The ticker symbol of the Index is “SOLFANGT”. Solactive
AG (the “Index Sponsor”) publishes the level of the Index. |
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Exchange Business Day: |
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“Exchange Business Day” means any day on which the primary exchange or market for trading of the notes is scheduled to be open for trading. |
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Index Business Day: |
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“Index Business Day” means any day on which the Index Sponsor publishes the closing level of the Index. |
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Payments on the Notes |
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Interest Payments: |
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None. |
Payment at Maturity/Cash
Settlement Amount:
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If you hold your notes to maturity, you will receive a cash payment in U.S. dollars at maturity in an amount equal to the arithmetic mean of the closing Indicative Note Values on each Index Business Day in the Final Measurement Period. This amount will not be less than $0. |
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Final Measurement Period: |
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The 10 consecutive Index Business Days from and including the Calculation
Date, subject to adjustment as described under “Additional Terms of the Notes – Market Disruption Events” in the product
supplement.
If the Calculation Agent determines that the “aggregate market
value” of the outstanding notes is less than or equal to $25,000,000 at the close of trading on the Index Business Day immediately
preceding the Calculation Date, the Final Measurement Period will consist solely of the Calculation Date.
The Calculation Agent will determine the aggregate market value for
purposes of this section by multiplying the closing Indicative Note Value on the applicable date by the number of units of the notes that
are outstanding on that date. |
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Calculation Date: |
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June 12, 2041 |
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Indicative Note Value |
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Indicative Note Value: |
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On the Initial Trade Date, the Indicative Note Value of each note
was equal to the Principal Amount of $25. On any subsequent Exchange Business Day until maturity, call or redemption of the notes,
the closing Indicative Note Value will equal (a) the Deposit Amount on that Exchange Business Day minus (b) the Short Index
Amount on that Exchange Business Day; provided that if that calculation results in a value less than or equal to $0, the closing
Indicative Note Value will be $0. If the closing Indicative Note Value is $0 on any Exchange Business Day, or the Intraday
Indicative Value at any time during the Core Trading Session (as defined below) on an Exchange Business Day, is less than or equal
to $0, then the Indicative Note Value on all future days during the term of the notes will be $0. If the Indicative Note Value
is $0, the Cash Settlement Amount will be $0.
The NYSE currently defines the “Core Trading Session” as
9:30AM to 4:00PM, New York time. This definition may change during the term of the notes. |
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Short Index Amount: |
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On the Initial Trade Date, the Short Index Amount was equal to the Daily Leverage Factor times the principal amount, which equals $75. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Short Index Amount will equal the product of (a) the closing Indicative Note Value on the immediately preceding Exchange Business Day times (b) the Daily Leverage Factor times (c) the Index Performance Factor on that Exchange Business Day. |
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Daily Leverage Factor: |
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3 |
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Market Disruption Events: |
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If a Market Disruption Event occurs or is continuing on any applicable
Index Business Day on which the Index Performance Factor must be determined, the Calculation Agent will determine the Index Performance
Factor for the notes on that day using an appropriate closing level of the Index for the applicable Index Business Day, taking into account
the nature and duration of such Market Disruption Event. Furthermore, if a Market Disruption Event occurs and is continuing with respect
to the notes on any Index Business Day (or occurred or was continuing on the immediately preceding Index Business Day), the calculation
of the Index Performance Factor will be modified so that the applicable leveraged exposure does not reset until the first Index Business
Day on which no Market Disruption Event with respect to the notes is continuing.
Please see the section of the product supplement, “Additional
Terms of the Notes—Market Disruption Events” for additional information about Market Disruption Events. |
Daily Interest |
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Daily Interest: |
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On the Initial Trade Date, the Daily Interest was $0. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Daily Interest will equal the product of (a) the closing Indicative Note Value on the immediately preceding Exchange Business Day times (b) the Daily Deposit Factor times (c) the Daily Interest Rate divided by (d) 365 times (e) the number of calendar days since the last Exchange Business Day. Because the Daily Interest is calculated and added to the Deposit Amount on a daily basis, the net effect of the Daily Interest accrues over time. The Daily Interest Rate will vary in time and can become negative on certain days, particularly if we increase the Interest Rate Spread as described below. On such days, the Daily Interest will also be negative. |
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Deposit Amount: |
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On the Initial Trade Date, the Deposit Amount was equal to the initial principal amount plus the
Short Index Amount on the Initial Trade Date, which was equal to $100. On any subsequent Exchange Business Day until
maturity, call or redemption of the notes, the Deposit Amount will equal (a) the closing Indicative Note Value on the immediately
preceding Exchange Business Day times the Daily Deposit Factor plus (b) the Daily Interest on that Exchange Business Day minus (c)
the Daily Investor Fee on that Exchange Business Day. |
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Daily Interest Rate: |
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The Daily Interest Rate will equal (a) the most recent US Federal Funds Effective Rate minus (b) the Interest Rate Spread (as defined below). The US Federal Funds Effective Rate is an interest rate that represents the rate at which U.S. banks may lend reserve balances to other depository institutions overnight, on an uncollateralized basis. The rate is released by the NY Federal Reserve each day at approximately 9:00 a.m. EST for the prior business day and published on Bloomberg L.P. (including any successor, “Bloomberg”) page “FEDL01 Index”. On the days when the US Federal Funds Effective Rate minus the Interest Rate Spread is less than 0%, the Daily Interest Rate will be negative. |
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Interest Rate Spread: |
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As of the Initial Trade Date, 2.00%. The Interest Rate Spread may be adjusted from time to time by the Calculation Agent, but in no case will it increase by more than 2.00% per annum, to a maximum amount of 4.00%. See “—Procedure for Adjusting the Interest Rate Spread” below. |
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Daily Deposit Factor: |
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4 |
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Index Performance
Factor |
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Index Performance Factor: |
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On the Initial Trade Date, the Index Performance Factor was set equal to 1. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Index Performance Factor will equal (a) the Index Closing Level on that Exchange Business Day (or, if such day is not an Index Business Day, the Index Closing Level on the immediately preceding Index Business Day) divided by (b) the Index Closing Level on the immediately preceding Index Business Day, as determined by the Calculation Agent. |
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Daily Investor Fee |
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Daily Investor Fee: |
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On the Initial Trade Date, the Daily Investor Fee was $0. On any
subsequent Exchange Business Day until maturity, call or redemption of the notes, the Daily Investor Fee will equal the product of (a)
the Indicative Note Value at the close of the immediately preceding Exchange Business Day times (b) the Fee Rate divided by (c) 365 times
(d) the number of calendar days since the last Exchange Business Day.
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Because the Daily Investor Fee is subtracted from the Deposit Amount
on a daily basis, the net effect of the Daily Investor Fee accumulates over time and is subtracted at a rate per year equal to the Fee
Rate specified below. Because the net effect of the Daily Investor Fee is a fixed percentage of the value of the notes, the aggregate
effect of the Daily Investor Fee will increase or decrease in a manner directly proportional to the value of the notes and the amount
of notes that are held. |
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Fee Rate: |
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0.95% per annum |
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Fee Adjustments |
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Procedure for Adjusting
the Interest Rate Spread: |
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The Calculation Agent may adjust the Interest Rate Spread, subject to the limitations set forth in this document. If it elects to do so, we will notify the trustee for the notes, and issue a press release that we will publish on our website at least five Business Days prior to the effective date (a “Fee Effective Date”) of the applicable change. We refer to the date on which we publish such a press release as a “Fee Notice Date.” Notwithstanding the forgoing, the Fee Effective Date for any increase to the Interest Rate Spread may be any date after the Fee Notice Date that is designated in the applicable press release. |
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Call Right |
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Call Right: |
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On any Index Business Day after the Initial Trade Date, we may give
notice that we will redeem all or a portion of the issued and outstanding notes. To exercise our call right, we must provide notice to
the holders prior to the Call Settlement Date, as set forth below, and in the product supplement. The notice will specify the amount of
the notes that we will call. If we exercise our Call Right, you will receive a cash payment for the notes to be called equal to the Call
Settlement Amount, which will be paid on the Call Settlement Date.
If the Call Settlement Amount is less than or equal to $0, the payment
upon exercise of the Call Right will be $0.
The Call Settlement Date will be the fifth Business Day following the
last Index Business Day in the Call Measurement Period. We may elect to call a portion of the notes on more than one occasion during the
term of the notes.
The Call Measurement Period will be a period of 10 consecutive Index
Business Days from and including the applicable Call Calculation Date, except as provided below, and subject to adjustment as described
in the product supplement under “Additional Terms of the Notes — Market Disruption Events.”
If the Calculation Agent determines that the “aggregate market
value” of the notes to be called in a whole or partial call is less than or equal to $25,000,000 at the close of trading on the
Index Business Day immediately preceding the Call Calculation Date, then the Call Measurement Period will consist solely of the Call Calculation
Date, and will not extend for 10 Index Business Days.
The Calculation Agent will determine the aggregate market value for
purposes of this section by multiplying the closing Indicative Note Value on the applicable date by the number of units of the notes that
are outstanding on that date. |
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Call Settlement Amount: |
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If we exercise our Call Right, for each note that is called, you will
receive on the Call Settlement Date a cash payment equal to the arithmetic mean of the closing Indicative Note Values on each Index Business
Day in the Call Measurement Period.
If we issue a call notice, the “Call Calculation Date”
will be the next Index Business Day after the applicable call notice is issued. The Call Settlement Date will be the fifth Business Day
following the last Index Business Day in the Call Measurement Period. |
Early Redemption at
Option of Holder |
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Early Redemption: |
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Subject to your compliance with the procedures described in the product
supplement under “Additional Terms of the Notes — Early Redemption at the Option of the Holders,” upon early redemption,
you will receive per note a cash payment on the relevant Redemption Date equal to (a) the Indicative Note Value as of the Redemption
Measurement Date minus (b) the Redemption Fee Amount. We refer to this cash payment as the “Redemption Amount.” |
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Final Redemption Date: |
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The final Redemption Date will be the last scheduled Index Business
Day prior to the Calculation Date or Call Calculation Date, as applicable. |
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Redemption Fee Amount: |
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As of any Redemption Date, an amount per note in cash equal to the product of (a) 0.125% and (b) the Indicative Note Value. We reserve the right from time to time to reduce or waive the Redemption Fee Amount in our sole discretion on a case-by-case basis. In exercising your right to have us redeem your notes, you should not assume you will be entitled to the benefit of any such waiver. |
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Minimum Redemption
Amount: |
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At least 25,000 notes. To satisfy the minimum redemption amount, your
broker or other financial intermediary may bundle your notes for redemption with those of other investors to reach this minimum amount;
however, there can be no assurance that they can or will do so. We may from time to time in our sole discretion reduce this minimum requirement
in whole or in part. Any such reduction will be applied on a consistent basis for all holders of the notes at the time the reduction becomes
effective.
The Minimum Redemption Amount will not be applicable for any redemption
validly elected on any Fee Notice Date or the following five Business Days if the Interest Rate Spread increased. |
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Redemption Measurement
Date: |
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The applicable “Redemption Measurement Date” means the first Index Business Day following the applicable Redemption Notice Date, subject to adjustments as described under “— Market Disruption Events.” We reserve the right to accelerate the Redemption Measurement Date to the Redemption Notice Date, in our sole discretion. |
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Performance
Information |
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Initial Index Level: |
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5,839.96, which was the closing level of the Closing Price Index on the Initial Trade Date. |
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Index Closing Level: |
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On any Index Business Day, the closing level of the Index as reported on Bloomberg under the applicable symbol set forth above, subject to adjustment as described in the product supplement under “Additional Terms of the Notes — Market Disruption Events.” |
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Intraday Indicative Value: |
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The Intraday Indicative Value of the notes at any time during an Exchange Business Day will equal (a) the Deposit Amount minus (b) the Intraday Short Index Amount; provided that if such calculation results in a value less than or equal to $0, the Intraday Indicative Value will be $0. If the Intraday Indicative Value is less than or equal to $0 at any time on any Exchange Business Day, then both the Intraday Indicative Value and the closing Indicative Note Value on that day, and for the remainder of the term of the notes, will be $0. |
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Intraday Short Index
Amount: |
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The Intraday Short Index Amount will equal the product of (a) the closing Indicative Note Value on the immediately preceding Exchange Business Day times (b) the Daily Leverage Factor times (c) the Intraday Index Performance Factor. |
Intraday Index
Performance Factor: |
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The Intraday Index Performance Factor will equal (a) the most recently published level of the Index divided by (b) the Index Closing Level on the immediately preceding Index Business Day. |
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Additional Information |
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Calculation Agent: |
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BMO Capital Markets Corp. |
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No Conversion into
Common Shares: |
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The notes will not be subject to conversion into our common shares or the common shares of any of our affiliates under subsection 39.2(2.3) of the Canada Deposit Insurance Corporation Act (the “CDIC Act”). |
The notes are not intended to be “buy
and hold” investments. The notes are intended to be daily trading tools for sophisticated investors and are not intended to be held
to maturity. The notes are designed to reflect a -3x inverse leveraged exposure to the performance of the Index on a daily basis, but
the returns on the notes over different periods of time can, and most likely will, differ significantly from three times the return on
a direct inverse investment in the Index. Also, the Index is potentially volatile as it includes a relatively small number of constituents;
any Index volatility would be magnified by the leverage. Accordingly, the notes should be purchased only by knowledgeable investors who
understand the potential consequences of investing in the Index and of seeking daily compounding leveraged investment results. Investors
should actively and continuously monitor their investments in the notes, even intra-day. Because your investment in the notes is linked
to a three times leveraged participation in the inverse performance of the Index, compounded daily, any increase in the level of the Index
will result in a decrease in the Cash Settlement Amount, Call Settlement Amount or Redemption Amount, as applicable (before taking into
account the fees and charges described in this document), and you may receive less than your original investment in the notes at maturity,
call or upon redemption, or if you sell your notes in the secondary market. Due to leverage, the notes are very sensitive to changes in
the level of the Index and the path of such changes. Because the applicable fees and charges may substantially reduce the amount of your
return at maturity, call or upon redemption, the level of the Index must decrease significantly in order for you to receive at least the
principal amount of your investment at maturity, call or upon redemption, or if you sell your notes. If the level of the Index increases
or does not decrease sufficiently to offset the negative effect of these fees and charges, you will receive less than the principal amount
of your investment at maturity, call or upon redemption, or if you sell your notes.
* We are using this pricing supplement to offer
up to $62,500,000 in aggregate principal amount of the notes (2,500,000 notes). On the Initial Trade Date, we sold $4,000,000 in aggregate
principal amount of the notes to BMO Capital Markets Corp. (“BMOCM”) at 100% of their stated principal amount. $37,500,000
in aggregate principal amount of the notes are outstanding as of the date of this pricing supplement. We will issue an additional $25,000,000
in principal amount of the notes (representing an additional 1,000,000 notes) on June 23, 2023. After the date of this document, we may
sell from time to time a portion of the notes at prices that are based on the Indicative Note Value at the time of sale, at prices related
to market prices or at negotiated prices. We will receive proceeds equal to 100% of the price at which the notes are sold to the public,
less any commissions paid to BMOCM. BMOCM may charge normal commissions in connection with any purchase or sale of the notes. In addition,
BMOCM may receive a portion of the Daily Investor Fee. Please see “Supplemental Plan of Distribution (Conflicts of Interest)”
for more information.
If there is a substantial demand for the notes, we may issue and sell
additional notes to BMOCM, and BMOCM may sell those notes to investors and dealers, potentially frequently. However, we and BMOCM are
under no obligation to issue or sell additional notes at any time, and if we and BMOCM do issue and sell additional notes, we or BMOCM
may limit or restrict such sales, and we may stop and subsequently resume selling additional notes at any time. Furthermore, the number
of notes stated at the top of the cover page of this pricing supplement is the maximum amount of the notes that we have currently
authorized for issuance. Although we have the right to increase the authorized amount of the notes at any time, it is our current intention
not to issue more than the current maximum authorized amount of the notes, even if there is substantial market demand for additional notes.
We may also reduce the maximum authorized amount of the notes at any time, and we have no obligation to issue up to the maximum authorized
amount.
Understanding the Value of the Notes
The
initial offering price of the notes was determined at the inception of the notes. The initial offering price and the Intraday
Indicative Value are not the same as the trading price, which is the price at which you may be able to sell your notes in the
secondary market, or the Redemption Amount, which is the amount that you will receive from us in the event that you choose to have
your notes repurchased by us. An explanation of each type of valuation is set forth below.
Initial
Offering Price to the Public. The initial offering price to the public was equal to the Principal Amount of the notes. The
initial offering price reflects the value of the notes only on the Initial Trade Date.
Intraday Indicative Value. The
Intraday Indicative Value of the notes at any time during an Exchange Business Day will equal (a) the Deposit Amount minus (b) the Intraday
Short Index Amount; provided that if such calculation results in a value equal to or less than $0 as set forth above, the Intraday Indicative
Value will be $0. If the Intraday Indicative Value is equal to or less than $0 at any time on any Exchange Business Day as set forth above,
then both the Intraday Indicative Value and the closing Indicative Note Value on that Exchange Business Day, and on all future Exchange
Business Days, will be $0. The Intraday Short Index Amount will equal the product of (a) the closing Indicative Note Value on the immediately
preceding Exchange Business Day times (b) the Daily Leverage Factor times (c) the Intraday Index Performance Factor. The
Intraday Index Performance Factor will equal (a) the most recently published level of the Index divided by (b) the Index Closing
Level on the immediately preceding Index Business Day.
The Intraday Indicative Value is not
the same as, and may differ from, the amount payable upon an early redemption, call or at maturity and the trading price of the notes
in the secondary market. Because the Intraday Indicative Value uses an intraday Index level for its calculation, a variation in the intraday
level of the Index from the previous Index Business Day’s Index Closing Level may cause a significant variation between the closing
Indicative Note Value and the Intraday Indicative Value on any date of determination. The Intraday Indicative Value may vary significantly
from the previous or next Index Business Day’s closing Indicative Note Value or the price of the notes purchased intraday. The Intraday
Indicative Value for the notes will be published every 15 seconds on Bloomberg under the ticker symbol indicated herein.
Trading Price. The market value
of the notes at any given time, which we refer to as the trading price, is the price at which you may be able to buy or sell your notes
in the secondary market, if one exists. The trading price may vary significantly from the Intraday Indicative Value, because the market
value reflects investor supply and demand for the notes.
Redemption Amount. The Redemption
Amount is the price per note that we will pay you to redeem the notes upon your request. The Redemption Amount is calculated according
to the formula set forth above. The Redemption Amount may vary significantly from the Intraday Indicative Value and the trading price
of the notes.
Because the Redemption Amount is based
on the Index Closing Level at the end of the Index Business Day after a notice of redemption is received, you will not know the Redemption
Amount you will receive at the time you elect to request that we redeem your notes.
Ticker Symbols
Trading price: |
BERZ |
Intraday indicative value: |
BERZIV |
Intraday Index value: |
SOLFANGT<Index>
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The notes may be a suitable investment for you if:
· You
seek a short-term investment with a return linked to a three times leveraged participation in the inverse performance of the Index, compounded
daily, in which case you are willing to accept the risk of fluctuations in the technology sector.
· You
understand (i) leverage risk, including the risks inherent in maintaining a constant three times daily resetting inverse leverage,
and (ii) the consequences of seeking leveraged investment results generally.
· You
believe the level of the Index will decrease during the term of the notes by an amount, after giving effect to the daily resetting
inverse leverage and the compounding effect thereof, sufficient to offset the Daily Investor Fee, any negative Daily Interest and
any Redemption Fee Amount.
· You
are a sophisticated investor, understand path dependence of investment returns and you seek a short-term investment in order to manage
daily trading risks.
· You
understand that the notes are designed to achieve their stated investment objective on a daily basis, but their performance over different
periods of time can differ significantly from their stated daily objective.
· You
are willing to accept the risk that you may lose some or all of your investment.
· You
are willing to hold securities that may be redeemed early by us, under our call right.
· You
are willing to forgo dividends or other distributions paid to holders of the Index constituents, except as reflected in the level of the
Index, and are willing to hold securities that may be negatively affected by dividends or other distributions paid to holders of the Index
constituents to the extent they are reflected in the level of the Index.
· You
understand that the trading price of the notes at any time may vary significantly from the Intraday Indicative Value of the notes at such
time and that paying a premium purchase price over the Intraday Indicative Value of the notes could lead to significant losses in the
event you sell the notes at a time when that premium is no longer present in the market place or the notes are called.
· You
are willing to actively and frequently monitor your investment in the notes.
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The notes may not be a suitable investment
for you if:
· You
believe that the level of the Index will increase during the term of the notes or the level of the Index will not decrease by an
amount, after giving effect to the daily resetting leverage and the compounding effect thereof, sufficient to offset the Daily
Investor Fee, any negative Daily Interest and any Redemption Fee Amount.
· You
are not willing to accept the risk that you may lose some or all of your investment.
· You
are not willing to hold securities that may be redeemed early by us, under our call right.
· You
do not seek a short-term investment with a return linked to a three times leveraged participation in the inverse performance of the Index,
compounded daily, in which case you are not willing to accept the risk of fluctuations in the technology sector.
· You
do not understand (i) leverage risk, including the risks inherent in maintaining a constant three times daily resetting inverse
leverage, and (ii) the consequences of seeking leveraged investment results generally.
· You
are not a sophisticated investor, do not understand path dependence of investment returns and you seek an investment for purposes other
than managing daily trading risks.
· You
do not understand that the trading price of the notes at any time may vary significantly from the Intraday Indicative Value of the notes
at such time and that paying a premium purchase price over the Intraday Indicative Value of the notes could lead to significant losses
in the event you sell the notes at a time when that premium is no longer present in the market place or the notes are called.
· You
are not willing to forgo dividends or other distributions paid to holders of the Index constituents, except as reflected in the level
of the Index, or you are not willing to hold securities that may be negatively affected by dividends or other distributions paid to holders
of the Index constituents to the extent they are reflected in the level of the Index.
· You
are not willing to actively and frequently monitor your investment in the notes.
· You
are not willing to accept the risk that the price at which you are able to sell the notes may be significantly less than the amount you
invested.
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· You are willing to accept the risk that the price at which you are able
to sell the notes may be significantly less than the amount you invested.
· You do not seek a pre-determined amount of current income from your
investment.
· You are not seeking an investment for which there will be an active
secondary market.
· You
are comfortable with the creditworthiness of Bank of Montreal, as issuer of the notes.
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· You prefer the lower risk and therefore accept the potentially lower
returns of fixed-income investments with comparable maturities and credit ratings.
· You seek an investment for which there will be an active secondary market.
· You are not comfortable with the creditworthiness of Bank of Montreal
as issuer of the notes.
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RISK FACTORS
Your investment in the notes will involve certain
risks. The notes are not secured debt and do not guarantee any return of principal at, or prior to, maturity, call or upon early redemption.
As described in more detail below, the trading price of the notes may vary considerably before the maturity date. Investing in the notes
is not equivalent to investing directly in the Index constituents or any securities of the constituent issuers. In addition, your investment
in the notes entails other risks not associated with an investment in conventional debt securities. In addition to the “Risk
Factors” sections of the product supplement, the prospectus supplement and the prospectus, you should consider carefully the following
discussion of risks before investing in the notes.
Risks Relating to the Terms of the Notes
The notes are linked to the inverse performance of the Index.
Your investment in the notes is linked to the
inverse, or “short,” performance of the Index. Therefore, notwithstanding the gains resulting from the daily interest, if
any, and the cumulative negative effect of the daily investor fee, your notes will generally appreciate as the level of the Index decreases
and will decrease in value as the level of the Index increases. You may lose some or all of your investment if the level of the Index
increases over the term of your notes.
The notes do not guarantee the return of your investment.
The notes may not return any of your investment. The amount payable
at maturity, call or upon early redemption, will reflect a three times daily resetting inverse leveraged participation in the inverse
performance of the Index minus the Daily Investor Fee, any negative Daily Interest, and, in the case of an early redemption, the
Redemption Fee Amount. These amounts will be determined as described in this pricing supplement. Because these fees and charges will reduce
the payments on the notes, the Index Closing Levels, measured as a component of the closing Indicative Note Value during the Final Measurement
Period or Call Measurement Period, or on a Redemption Measurement Date, will need to have decreased over the term of the notes by an amount,
after giving effect to the daily resetting leverage and the compounding effect thereof, sufficient to offset the decrease in the principal
amount represented by the Daily Investor Fee, any negative Daily Interest, and the Redemption Fee Amount, if applicable, in order for
you to receive an aggregate amount at maturity, upon a call or redemption, or if you sell your notes, that is equal to at least the principal
amount of your notes. If the decrease in the Index Closing Levels, as measured during the Final Measurement Period or Call Measurement
Period, or on a Redemption Measurement Date, is insufficient to offset the cumulative negative effect of the Daily Investor Fee, any negative
Daily Interest, and the Redemption Fee Amount, if applicable, you will lose some or all of your investment at maturity, call or upon early
redemption. This loss may occur even if the Index Closing Levels during the Final Measurement Period or Call Measurement Period, on a
Redemption Measurement Date, or when you elect to sell your notes, have decreased since the Initial Trade Date.
The negative effect of the Daily Investor Fee, any negative Daily Interest,
and the Redemption Fee Amount, if applicable, are in addition to the losses that may be caused by the daily resetting leverage of the
notes and volatility in the Index. See “—Leverage increases the sensitivity of your notes to changes in the level of the Index,”
“—The notes are not suitable for investors with longer-term investment objectives” and “—The notes are not
suitable for all investors. In particular, the notes should be purchased only by sophisticated investors who do not intend to hold the
notes as a buy and hold investment, who are willing to actively and continuously monitor their investment and who understand the consequences
of investing in and of seeking daily resetting leveraged investment results” below.
If the Intraday Indicative Value for the notes is equal to or less
than $0 during the Core Trading Session on an Exchange Business Day, or the closing Indicative Note Value is equal to or less than $0,
you will lose all of your investment in the notes.
If the closing Indicative Note Value or the Intraday
Indicative Value of the notes is equal to or less than $0 as set forth above, then the notes will be permanently worth $0 (a total loss
of value) and you will lose all of your investment in the notes and the Cash Settlement Amount will be $0. We would be likely to call
the notes in full under these circumstances, and you will not receive any payments on the notes.
Even if the Index Closing Levels during the Final Measurement Period
or Call Measurement Period, or on a Redemption Measurement Date, have decreased since the initial trade date, you may receive less than
the principal amount of your notes due to the Daily Investor Fee, any negative Daily Interest, and the Redemption Fee Amount, if applicable.
The amount of the Daily Investor Fee, any negative
Daily Interest, and the Redemption Fee Amount, if applicable, will reduce the payment, if any, you will receive at maturity, call or upon
early redemption, or if you sell the notes. Although the Daily Interest will be added to the Deposit Amount, the Daily Interest will be
negative on any Index Business Day on which the Daily Interest Rate is negative. On those Index Business Days, the Daily Interest will
be subtracted from the Deposit Amount. In addition, if you elect to require us to redeem your notes prior to maturity, you will be charged
a Redemption Fee Amount equal to 0.125% of the Indicative Note Value. If the Index Closing Levels, measured as a component of the closing
Indicative Note Value during the Final Measurement Period or Call Measurement Period, or on a Redemption Measurement Date, have decreased
insufficiently to offset the cumulative negative effect of these fees and charges, you will receive less than the principal amount of
your investment at maturity, call or upon early redemption of your notes.
As described in the “Summary” section
above (and up to the limits in that section), we may increase the Interest Rate Spread. If we do so, the Daily Interest will decrease,
and your return on the notes will be adversely affected. Please see the section “Hypothetical Examples” below.
Leverage increases the sensitivity of your notes to changes in the
level of the Index.
Because your investment in the notes is linked to a three times leveraged,
compounded daily, participation in the inverse performance of the Index, changes in the level of the Index will have a greater impact
on the payout on your notes than on a payout on securities that are not so leveraged. In particular, any increase in the level of the
Index will result in a significantly greater decrease in your payment at maturity, call or upon redemption, and you will suffer losses
on your investment in the notes substantially greater than you would if the terms of your notes did not contain leverage. Accordingly,
as a result of this daily resetting leverage and without taking into account any positive effect of the Daily Interest and the cumulative
negative effect of the Daily Investor Fee, if the level of the Index increases over the term of the notes, the daily resetting leverage
will magnify any losses at maturity, call or upon redemption.
As discussed below under “—The Index
has limited actual historical information,” due to the relatively small number of Index constituents, changes in the performance
of just one Index constituent can have a material effect on the Index level. Giving effect to leverage, negative changes in the performance
of one Index constituent will be magnified and have a material adverse effect on the value of the notes.
The notes are subject to our credit risk.
The notes are subject to our credit risk, and
our credit ratings and credit spreads may adversely affect the market value of the notes. The notes are senior unsecured debt obligations
of the issuer, Bank of Montreal, and are not, either directly or indirectly, an obligation of any third party. Investors are dependent
on our ability to pay all amounts due on the notes at maturity, call or upon early redemption or on any other relevant payment dates,
and therefore investors are subject to our credit risk and to changes in the market’s view of our creditworthiness. If we were to
default on our payment obligations, you may not receive any amounts owed to you under the notes and you could lose your entire investment.
Our credit ratings are an assessment of our ability
to pay our obligations, including those on the notes. Consequently, actual or anticipated changes in our credit ratings may affect the
market value of the notes. However, because the return on the notes is dependent upon certain factors in addition to our ability to pay
our obligations on the notes, an improvement in our credit ratings will not reduce the other investment risks related to the notes. Therefore,
an improvement in our credit ratings may or may not have a positive effect on the market value of the notes.
The notes are not suitable for investors with longer-term investment
objectives.
The notes are not intended to be “buy and
hold” investments. The notes are intended to be daily trading tools for sophisticated investors, and are not intended to be held
to maturity. The notes are designed to achieve their stated investment objective on each day, but their performance over different periods
of time can differ significantly from their stated daily objective because the relationship between the level of the Index and the closing
Indicative Note Value will begin to break down as the length of an investor’s holding period increases. The notes are not long-term
substitutes for inverse positions in the Index constituents.
Investors should carefully consider whether the
notes are appropriate for their investment portfolio. As discussed below, because the notes are meant to provide leveraged inverse exposure
to changes in the Index Closing Level on each Index Business Day, their performance over months or years can differ significantly from
the performance of the Index during the same period of time. Therefore, it is possible that you will suffer significant losses in the
notes even if the long-term performance of the Index is negative (before taking into account the negative effect of the Daily Investor
Fee, the Daily Interest, and the Redemption Fee Amount, if applicable). It is possible for the level of the Index to decrease over
time while the market value of the notes declines over time. You should proceed with extreme caution in considering an investment in
the notes.
The notes seek to provide a daily resetting leveraged inverse return
based on the performance of the Index (as adjusted for costs and fees) over a period of a single day. The notes do not attempt to, and
should not be expected to, provide returns that reflect leverage on the return of the Index for periods longer than a single day.
The daily resetting leverage is expected to cause
the notes to experience a “decay” effect, which will impair the performance of the notes if the Index experiences volatility
from day to day and such performance will be dependent on the path of daily returns during the holder’s holding period. The “decay”
effect refers to the likely tendency of the notes to lose value over time. At higher ranges of volatility, there is a significant chance
of a complete loss of the value of the notes even if the performance of the Index is flat (before taking into account the negative effect
of the Daily Investor Fee, any negative Daily Interest, and the Redemption Fee Amount, if applicable). Although the decay effect is more
likely to manifest itself the longer the notes are held, the decay effect can have a significant impact on the performance of the notes,
even over a period as short as two days. The notes should be purchased only by knowledgeable investors who understand the potential consequences
of investing in the Index or its components and of seeking daily compounding leveraged inverse investment results on each day. The notes
may not be appropriate for investors who intend to hold positions in an attempt to generate returns over periods longer than one day.
See “Hypothetical Examples — Illustrations of the "Decay" Effect on the Notes” below.
In addition, the daily resetting leverage feature will result in leverage
relative to the closing Indicative Note Value that may be greater or less than the stated leverage factor if the value of the notes has
changed since the beginning of the day in which you purchase the notes.
You should regularly monitor your holdings of the notes to ensure
that they remain consistent with your investment strategies.
The notes are designed to reflect a
leveraged inverse exposure to the performance of the Index on a daily basis, as described in this document. As such, the notes will be
more volatile than a non-leveraged investment linked to the Index. You should regularly monitor your holdings of the notes to ensure that
they remain consistent with your investment strategies.
The notes are not suitable for all investors.
In particular, the notes should be purchased only by sophisticated investors who do not intend to hold the notes as a buy and hold investment,
who are willing to actively and continuously monitor their investment and who understand the consequences of investing in and of seeking
daily resetting inverse leveraged investment results.
The notes require an understanding of path dependence
of investment results and are intended for sophisticated investors to use as part of an overall diversified portfolio. The notes are risky
and may not be suitable for investors who plan to hold them for periods greater than a single day. The notes are designed to achieve their
stated investment objective on each day, but the performance of the notes over different periods of time can differ significantly from
their stated daily objectives because the relationship between the level of the Index and the Indicative Note Value will begin to break
down as the length of an investor’s holding period increases. The notes are not long-term substitutes for inverse positions in the
Index constituents. Accordingly, there is a significant possibility that the returns on the notes will not correlate with returns on the
Index over periods longer than one day.
Investors should carefully consider whether the
notes are appropriate for their investment portfolio. The notes entail leverage risk and should be purchased only by investors who understand
leverage risk, including the risks inherent in maintaining a constant three times inverse leverage on a daily basis as described in this
document, and the consequences of seeking daily inverse leveraged investment results generally. Investing in the notes is not equivalent
to a direct investment in the Index constituents because the notes reset their theoretical leveraged exposure to the Index on each day
(subject to the occurrence of a Market Disruption Event). This resetting will impair the performance of the notes if the Index experiences
volatility from day to day, and such performance is dependent on the path of daily returns during an investor’s holding period.
If the notes experience a high amount of realized volatility, there is a significant chance of a complete loss of your investment even
if the performance of the Index is flat. In addition, the notes are meant to provide leveraged inverse exposure to changes in the Index
Closing Level, which means their performance over months or years can differ significantly from the performance of the Index over the
same period of time. It is possible that you will suffer significant losses in the notes even if the long-term performance of the Index
is negative (before taking into account the negative effect of the Daily Investor Fee, any negative Daily Interest, and the Redemption
Fee Amount, if applicable).
The amount you receive at maturity, call or redemption
will be contingent upon the compounded leveraged inverse daily performance of the Index during the term of the notes, as described in
this document. There is no guarantee that you will receive at maturity, call or redemption your initial investment or any return on that
investment. Significant adverse daily performances for the notes may not be offset by any beneficial daily performances of the same magnitude.
Due to the effect of compounding, if the Indicative Note Value increases,
any subsequent increase of the Index level will result in a larger dollar reduction from the Indicative Note Value than if the Indicative
Note Value remained constant.
If the Indicative Note Value increases, the dollar
amount that you can lose in any single Index Business Day from an increase of the Index level will increase correspondingly. This is because
the Index Performance Factor will be applied to a larger Indicative Note Value and, consequently, a larger Short Index Amount in calculating
any subsequent Indicative Note Value. As such, the dollar amount that you can lose from any increase will be greater than if the Indicative
Note Value were maintained at a constant level. This means that if the Indicative Note Value increases, you could lose more than 3% of
your initial investment for each 1% daily increase of the Index level.
Due to the effect of compounding, if the Indicative Note Value decreases,
any subsequent decrease of the Index level will result in a smaller dollar increase on the Indicative Note Value than if the Indicative
Note Value remained constant.
If the Indicative Note Value decreases, the dollar
amount that you can gain in any single Index Business Day from a decrease of the Index level will decrease correspondingly. This is because
the Index Performance Factor will be applied to a smaller Indicative Note Value and, consequently, a smaller Short Index Amount in calculating
any subsequent Indicative Note Value. As such, the dollar amount that you can gain from any decrease of the Index level will be less than
if the Indicative Note Value were maintained at a constant level. This means that if the Indicative Note Value decreases, it will take
larger daily decreases of the Index level to restore the value of your investment back to the amount of your initial investment than would
have been the case if the Indicative Note Value were maintained at a constant level. Further, if you invest in the notes, you could gain
less than 3% of your initial investment for each 1% daily decrease of the Index level.
The leverage of the notes is reset daily, and the leverage of the
notes during any given day may be greater than or less than -3.0.
The leverage of the notes is reset daily (subject to the occurrence
of a Market Disruption Event) based on the Index Closing Level. Resetting the Indicative Note Value has the effect of resetting the then-current
leverage to approximately -3.0. During any given day, the leverage of the notes will depend on intra-day changes in the level of the Index
and any change in the level of the Index on any day may be greater or less than -3.0. If the level of the Index on any day has increased
from the Index Closing Level on the preceding day, the leverage of the notes will be greater than -3.0 (e.g., -3.3, -4.0, -6.0);
conversely, if the level of the Index on any day has decreased from the Index Closing Level on the preceding day, the leverage of the
notes will be less than -3.0 (e.g., -2.0, -1.0, -0.5). Thus, the leverage of the notes at the time that you purchase them may be
greater or less than the target leverage of -3.0, depending on the performance of the Index since the leverage was reset. See “—
The notes are subject to intraday purchase risk” below.
The notes are subject to our Call Right, which does not allow for
participation in any future performance of the Index. The exercise of our Call Right may adversely affect the value of, or your ability
to sell, your notes. We may call the notes prior to the maturity date.
We have the right to call
the notes prior to maturity. You will only be entitled to receive a payment on the Call Settlement Date equal to the Call Settlement Amount.
The Call Settlement Amount may be less than the stated principal amount of your notes. You will not be entitled to any further payments
after the Call Settlement Date, even if the Index level decreases substantially after the Call Measurement Period. In addition, the issuance
of a notice of our election to exercise our call right in whole or in part may adversely impact your ability to sell your notes, and/or
the price at which you may be able to sell your notes prior to the Call Settlement Date. We have no obligation to ensure that investors
will not lose all or a portion of their investment in the notes if we call the notes; consequently, a potential conflict between our interests
and those of the noteholders exists with respect to our Call Right.
If we exercise our right
to call the notes prior to maturity, your payment on the Call Settlement Date may be less than the Indicative Note Value at the time we
gave the notice of our election to call the notes.
As discussed above, we have
the right to call the notes on or prior to the Maturity Date. The Call Settlement Amount will be payable on the Call Settlement Date and
we will provide notice prior to the Call Settlement Date of our election to exercise our call of the notes. The Call Settlement Amount
per note will be based principally on the closing Indicative Note Value on each Index Business Day during the Call Measurement Period
(determined as set forth above). The Call Calculation Date will be a date specified in our call notice, subject to postponement if that
date is not an Index Business Day or in the event of a Market Disruption Event. It is possible that the market prices of the Index
constituents, and, as a result, the Index Closing Level and the Indicative Note Value, may vary significantly between when we provide
the notice of our intent to call the notes and the Call Calculation Date, including potentially as a result of our trading activities
during this period, as described further under “We or our affiliates may have economic interests that are adverse to those of the
holders of the notes as a result of our hedging and other trading activities.” As a result, you may receive a Call Settlement Amount
that is significantly less than the Indicative Value at the time of the notice of our election to call the notes and may be less than
your initial investment in the notes.
The notes do not pay any interest, and you will not have any ownership
rights in the Index constituents.
The notes do not pay any
interest, and you should not invest in the notes if you are seeking an interest-bearing investment. You will not have any ownership
rights in the Index constituents, nor will you have any right to receive dividends or other distributions paid to holders of the Index
constituents, except as reflected in the level of the Index. The Cash Settlement Amount, the Call Settlement Amount or Redemption Amount,
if any, will be paid in U.S. dollars, and you will have no right to receive delivery of any shares of the Index constituents.
The Index Closing Levels used to calculate the payment at maturity,
call or upon a redemption may be greater than those levels on the Maturity Date, Call Settlement Date or at other times during the term
of the notes.
The Index Closing Level on the Maturity Date,
Call Settlement Date or at other times during the term of the notes, including dates near the Final Measurement Period or the Call Measurement
Period, as applicable, could be less than any of the Index Closing Levels during the Final Measurement Period or Call Measurement Period,
as applicable. This difference could be particularly large if there is a significant decrease in the Index Closing Level after the Final
Measurement Period or the Call Measurement Period, as applicable, or if there is a significant increase in the Index Closing Level around
the Final Measurement Period or the Call Measurement Period, as applicable, or if there is significant volatility in the Index Closing
Level during the term of the notes.
There are restrictions on the minimum number of notes you may request
that we redeem and the dates on which you may exercise your right to have us redeem your notes.
If you elect to require us to redeem your notes,
except under the circumstances set forth above, you must request that we redeem at least 25,000 notes on any Business Day, through and
including the Final Redemption Date. If you own fewer than 25,000 notes, you generally will not be able to elect to require us to redeem
your notes. Your request that we redeem your notes is only valid if we receive your Redemption Notice by email no later than 2:00 p.m.,
New York City time, on the applicable Redemption Notice Date and a completed and signed Redemption Confirmation by 5:00 p.m., New York
City time, that same day. If we do not receive such notice and confirmation, your redemption request will not be effective and we will
not redeem your notes on the corresponding Redemption Date.
The daily redemption feature is intended to induce
arbitrageurs to counteract any trading of the notes at a premium or discount to their indicative value. There can be no assurance that
arbitrageurs will employ the redemption feature in this manner.
Because of the timing requirements of the Redemption
Notice and the Redemption Confirmation, settlement of the redemption will be prolonged when compared to a sale and settlement in the secondary
market. Because your request that we redeem your notes is irrevocable, this will subject you to loss if the level of the Index increases
after we receive your request. Furthermore, our obligation to redeem the notes prior to maturity may be postponed upon the occurrence
of a Market Disruption Event.
If you want to sell your notes but are unable
to satisfy the minimum redemption requirements, you may sell your notes into the secondary market at any time, subject to the risks described
below. A trading market for the notes may not develop. Also, the price you may receive for the notes in the secondary market may differ
from, and may be significantly less than, the Redemption Amount.
You will not know the Redemption Amount at the time you elect to
request that we redeem your notes.
You will not know the Redemption Amount you will
receive at the time you elect to request that we redeem your notes. Your notice to us to redeem your notes is irrevocable and must be
received by us no later than 2:00 p.m., New York City time, on the applicable Redemption Notice Date and a completed and signed confirmation
of such redemption must be received by us no later than 5:00 p.m., New York City time, on the same day. The Redemption Measurement Date
is the Index Business Day following the applicable Redemption Notice Date, unless we elect to move that date to the Redemption Notice
Date. You will not know the Redemption Amount until after the Redemption Measurement Date, and we will pay you the Redemption Amount,
if any, on the Redemption Date, which is the third Business Day following the applicable Redemption Measurement Date. As a result, you
will be exposed to market risk in the event the level of the Index fluctuates after we confirm the validity of your notice of election
to exercise your right to have us redeem your notes, and prior to the relevant Redemption Date.
Significant aspects of the tax treatment of the notes are uncertain.
The tax treatment of the notes is uncertain. We
do not plan to request a ruling from the Internal Revenue Service or from any Canadian authorities regarding the tax treatment of the
notes, and the Internal Revenue Service or a court may not agree with the tax treatment described in this pricing supplement.
The Internal Revenue Service has issued a notice
indicating that it and the Treasury Department are actively considering whether, among other issues, a holder should be required to accrue
interest over the term of an instrument such as the notes even though that holder will not receive any payments with respect to the notes
until maturity and whether all or part of the gain a holder may recognize upon sale or maturity of an instrument such as the notes could
be treated as ordinary income. The outcome of this process is uncertain and could apply on a retroactive basis.
Please read carefully the section entitled “Supplemental
Tax Considerations” in the product supplement and in this pricing supplement. You should consult your tax advisor about your own
tax situation.
Risks Relating to Liquidity and the Secondary
Market
The Intraday Indicative Value and the Indicative
Note Value are not the same as the closing price or any other trading price of the notes in the secondary market.
The Intraday Indicative Value at any point in
time during the Core Trading Session of an Exchange Business Day will equal (a) the Deposit Amount minus (b) the Intraday Short Index
Amount; provided that if such calculation results in a value equal to or less than $0, the Intraday Indicative Value will be $0. Because
the Intraday Indicative Value uses an intraday Index level for its calculation, a variation in the intraday level of the Index from the
previous Index Business Day’s Index Closing Level may cause a significant variation between the closing Indicative Note Value and
the Intraday Indicative Value on any date of determination. The Intraday Indicative Value also does not reflect intraday changes in the
leverage; it is based on the constant Daily Leverage Factor of 3. Consequently, the Intraday Indicative Value may vary significantly from
the previous or next Index Business Day’s closing Indicative Note Value or the price of the notes purchased intraday.
The trading price of the notes at any time is
the price at which you may be able to sell your notes in the secondary market at such time, if one exists. The trading price of the notes
at any time may vary significantly from the Intraday Indicative Value of the notes at such time due to, among other things, imbalances
of supply and demand, lack of liquidity, transaction costs, credit considerations and bid-offer spreads, and any corresponding premium
in the trading price may be reduced or eliminated at any time. Paying a premium purchase price over the Intraday Indicative Value of the
notes could lead to significant losses in the event the investor sells such notes at a time when that premium is no longer present in
the market place or the notes are called, in which case investors will receive a cash payment based on the closing Indicative Note Value
of the notes during the Call Measurement Period. See “— There is no assurance that your notes will continue to be listed on
a securities exchange, and they may not have an active trading market” below. We may, without providing you notice or obtaining
your consent, create and issue notes in addition to those offered by this pricing supplement having the same terms and conditions as the
notes. However, we are under no obligation to sell additional notes at any time, and we may suspend issuance of new notes at any time
and for any reason without providing you notice or obtaining your consent. If we limit, restrict or stop sales of additional notes, or
if we subsequently resume sales of such additional notes, the price and liquidity of the notes could be materially and adversely affected,
including an increase or decline in the premium purchase price of the notes over the Intraday Indicative Value of the notes. Before trading
in the secondary market, you should compare the Intraday Indicative Value with the then-prevailing trading price of the notes.
Publication of the Intraday Indicative Value may
be delayed, particularly if the publication of the intraday Index value is delayed. See “Intraday Value of the Index and the Notes—Intraday
Indicative Note Values.”
There is no assurance that your notes will continue to be listed
on a securities exchange, and they may not have an active trading market.
The notes are listed on the NYSE under the ticker
symbol “BERZ”. No assurance can be given as to the continued listing of the notes for their term or of the liquidity or trading
market for the notes. There can be no assurance that a secondary market for the notes will be maintained. We are not required to maintain
any listing of the notes on any securities exchange.
If the notes are delisted, they will no longer
trade on a national securities exchange. Trading in delisted notes, if any, would be on an over-the-counter basis. If the notes are removed
from their primary source of liquidity, it is possible that holders may not be able to trade their notes at all. We cannot predict with
certainty what effect, if any, a delisting would have on the trading price of the notes; however, the notes may trade at a significant
discount to their indicative value. If a holder had paid a premium over the Intraday Indicative Value of the notes and wanted to sell
the notes at a time when that premium has declined or is no longer present, the investor may suffer significant losses and may be unable
to sell the notes in the secondary market.
The liquidity of the market for the notes may vary materially over
time, and may be limited if you do not hold at least 25,000 notes.
As stated on the cover of this pricing supplement,
we sold a portion of the notes on the Initial Trade Date, and the remainder of the notes may be offered and sold from time to time, through
BMOCM, our affiliate, as agent, to investors and dealers acting as principals. Certain affiliates of BMOCM may engage in limited purchase
and resale transactions in the notes, and we or BMOCM may purchase notes from holders in amounts and at prices that may be agreed from
time to time, although none of us are required to do so. Also, the number of notes outstanding or held by persons other than our affiliates
could be reduced at any time due to early redemptions of the notes or due to our or our affiliates’ purchases of notes in the secondary
market. Accordingly, the liquidity of the market for the notes could vary materially over the term of the notes. There may not be sufficient
liquidity to enable you to sell your notes readily and you may suffer substantial losses and/or sell your notes at prices substantially
less than their Intraday Indicative Value or Indicative Note Value, including being unable to sell them at all or only for a minimal price
in the secondary market. You may elect to require us to redeem your notes, but such redemption is subject to the restrictive conditions
and procedures described in this pricing supplement, including the condition that, except to the extent set forth above, you must request
that we redeem a minimum of 25,000 notes on any Redemption Date.
We may sell additional notes at different prices, but we are under
no obligation to issue or sell additional notes at any time, and if we do sell additional notes, we may limit or restrict such sales,
and we may stop selling additional notes at any time.
In our sole discretion, we may decide to issue
and sell additional notes from time to time at a price that is higher or lower than the stated principal amount, based on the Indicative
Note Value at that time. The price of the notes in any subsequent sale may differ substantially (higher or lower) from the issue price
paid in connection with any other issuance of such notes. Additionally, any notes held by us or an affiliate in inventory may be resold
at prevailing market prices. However, we are under no obligation to issue or sell additional notes at any time, and if we do sell additional
notes, we may limit or restrict such sales, and we may stop selling additional notes at any time. If we start selling additional notes,
we may stop selling additional notes for any reason, which could materially and adversely affect the price and liquidity of such notes
in the secondary market.
Any limitation or suspension on the issuance or
sale of the notes by us or BMOCM may materially and adversely affect the price and liquidity of the notes in the secondary market. Alternatively,
the decrease in supply may cause an imbalance in the market supply and demand, which may cause the notes to trade at a premium over the
indicative value of the notes. Any premium may be reduced or eliminated at any time. Paying a premium purchase price over the Indicative
Note Value could lead to significant losses if you sell those notes at a time when that premium is no longer present in the marketplace
or if the notes are called at our option. If we call the notes prior to maturity, investors will receive a cash payment in an amount equal
to the Call Settlement Amount, which will not include any premium. Investors should consult their financial advisors before purchasing
or selling the notes, especially if they are trading at a premium.
The value of the notes in the secondary market may be influenced
by many unpredictable factors.
The market value of your notes may fluctuate between
the date you purchase them and the relevant date of determination. You may also sustain a significant loss if you sell your notes in the
secondary market. Several factors, many of which are beyond our control, will influence the market value of the notes. We expect that,
generally, the Index level on any day will affect the value of the notes more than any other single factor. The value of the notes may
be affected by a number of other factors that may either offset or magnify each other.
The notes are subject to intraday purchase risk.
The notes may be purchased in the secondary market
at prices other than the closing Indicative Note Value, which will have an effect on the effective leverage amount of the notes. Because
the exposure is fixed after the close of each trading day (subject to the occurrence of a Market Disruption Event) and does not change
intraday as the level of the Index moves in favor of the notes (i.e., the level of the Index decreases), the actual exposure in
the notes decreases. The reverse is also true. The table below presents the hypothetical exposure an investor has (ignoring all costs,
fees and other factors) when purchasing a note intraday given the movement of the level of the Index since the closing level of the Index
on the prior Index Business Day. The resulting effective exposure amount will then be constant for that purchaser until the earlier of
(i) a sale or (ii) the end of the relevant day. The table below assumes the closing Indicative Note Value for the notes was $25 on the
prior Index Business Day and the closing level of the Index on the prior Index Business Day was 100.00.
A |
B |
C |
D |
E |
Index Level |
% Change
in Index Level |
Hypothetical Price
for -3x Notes
C=$25*(1-3*B) |
Hypothetical Notional
Exposure for -3x Notes
D=$25*(1+B)*-3 |
Effective Leverage
Amount of -3x Notes
E=D/C |
120.00 |
20% |
$10.00 |
-$90.00 |
-9.00 |
115.00 |
15% |
$13.75 |
-$86.25 |
-6.27 |
110.00 |
10% |
$17.50 |
-$82.50 |
-4.71 |
105.00 |
5% |
$21.25 |
-$78.75 |
-3.71 |
104.00 |
4% |
$22.00 |
-$78.00 |
-3.55 |
103.00 |
3% |
$22.75 |
-$77.25 |
-3.40 |
102.00 |
2% |
$23.50 |
-$76.50 |
-3.26 |
101.00 |
1% |
$24.25 |
-$75.75 |
-3.12 |
100.00 |
0% |
$25.00 |
-$75.00 |
-3.00 |
99.00 |
-1% |
$25.75 |
-$74.25 |
-2.88 |
98.00 |
-2% |
$26.50 |
-$73.50 |
-2.77 |
97.00 |
-3% |
$27.25 |
-$72.75 |
-2.67 |
96.00 |
-4% |
$28.00 |
-$72.00 |
-2.57 |
95.00 |
-5% |
$28.75 |
-$71.25 |
-2.48 |
85.00 |
-15% |
$36.25 |
-$63.75 |
-1.76 |
80.00 |
-20% |
$40.00 |
-$60.00 |
-1.50 |
The table above shows that if the level of the
Index increases during the Index Business Day, your effective exposure increases from three times leveraged short. For example, if the
level of the Index increases by 20%, your effective exposure increases from -3x to -9x.
The table above also shows that if the level of
the Index decreases during the Index Business Day, your effective exposure decreases from three times leveraged short. For example, if
the level of the Index decreases by 20%, your effective exposure decreases from -3x to -1.5x.
Risks Relating to Conflicts of Interest and
Hedging
Please see the discussion in the product supplement
under the caption “Risk Factors—Risks Relating to Conflicts of Interest and Hedging” for important information relating
to the different roles that we and our affiliates will play in connection with the offering of the notes, and the variety of conflicts
of interest that may arise.
In addition to the conflicts of interest noted
in that section, please note that we will have the rights set forth in the “Summary” section above, including the right to
increase the Interest Rate Spread, up to the limits set forth in the “Summary” section.
Risks Relating to the Index
The Index has limited actual historical information.
The Index was launched on June 8, 2021. Because
the Index is of recent origin and limited actual historical performance data exists with respect to it, your investment in the notes may
involve a greater risk than investing in securities linked to an Index with a more established record of performance.
The historical performance of the Index should
not be taken as an indication of its future performance. While the trading prices of the Index constituents will determine the Index level,
it is impossible to predict whether the Index level will fall or rise. Trading prices of the Index constituents will be influenced by
the complex and interrelated economic, financial, regulatory, geographic, judicial, tax, political and other factors that can affect the
capital markets generally and the equity trading markets on which the Index constituents are traded, and by various circumstances that
can influence the prices of the Index constituents. Due to the relatively small number of Index constituents, the level of the Index may
be materially affected by changes in the level of a small number of Index constituents.
An investment in the notes is subject to risks relating to companies
engaged in the technology sector.
The Index’s constituents are concentrated
in 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 level of the Index. 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 in the U.S. and internationally. Stocks of technology companies and companies that rely heavily on technology tend to be more volatile
than the overall market. Additionally, companies in the technology sector may face dramatic and often unpredictable changes in growth
rates. Any of these factors could increase the level of the Index, and adversely impact the payments on the notes.
The Index Sponsor may adjust the Index in a way that may affect
its level, and the Index Sponsor has no obligation to consider your interests.
Solactive AG (“Solactive”), as the
Index Sponsor, is responsible for maintaining the Index. The Index Sponsor can add, delete or substitute an Index constituent or make
other methodological changes that could change the Index level. Changes to the Index constituents may affect the Index, as a newly added
equity security may perform significantly better or worse than the Index constituent or constituents it replaces. Additionally, the Index
Sponsor may alter, discontinue or suspend calculation or dissemination of the Index. Any of these actions could adversely affect the value
of the notes. The Index Sponsor has no obligation to consider your interests in calculating or revising the Index, and you will not have
any rights against the Index Sponsor if it takes any such action. See “The Index.”
We and our affiliates have no affiliation with the Index Sponsor,
and are not responsible for any of its public disclosure of information.
We and our affiliates are not affiliated with the
Index Sponsor (except for licensing arrangements discussed under “The Index — License Agreement”) and have no ability
to control or predict its actions, including any errors in or discontinuation of public disclosure regarding methods or policies relating
to the calculation of the Index. If the Index Sponsor discontinues or suspends the calculation of the Index, it may become difficult to
determine the market value of the notes and the payment at maturity, call or upon early redemption. The Calculation Agent may designate
a successor index in its sole discretion. If the Calculation Agent determines in its sole discretion that no successor index comparable
to the Index exists, the payment you receive at maturity, call or upon early redemption will be determined by the Calculation Agent in
its sole discretion. See the section in the product supplement, “Additional Terms of the Notes — Discontinuance or Modification
of an Index.”
The Index Sponsor is not involved in the offering
of the notes in any way and does not have any obligation of any sort with respect to your notes. We are not affiliated with the Index
Sponsor, and the Index Sponsor does not have any obligation to take your interests into consideration for any reason, including when taking
any actions that might affect the value of the notes.
We have derived the information about the Index
Sponsor and the Index from publicly available information, without independent verification. Neither we nor any of our affiliates have
undertaken any independent review of the publicly available information about the Index Sponsor or the Index contained in this pricing
supplement. You, as an investor in the notes, should make your own independent investigation into the Index Sponsor and the Index.
The Index Sponsor may, in its sole discretion, discontinue the public
disclosure of the intraday Index value and the end-of-day closing value of the Index.
The Index Sponsor is under no obligation to holders
of the notes to continue to calculate the intraday Index value and end-of-day official closing value of the Index, or to calculate similar
values for any successor index. If the Index Sponsor discontinues such public disclosure, we may not be able to provide the Intraday Indicative
Values related to the Index or the Intraday Indicative Value of the notes.
A limited number of Index constituents may affect the level of the
Index, and the Index is not necessarily representative of its focus industry.
As of the date of this pricing supplement, the
Index consists of only 15 Index components. Any increase in the market price of any of those stocks is likely to have a substantial positive
impact on the level of the Index and the value of the notes. Significant changes to any of these stocks or their issuers, including a
merger or similar transaction, will have a more material impact on the level of the Index as compared to a more diversified index. Due
to the relatively small number of Index constituents, those Index constituents and the Index itself may not necessarily follow the price
movements of other companies in the industries tracked by the Index. If the Index constituents increase in value, the Index will also
increase in value, even if stock prices of other companies in the technology industry generally decrease in value. Giving effect to leverage,
positive changes in the performance of one Index constituent will be magnified and have a material adverse effect on the value of the
notes. See “Summary—Path Dependence and Daily Leverage Reset” in the product supplement.
Eight core stocks will always be included in the
Index, unless they fail to satisfy certain qualifications for inclusion. Accordingly, the performance of these stocks will have a significant
impact on the value of the notes prior to maturity, and any positive changes in their prices will adversely affect the value of the notes.
In addition, because these eight components are not expected to change, the composition of the Index may not reflect changes in the technology
sector generally over the term of the notes.
We are not currently affiliated with any of the Index components.
We are not currently affiliated with any of the
components of the Index. As a result, we have no ability, nor expect to have the ability in the future, to control the actions of these
companies, including actions that could affect the level of the Index or the value of your notes, and we are not responsible for any disclosure
made by any other company. None of the money you pay us will go to any of the constituent issuers represented in the Index and none of
the constituent issuers will be involved in the offering of the notes in any way. These companies will not have any obligation to consider
your interests as a holder of the notes in taking any corporate actions that might affect the value of your notes.
HYPOTHETICAL EXAMPLES
Hypothetical Payment at Maturity
The following
examples and tables illustrate how the notes would perform at maturity in hypothetical circumstances. They are intended to highlight how
the return on the notes is affected by the daily performance of the Index, fees, leverage, compounding and path dependency. For ease of
review, the hypotheticals cover a 22-day period.
The resetting of the leverage on each day is likely to cause each note
to experience a “decay” effect, which is likely to worsen over time and will be greater the more volatile the level of the
Index. The “decay” effect refers to the likely tendency of the notes to lose value over time. Accordingly, the notes are not
suitable for intermediate- or long-term investment, as any intermediate- or long-term investment is very likely to sustain significant
losses, even if the Index depreciates over the relevant time period. Although the decay effect is more likely to impact the return on
the notes the longer the notes are held, the decay effect can have a significant impact on the note performance even over a period as
short as two days. The notes are suitable only for sophisticated investors. If you invest in the notes, you should continuously monitor
your holdings of the notes and make investment decisions at least on each trading day. Please see the section "—Illustrations
of the "Decay Effect" on the Notes" below.
We have shown
two sets of examples: 1 to 5 and 6 to 10. Examples 1 to 5 are based upon the minimum Interest Rate Spread of 2.00%. Examples 6 to 10 show
the impact if we elect to increase this amount to the maximum extent described above, to an Interest Rate Spread of 4.00%. All of these
examples assume that the US Federal Funds Effective Rate remains constant at 0% during the relevant period.
We have included examples in which the Index level alternatively decreases
and increases at a constant rate of 3.00% per day, with the Index level decreasing by 0.99 points by day 22 (Examples 1 and 6), with a
Note Return of -9.05% (Example 1) and -9.50% (Example 6); we have also included examples in which the Index level increases at a constant
rate of 3.00% per day, increasing 91.61 points by day 22 (Examples 2 and 7) with a Note Return of -87.52% (Example 2) and -87.58% (Example
7). Examples 3 to 5 and 8 to 10 highlight the effect of volatility in the Index. In Examples 3 and 8, the Index level decreases by a constant
1% per day, with a decrease of 19.84 points by day 22 and a Note Return of 90.61% (Example 3) and 89.72% (Example 8). In contrast, in
Examples 4 and 9, at day 22, the Index level has decreased 19.63 points; however, due to the volatility of the Index on a daily basis,
the Note Return is -72.90% (Example 4) and -73.05% (Example 9), a significant difference from the returns in Examples 3 and 8. Examples
5 and 10 also highlight the effect of volatility in the Index, in that the Index increases and decreases in a volatile manner over the
22-day period, and ends at close to the same level as on day one. The Note Return is -37.25% (Example 5) and -37.57% (Example 10) even
though the Index level is still at approximately 100.
For ease of
analysis and presentation, all of the examples assume that the notes were purchased on the Initial Trade Date at the Indicative Note
Value and disposed of on the Maturity Date, no Market Disruption Events occurred and that the term of the notes is 22 days. In Examples
1-10, the Daily Investor Fee and the Daily Interest assume that there are no weekends or holidays. The examples assume that every calendar
day is an Exchange Business Day. The examples do not contemplate a call or early redemption during the relevant period.
These examples
highlight the impact of the Daily Investor Fee, leverage and compounding on the payment at maturity under different circumstances. Many
other factors will affect the value of the notes, and these figures are provided for illustration only. These hypothetical examples should
not be taken as an indication or a prediction of future Index performance or investment results and are intended to illustrate a few of
the possible returns on the notes. Because the Indicative Note Value takes into account the net effect of the Daily Investor Fee, which
is a fixed percentage of the value of the notes, and the performance of the Index, the Indicative Note Value is dependent on the path
taken by the Index level to arrive at its ending level. The figures in these examples have been rounded for convenience.
We cannot predict the actual Index level at any time during the term
of the notes or the market value of the notes, nor can we predict the relationship between the Index level and the market value of your
notes at any time prior to the Maturity Date. The actual amount that a holder of the notes will receive at maturity or call, or upon early
redemption, as the case may be, and the rate of return on the notes will depend on the actual Index Closing Levels during the term of
the notes and during the Final Measurement Period or Call Measurement Period, or on a Redemption Measurement Date, the Daily Investor
Fee, Daily Interest, Index volatility and the Redemption Fee Amount, if applicable. Moreover, the assumptions on which the hypothetical
returns are based are purely for illustrative purposes. Consequently, the amount to be paid in respect of your notes, if any, on the Maturity
Date, Call Settlement Date or the relevant Redemption Date, as applicable, may be very different from the information reflected in this
section.
Examples 1-5: Minimum Amount of the Interest Rate Spread
Example 1: The Index level alternatively decreases and increases
by a constant 3.00% per day.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-2.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-9.05% |
Cumulative Index Return |
-0.99% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily
Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value
* Daily
Deposit
Factor *
Daily
Interest Rate
/ 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
97.00 |
-3.0% |
0.97 |
$0.0007 |
$0.0007 |
-$0.00548 |
$99.99 |
$72.75 |
$27.24 |
8.98% |
2 |
99.91 |
3.0% |
1.03 |
$0.0007 |
$0.0014 |
-$0.00597 |
$108.97 |
$84.18 |
$24.79 |
-9.02% |
3 |
96.91 |
-3.0% |
0.97 |
$0.0006 |
$0.0020 |
-$0.00543 |
$99.13 |
$72.13 |
$27.01 |
8.98% |
4 |
99.82 |
3.0% |
1.03 |
$0.0007 |
$0.0027 |
-$0.00592 |
$108.03 |
$83.46 |
$24.57 |
-9.02% |
5 |
96.83 |
-3.0% |
0.97 |
$0.0006 |
$0.0033 |
-$0.00539 |
$98.28 |
$71.51 |
$26.78 |
8.98% |
6 |
99.73 |
3.0% |
1.03 |
$0.0007 |
$0.0040 |
-$0.00587 |
$107.10 |
$82.74 |
$24.36 |
-9.02% |
7 |
96.74 |
-3.0% |
0.97 |
$0.0006 |
$0.0047 |
-$0.00534 |
$97.44 |
$70.89 |
$26.55 |
8.98% |
8 |
99.64 |
3.0% |
1.03 |
$0.0007 |
$0.0054 |
-$0.00582 |
$106.18 |
$82.03 |
$24.15 |
-9.02% |
9 |
96.65 |
-3.0% |
0.97 |
$0.0006 |
$0.0060 |
-$0.00529 |
$96.60 |
$70.28 |
$26.32 |
8.98% |
10 |
99.55 |
3.0% |
1.03 |
$0.0007 |
$0.0067 |
-$0.00577 |
$105.27 |
$81.33 |
$23.94 |
-9.02% |
11 |
96.56 |
-3.0% |
0.97 |
$0.0006 |
$0.0073 |
-$0.00525 |
$95.77 |
$69.68 |
$26.09 |
8.98% |
12 |
99.46 |
3.0% |
1.03 |
$0.0007 |
$0.0080 |
-$0.00572 |
$104.37 |
$80.63 |
$23.74 |
-9.02% |
13 |
96.48 |
-3.0% |
0.97 |
$0.0006 |
$0.0086 |
-$0.00520 |
$94.95 |
$69.08 |
$25.87 |
8.98% |
14 |
99.37 |
3.0% |
1.03 |
$0.0007 |
$0.0093 |
-$0.00567 |
$103.47 |
$79.94 |
$23.53 |
-9.02% |
15 |
96.39 |
-3.0% |
0.97 |
$0.0006 |
$0.0099 |
-$0.00516 |
$94.13 |
$68.49 |
$25.65 |
8.98% |
16 |
99.28 |
3.0% |
1.03 |
$0.0007 |
$0.0106 |
-$0.00562 |
$102.58 |
$79.25 |
$23.33 |
-9.02% |
17 |
96.30 |
-3.0% |
0.97 |
$0.0006 |
$0.0112 |
-$0.00511 |
$93.33 |
$67.90 |
$25.43 |
8.98% |
18 |
99.19 |
3.0% |
1.03 |
$0.0007 |
$0.0118 |
-$0.00557 |
$101.70 |
$78.57 |
$23.13 |
-9.02% |
19 |
96.22 |
-3.0% |
0.97 |
$0.0006 |
$0.0124 |
-$0.00507 |
$92.52 |
$67.31 |
$25.21 |
8.98% |
20 |
99.10 |
3.0% |
1.03 |
$0.0007 |
$0.0131 |
-$0.00553 |
$100.83 |
$77.89 |
$22.93 |
-9.02% |
21 |
96.13 |
-3.0% |
0.97 |
$0.0006 |
$0.0137 |
-$0.00503 |
$91.73 |
$66.74 |
$24.99 |
8.98% |
22 |
99.01 |
3.0% |
1.03 |
$0.0007 |
$0.0143 |
-$0.00548 |
$99.96 |
$77.23 |
$22.74 |
-9.02% |
Example 2: The Index level increases by a constant 3.00% per day.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-2.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-87.52% |
Cumulative Index Return |
91.61% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily
Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value
* Daily
Deposit
Factor *
Daily
Interest Rate
/ 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
103.00 |
3.0% |
1.03 |
$0.0007 |
$0.0007 |
-$0.00548 |
$99.99 |
$77.25 |
$22.74 |
-9.02% |
2 |
106.09 |
3.0% |
1.03 |
$0.0006 |
$0.0012 |
-$0.00498 |
$90.97 |
$70.28 |
$20.69 |
-9.02% |
3 |
109.27 |
3.0% |
1.03 |
$0.0005 |
$0.0018 |
-$0.00454 |
$82.76 |
$63.94 |
$18.82 |
-9.02% |
4 |
112.55 |
3.0% |
1.03 |
$0.0005 |
$0.0023 |
-$0.00413 |
$75.29 |
$58.17 |
$17.13 |
-9.02% |
5 |
115.93 |
3.0% |
1.03 |
$0.0004 |
$0.0027 |
-$0.00375 |
$68.50 |
$52.92 |
$15.58 |
-9.02% |
6 |
119.41 |
3.0% |
1.03 |
$0.0004 |
$0.0031 |
-$0.00341 |
$62.32 |
$48.14 |
$14.17 |
-9.02% |
7 |
122.99 |
3.0% |
1.03 |
$0.0004 |
$0.0035 |
-$0.00311 |
$56.69 |
$43.80 |
$12.89 |
-9.02% |
8 |
126.68 |
3.0% |
1.03 |
$0.0003 |
$0.0038 |
-$0.00283 |
$51.58 |
$39.84 |
$11.73 |
-9.02% |
9 |
130.48 |
3.0% |
1.03 |
$0.0003 |
$0.0041 |
-$0.00257 |
$46.92 |
$36.25 |
$10.67 |
-9.02% |
10 |
134.39 |
3.0% |
1.03 |
$0.0003 |
$0.0044 |
-$0.00234 |
$42.69 |
$32.98 |
$9.71 |
-9.02% |
11 |
138.42 |
3.0% |
1.03 |
$0.0003 |
$0.0047 |
-$0.00213 |
$38.83 |
$30.00 |
$8.83 |
-9.02% |
12 |
142.58 |
3.0% |
1.03 |
$0.0002 |
$0.0049 |
-$0.00194 |
$35.33 |
$27.29 |
$8.04 |
-9.02% |
13 |
146.85 |
3.0% |
1.03 |
$0.0002 |
$0.0051 |
-$0.00176 |
$32.14 |
$24.83 |
$7.31 |
-9.02% |
14 |
151.26 |
3.0% |
1.03 |
$0.0002 |
$0.0053 |
-$0.00160 |
$29.24 |
$22.59 |
$6.65 |
-9.02% |
15 |
155.80 |
3.0% |
1.03 |
$0.0002 |
$0.0055 |
-$0.00146 |
$26.60 |
$20.55 |
$6.05 |
-9.02% |
16 |
160.47 |
3.0% |
1.03 |
$0.0002 |
$0.0056 |
-$0.00133 |
$24.20 |
$18.70 |
$5.50 |
-9.02% |
17 |
165.28 |
3.0% |
1.03 |
$0.0001 |
$0.0058 |
-$0.00121 |
$22.02 |
$17.01 |
$5.01 |
-9.02% |
18 |
170.24 |
3.0% |
1.03 |
$0.0001 |
$0.0059 |
-$0.00110 |
$20.03 |
$15.47 |
$4.56 |
-9.02% |
19 |
175.35 |
3.0% |
1.03 |
$0.0001 |
$0.0060 |
-$0.00100 |
$18.22 |
$14.08 |
$4.14 |
-9.02% |
20 |
180.61 |
3.0% |
1.03 |
$0.0001 |
$0.0061 |
-$0.00091 |
$16.58 |
$12.81 |
$3.77 |
-9.02% |
21 |
186.03 |
3.0% |
1.03 |
$0.0001 |
$0.0062 |
-$0.00083 |
$15.08 |
$11.65 |
$3.43 |
-9.02% |
22 |
191.61 |
3.0% |
1.03 |
$0.0001 |
$0.0063 |
-$0.00075 |
$13.72 |
$10.60 |
$3.12 |
-9.02% |
Example 3: The Index level decreases by a constant 1.00% per day.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-2.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
90.61% |
Cumulative Index Return |
-19.84% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
99.00 |
-1.0% |
0.99 |
$0.0007 |
$0.0007 |
-$0.00548 |
$99.99 |
$74.25 |
$25.74 |
2.98% |
2 |
98.01 |
-1.0% |
0.99 |
$0.0007 |
$0.0013 |
-$0.00564 |
$102.97 |
$76.46 |
$26.51 |
2.98% |
3 |
97.03 |
-1.0% |
0.99 |
$0.0007 |
$0.0020 |
-$0.00581 |
$106.03 |
$78.73 |
$27.30 |
2.98% |
4 |
96.06 |
-1.0% |
0.99 |
$0.0007 |
$0.0027 |
-$0.00598 |
$109.19 |
$81.08 |
$28.11 |
2.98% |
5 |
95.10 |
-1.0% |
0.99 |
$0.0007 |
$0.0035 |
-$0.00616 |
$112.44 |
$83.49 |
$28.95 |
2.98% |
6 |
94.15 |
-1.0% |
0.99 |
$0.0008 |
$0.0042 |
-$0.00634 |
$115.78 |
$85.97 |
$29.81 |
2.98% |
7 |
93.21 |
-1.0% |
0.99 |
$0.0008 |
$0.0050 |
-$0.00653 |
$119.23 |
$88.53 |
$30.70 |
2.98% |
8 |
92.27 |
-1.0% |
0.99 |
$0.0008 |
$0.0058 |
-$0.00673 |
$122.78 |
$91.17 |
$31.61 |
2.98% |
9 |
91.35 |
-1.0% |
0.99 |
$0.0008 |
$0.0066 |
-$0.00693 |
$126.43 |
$93.88 |
$32.55 |
2.98% |
10 |
90.44 |
-1.0% |
0.99 |
$0.0008 |
$0.0075 |
-$0.00713 |
$130.19 |
$96.67 |
$33.52 |
2.98% |
11 |
89.53 |
-1.0% |
0.99 |
$0.0009 |
$0.0083 |
-$0.00735 |
$134.06 |
$99.55 |
$34.52 |
2.98% |
12 |
88.64 |
-1.0% |
0.99 |
$0.0009 |
$0.0092 |
-$0.00757 |
$138.05 |
$102.51 |
$35.54 |
2.98% |
13 |
87.75 |
-1.0% |
0.99 |
$0.0009 |
$0.0101 |
-$0.00779 |
$142.16 |
$105.56 |
$36.60 |
2.98% |
14 |
86.87 |
-1.0% |
0.99 |
$0.0010 |
$0.0111 |
-$0.00802 |
$146.39 |
$108.70 |
$37.69 |
2.98% |
15 |
86.01 |
-1.0% |
0.99 |
$0.0010 |
$0.0121 |
-$0.00826 |
$150.75 |
$111.94 |
$38.81 |
2.98% |
16 |
85.15 |
-1.0% |
0.99 |
$0.0010 |
$0.0131 |
-$0.00851 |
$155.23 |
$115.27 |
$39.97 |
2.98% |
17 |
84.29 |
-1.0% |
0.99 |
$0.0010 |
$0.0141 |
-$0.00876 |
$159.85 |
$118.70 |
$41.15 |
2.98% |
18 |
83.45 |
-1.0% |
0.99 |
$0.0011 |
$0.0152 |
-$0.00902 |
$164.61 |
$122.23 |
$42.38 |
2.98% |
19 |
82.62 |
-1.0% |
0.99 |
$0.0011 |
$0.0163 |
-$0.00929 |
$169.50 |
$125.87 |
$43.64 |
2.98% |
20 |
81.79 |
-1.0% |
0.99 |
$0.0011 |
$0.0174 |
-$0.00956 |
$174.55 |
$129.61 |
$44.94 |
2.98% |
21 |
80.97 |
-1.0% |
0.99 |
$0.0012 |
$0.0186 |
-$0.00985 |
$179.74 |
$133.47 |
$46.28 |
2.98% |
22 |
80.16 |
-1.0% |
0.99 |
$0.0012 |
$0.0198 |
-$0.01014 |
$185.09 |
$137.44 |
$47.65 |
2.98% |
Example 4: The Index level decreases in a volatile manner.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-2.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-72.90% |
Cumulative Index Return |
-19.63% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
89.00 |
-11.0% |
0.89 |
$0.0007 |
$0.0007 |
-$0.00548 |
$99.99 |
$66.75 |
$33.24 |
32.98% |
2 |
92.56 |
4.0% |
1.04 |
$0.0009 |
$0.0015 |
-$0.00729 |
$132.97 |
$103.72 |
$29.25 |
-12.02% |
3 |
95.34 |
3.0% |
1.03 |
$0.0008 |
$0.0023 |
-$0.00641 |
$116.98 |
$90.37 |
$26.61 |
-9.02% |
4 |
103.92 |
9.0% |
1.09 |
$0.0007 |
$0.0030 |
-$0.00583 |
$106.42 |
$87.01 |
$19.42 |
-27.02% |
5 |
109.11 |
5.0% |
1.05 |
$0.0005 |
$0.0035 |
-$0.00426 |
$77.66 |
$61.16 |
$16.50 |
-15.02% |
6 |
121.12 |
11.0% |
1.11 |
$0.0004 |
$0.0039 |
-$0.00362 |
$65.99 |
$54.94 |
$11.05 |
-33.02% |
7 |
128.38 |
6.0% |
1.06 |
$0.0003 |
$0.0042 |
-$0.00242 |
$44.20 |
$35.14 |
$9.06 |
-18.02% |
8 |
134.80 |
5.0% |
1.05 |
$0.0002 |
$0.0044 |
-$0.00199 |
$36.23 |
$28.54 |
$7.70 |
-15.02% |
9 |
161.76 |
20.0% |
1.20 |
$0.0002 |
$0.0046 |
-$0.00169 |
$30.79 |
$27.71 |
$3.08 |
-60.02% |
10 |
127.79 |
-21.0% |
0.79 |
$0.0001 |
$0.0047 |
-$0.00067 |
$12.31 |
$7.29 |
$5.02 |
62.98% |
11 |
122.68 |
-4.0% |
0.96 |
$0.0001 |
$0.0048 |
-$0.00110 |
$20.06 |
$14.44 |
$5.62 |
11.98% |
12 |
131.27 |
7.0% |
1.07 |
$0.0001 |
$0.0050 |
-$0.00123 |
$22.46 |
$18.03 |
$4.43 |
-21.02% |
13 |
154.90 |
18.0% |
1.18 |
$0.0001 |
$0.0051 |
-$0.00097 |
$17.74 |
$15.70 |
$2.04 |
-54.02% |
14 |
165.74 |
7.0% |
1.07 |
$0.0001 |
$0.0052 |
-$0.00045 |
$8.16 |
$6.55 |
$1.61 |
-21.02% |
15 |
159.11 |
-4.0% |
0.96 |
$0.0000 |
$0.0052 |
-$0.00035 |
$6.44 |
$4.64 |
$1.80 |
11.98% |
16 |
120.92 |
-24.0% |
0.76 |
$0.0000 |
$0.0052 |
-$0.00040 |
$7.21 |
$4.11 |
$3.10 |
71.98% |
17 |
106.41 |
-12.0% |
0.88 |
$0.0001 |
$0.0053 |
-$0.00068 |
$12.40 |
$8.19 |
$4.22 |
35.98% |
18 |
92.58 |
-13.0% |
0.87 |
$0.0001 |
$0.0054 |
-$0.00092 |
$16.87 |
$11.01 |
$5.86 |
38.98% |
19 |
82.39 |
-11.0% |
0.89 |
$0.0002 |
$0.0056 |
-$0.00128 |
$23.44 |
$15.65 |
$7.79 |
32.98% |
20 |
76.63 |
-7.0% |
0.93 |
$0.0002 |
$0.0058 |
-$0.00171 |
$31.17 |
$21.74 |
$9.43 |
20.98% |
21 |
70.50 |
-8.0% |
0.92 |
$0.0002 |
$0.0060 |
-$0.00207 |
$37.71 |
$26.02 |
$11.69 |
23.98% |
22 |
80.37 |
14.0% |
1.14 |
$0.0003 |
$0.0063 |
-$0.00256 |
$46.75 |
$39.97 |
$6.78 |
-42.02% |
Example 5: The Index level increases and decreases in a volatile
manner, ending at the same level.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-2.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-37.25% |
Cumulative Index Return |
-0.02% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily
Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
102.00 |
2.0% |
1.02 |
$0.0007 |
$0.0007 |
-$0.00548 |
$99.99 |
$76.50 |
$23.49 |
-6.02% |
2 |
105.06 |
3.0% |
1.03 |
$0.0006 |
$0.0013 |
-$0.00515 |
$93.97 |
$72.60 |
$21.37 |
-9.02% |
3 |
109.26 |
4.0% |
1.04 |
$0.0006 |
$0.0018 |
-$0.00468 |
$85.49 |
$66.69 |
$18.80 |
-12.02% |
4 |
98.34 |
-10.0% |
0.90 |
$0.0005 |
$0.0023 |
-$0.00412 |
$75.21 |
$50.77 |
$24.44 |
29.98% |
5 |
100.30 |
2.0% |
1.02 |
$0.0006 |
$0.0029 |
-$0.00536 |
$97.75 |
$74.79 |
$22.97 |
-6.02% |
6 |
103.31 |
3.0% |
1.03 |
$0.0006 |
$0.0035 |
-$0.00503 |
$91.86 |
$70.97 |
$20.89 |
-9.02% |
7 |
92.98 |
-10.0% |
0.90 |
$0.0005 |
$0.0041 |
-$0.00458 |
$83.57 |
$56.42 |
$27.16 |
29.98% |
8 |
94.84 |
2.0% |
1.02 |
$0.0007 |
$0.0048 |
-$0.00595 |
$108.63 |
$83.10 |
$25.52 |
-6.02% |
9 |
96.74 |
2.0% |
1.02 |
$0.0007 |
$0.0055 |
-$0.00559 |
$102.08 |
$78.10 |
$23.98 |
-6.02% |
10 |
87.06 |
-10.0% |
0.90 |
$0.0006 |
$0.0061 |
-$0.00526 |
$95.93 |
$64.76 |
$31.17 |
29.98% |
11 |
88.80 |
2.0% |
1.02 |
$0.0008 |
$0.0069 |
-$0.00683 |
$124.69 |
$95.39 |
$29.30 |
-6.02% |
12 |
90.58 |
2.0% |
1.02 |
$0.0008 |
$0.0077 |
-$0.00642 |
$117.18 |
$89.65 |
$27.53 |
-6.02% |
13 |
81.52 |
-10.0% |
0.90 |
$0.0007 |
$0.0084 |
-$0.00603 |
$110.12 |
$74.33 |
$35.78 |
29.98% |
14 |
83.15 |
2.0% |
1.02 |
$0.0009 |
$0.0093 |
-$0.00784 |
$143.13 |
$109.50 |
$33.63 |
-6.02% |
15 |
84.82 |
2.0% |
1.02 |
$0.0009 |
$0.0102 |
-$0.00737 |
$134.50 |
$102.90 |
$31.60 |
-6.02% |
16 |
76.33 |
-10.0% |
0.90 |
$0.0008 |
$0.0110 |
-$0.00693 |
$126.40 |
$85.32 |
$41.07 |
29.98% |
17 |
77.86 |
2.0% |
1.02 |
$0.0011 |
$0.0121 |
-$0.00900 |
$164.29 |
$125.69 |
$38.60 |
-6.02% |
18 |
79.42 |
2.0% |
1.02 |
$0.0010 |
$0.0131 |
-$0.00846 |
$154.39 |
$118.12 |
$36.27 |
-6.02% |
19 |
81.01 |
2.0% |
1.02 |
$0.0009 |
$0.0140 |
-$0.00795 |
$145.09 |
$111.00 |
$34.09 |
-6.02% |
20 |
89.11 |
10.0% |
1.10 |
$0.0009 |
$0.0149 |
-$0.00747 |
$136.35 |
$112.49 |
$23.85 |
-30.02% |
21 |
90.89 |
2.0% |
1.02 |
$0.0006 |
$0.0155 |
-$0.00523 |
$95.41 |
$72.99 |
$22.42 |
-6.02% |
22 |
99.98 |
10.0% |
1.10 |
$0.0006 |
$0.0161 |
-$0.00491 |
$89.66 |
$73.98 |
$15.69 |
-30.02% |
Examples 6 to 10: Maximum Amount of the Interest Rate Spread
Example 6: The Index level alternatively decreases and increases
by a constant 3.00% per day.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-4.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-9.50% |
Cumulative Index Return |
-0.99% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current Index
Level /
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
97.00 |
-3.0% |
0.97 |
$0.0007 |
$0.0007 |
-$0.01096 |
$99.99 |
$72.75 |
$27.24 |
8.95% |
2 |
99.91 |
3.0% |
1.03 |
$0.0007 |
$0.0014 |
-$0.01194 |
$108.94 |
$84.17 |
$24.77 |
-9.05% |
3 |
96.91 |
-3.0% |
0.97 |
$0.0006 |
$0.0020 |
-$0.01086 |
$99.09 |
$72.09 |
$26.99 |
8.95% |
4 |
99.82 |
3.0% |
1.03 |
$0.0007 |
$0.0027 |
-$0.01183 |
$107.96 |
$83.41 |
$24.55 |
-9.05% |
5 |
96.83 |
-3.0% |
0.97 |
$0.0006 |
$0.0033 |
-$0.01076 |
$98.19 |
$71.44 |
$26.75 |
8.95% |
6 |
99.73 |
3.0% |
1.03 |
$0.0007 |
$0.0040 |
-$0.01173 |
$106.98 |
$82.65 |
$24.33 |
-9.05% |
7 |
96.74 |
-3.0% |
0.97 |
$0.0006 |
$0.0047 |
-$0.01066 |
$97.30 |
$70.80 |
$26.51 |
8.95% |
8 |
99.64 |
3.0% |
1.03 |
$0.0007 |
$0.0054 |
-$0.01162 |
$106.02 |
$81.91 |
$24.11 |
-9.05% |
9 |
96.65 |
-3.0% |
0.97 |
$0.0006 |
$0.0060 |
-$0.01057 |
$96.43 |
$70.16 |
$26.27 |
8.95% |
10 |
99.55 |
3.0% |
1.03 |
$0.0007 |
$0.0067 |
-$0.01151 |
$105.06 |
$81.17 |
$23.89 |
-9.05% |
11 |
96.56 |
-3.0% |
0.97 |
$0.0006 |
$0.0073 |
-$0.01047 |
$95.56 |
$69.52 |
$26.03 |
8.95% |
12 |
99.46 |
3.0% |
1.03 |
$0.0007 |
$0.0080 |
-$0.01141 |
$104.11 |
$80.44 |
$23.68 |
-9.05% |
13 |
96.48 |
-3.0% |
0.97 |
$0.0006 |
$0.0086 |
-$0.01038 |
$94.69 |
$68.90 |
$25.80 |
8.95% |
14 |
99.37 |
3.0% |
1.03 |
$0.0007 |
$0.0093 |
-$0.01131 |
$103.17 |
$79.71 |
$23.46 |
-9.05% |
15 |
96.39 |
-3.0% |
0.97 |
$0.0006 |
$0.0099 |
-$0.01028 |
$93.84 |
$68.27 |
$25.56 |
8.95% |
16 |
99.28 |
3.0% |
1.03 |
$0.0007 |
$0.0105 |
-$0.01121 |
$102.24 |
$78.99 |
$23.25 |
-9.05% |
17 |
96.30 |
-3.0% |
0.97 |
$0.0006 |
$0.0111 |
-$0.01019 |
$92.99 |
$67.66 |
$25.33 |
8.95% |
18 |
99.19 |
3.0% |
1.03 |
$0.0007 |
$0.0118 |
-$0.01110 |
$101.32 |
$78.28 |
$23.04 |
-9.05% |
19 |
96.22 |
-3.0% |
0.97 |
$0.0006 |
$0.0124 |
-$0.01010 |
$92.15 |
$67.05 |
$25.10 |
8.95% |
20 |
99.10 |
3.0% |
1.03 |
$0.0007 |
$0.0131 |
-$0.01100 |
$100.40 |
$77.57 |
$22.83 |
-9.05% |
21 |
96.13 |
-3.0% |
0.97 |
$0.0006 |
$0.0137 |
-$0.01001 |
$91.32 |
$66.44 |
$24.88 |
8.95% |
22 |
99.01 |
3.0% |
1.03 |
$0.0006 |
$0.0143 |
-$0.01090 |
$99.50 |
$76.87 |
$22.63 |
-9.05% |
Example 7: The Index level increases by a constant 3.00% per day.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-4.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-87.58% |
Cumulative Index Return |
91.61% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
103.00 |
3.0% |
1.03 |
$0.0007 |
$0.0007 |
-$0.01096 |
$99.99 |
$77.25 |
$22.74 |
-9.05% |
2 |
106.09 |
3.0% |
1.03 |
$0.0006 |
$0.0012 |
-$0.00997 |
$90.94 |
$70.26 |
$20.68 |
-9.05% |
3 |
109.27 |
3.0% |
1.03 |
$0.0005 |
$0.0018 |
-$0.00907 |
$82.72 |
$63.91 |
$18.81 |
-9.05% |
4 |
112.55 |
3.0% |
1.03 |
$0.0005 |
$0.0023 |
-$0.00825 |
$75.23 |
$58.12 |
$17.11 |
-9.05% |
5 |
115.93 |
3.0% |
1.03 |
$0.0004 |
$0.0027 |
-$0.00750 |
$68.43 |
$52.87 |
$15.56 |
-9.05% |
6 |
119.41 |
3.0% |
1.03 |
$0.0004 |
$0.0031 |
-$0.00682 |
$62.24 |
$48.08 |
$14.15 |
-9.05% |
7 |
122.99 |
3.0% |
1.03 |
$0.0004 |
$0.0035 |
-$0.00620 |
$56.61 |
$43.73 |
$12.87 |
-9.05% |
8 |
126.68 |
3.0% |
1.03 |
$0.0003 |
$0.0038 |
-$0.00564 |
$51.49 |
$39.78 |
$11.71 |
-9.05% |
9 |
130.48 |
3.0% |
1.03 |
$0.0003 |
$0.0041 |
-$0.00513 |
$46.83 |
$36.18 |
$10.65 |
-9.05% |
10 |
134.39 |
3.0% |
1.03 |
$0.0003 |
$0.0044 |
-$0.00467 |
$42.59 |
$32.91 |
$9.69 |
-9.05% |
11 |
138.42 |
3.0% |
1.03 |
$0.0003 |
$0.0047 |
-$0.00425 |
$38.74 |
$29.93 |
$8.81 |
-9.05% |
12 |
142.58 |
3.0% |
1.03 |
$0.0002 |
$0.0049 |
-$0.00386 |
$35.23 |
$27.22 |
$8.01 |
-9.05% |
13 |
146.85 |
3.0% |
1.03 |
$0.0002 |
$0.0051 |
-$0.00351 |
$32.05 |
$24.76 |
$7.29 |
-9.05% |
14 |
151.26 |
3.0% |
1.03 |
$0.0002 |
$0.0053 |
-$0.00319 |
$29.15 |
$22.52 |
$6.63 |
-9.05% |
15 |
155.80 |
3.0% |
1.03 |
$0.0002 |
$0.0055 |
-$0.00291 |
$26.51 |
$20.48 |
$6.03 |
-9.05% |
16 |
160.47 |
3.0% |
1.03 |
$0.0002 |
$0.0056 |
-$0.00264 |
$24.11 |
$18.63 |
$5.48 |
-9.05% |
17 |
165.28 |
3.0% |
1.03 |
$0.0001 |
$0.0058 |
-$0.00240 |
$21.93 |
$16.94 |
$4.99 |
-9.05% |
18 |
170.24 |
3.0% |
1.03 |
$0.0001 |
$0.0059 |
-$0.00219 |
$19.95 |
$15.41 |
$4.54 |
-9.05% |
19 |
175.35 |
3.0% |
1.03 |
$0.0001 |
$0.0060 |
-$0.00199 |
$18.14 |
$14.02 |
$4.13 |
-9.05% |
20 |
180.61 |
3.0% |
1.03 |
$0.0001 |
$0.0061 |
-$0.00181 |
$16.50 |
$12.75 |
$3.75 |
-9.05% |
21 |
186.03 |
3.0% |
1.03 |
$0.0001 |
$0.0062 |
-$0.00164 |
$15.01 |
$11.60 |
$3.41 |
-9.05% |
22 |
191.61 |
3.0% |
1.03 |
$0.0001 |
$0.0063 |
-$0.00150 |
$13.65 |
$10.55 |
$3.10 |
-9.05% |
Example 8: The Index level decreases by a constant 1.00% per day.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-4.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
89.72% |
Cumulative Index Return |
-19.84% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
99.00 |
-1.0% |
0.99 |
$0.0007 |
$0.0007 |
-$0.01096 |
$99.99 |
$74.25 |
$25.74 |
2.95% |
2 |
98.01 |
-1.0% |
0.99 |
$0.0007 |
$0.0013 |
-$0.01128 |
$102.94 |
$76.44 |
$26.50 |
2.95% |
3 |
97.03 |
-1.0% |
0.99 |
$0.0007 |
$0.0020 |
-$0.01162 |
$105.98 |
$78.70 |
$27.28 |
2.95% |
4 |
96.06 |
-1.0% |
0.99 |
$0.0007 |
$0.0027 |
-$0.01196 |
$109.11 |
$81.03 |
$28.09 |
2.95% |
5 |
95.10 |
-1.0% |
0.99 |
$0.0007 |
$0.0035 |
-$0.01231 |
$112.33 |
$83.42 |
$28.92 |
2.95% |
6 |
94.15 |
-1.0% |
0.99 |
$0.0008 |
$0.0042 |
-$0.01268 |
$115.65 |
$85.88 |
$29.77 |
2.95% |
7 |
93.21 |
-1.0% |
0.99 |
$0.0008 |
$0.0050 |
-$0.01305 |
$119.07 |
$88.42 |
$30.65 |
2.95% |
8 |
92.27 |
-1.0% |
0.99 |
$0.0008 |
$0.0058 |
-$0.01344 |
$122.59 |
$91.03 |
$31.56 |
2.95% |
9 |
91.35 |
-1.0% |
0.99 |
$0.0008 |
$0.0066 |
-$0.01383 |
$126.21 |
$93.72 |
$32.49 |
2.95% |
10 |
90.44 |
-1.0% |
0.99 |
$0.0008 |
$0.0074 |
-$0.01424 |
$129.93 |
$96.49 |
$33.45 |
2.95% |
11 |
89.53 |
-1.0% |
0.99 |
$0.0009 |
$0.0083 |
-$0.01466 |
$133.77 |
$99.34 |
$34.43 |
2.95% |
12 |
88.64 |
-1.0% |
0.99 |
$0.0009 |
$0.0092 |
-$0.01509 |
$137.72 |
$102.27 |
$35.45 |
2.95% |
13 |
87.75 |
-1.0% |
0.99 |
$0.0009 |
$0.0101 |
-$0.01554 |
$141.79 |
$105.29 |
$36.50 |
2.95% |
14 |
86.87 |
-1.0% |
0.99 |
$0.0009 |
$0.0111 |
-$0.01600 |
$145.98 |
$108.40 |
$37.58 |
2.95% |
15 |
86.01 |
-1.0% |
0.99 |
$0.0010 |
$0.0121 |
-$0.01647 |
$150.29 |
$111.60 |
$38.69 |
2.95% |
16 |
85.15 |
-1.0% |
0.99 |
$0.0010 |
$0.0131 |
-$0.01696 |
$154.73 |
$114.90 |
$39.83 |
2.95% |
17 |
84.29 |
-1.0% |
0.99 |
$0.0010 |
$0.0141 |
-$0.01746 |
$159.30 |
$118.29 |
$41.01 |
2.95% |
18 |
83.45 |
-1.0% |
0.99 |
$0.0011 |
$0.0152 |
-$0.01798 |
$164.00 |
$121.79 |
$42.22 |
2.95% |
19 |
82.62 |
-1.0% |
0.99 |
$0.0011 |
$0.0163 |
-$0.01851 |
$168.85 |
$125.38 |
$43.46 |
2.95% |
20 |
81.79 |
-1.0% |
0.99 |
$0.0011 |
$0.0174 |
-$0.01905 |
$173.83 |
$129.09 |
$44.75 |
2.95% |
21 |
80.97 |
-1.0% |
0.99 |
$0.0012 |
$0.0186 |
-$0.01962 |
$178.97 |
$132.90 |
$46.07 |
2.95% |
22 |
80.16 |
-1.0% |
0.99 |
$0.0012 |
$0.0198 |
-$0.02019 |
$184.25 |
$136.82 |
$47.43 |
2.95% |
Example 9: The Index level decreases in a volatile manner.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-4.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-73.05% |
Cumulative Index Return |
-19.63% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note Value
* Fee Rate
/ 365 |
Total of
E |
Previous
Indicative
Note Value *
Daily Deposit
Factor *
Daily Interest
Rate / 365 |
Previous
Indicative
Note Value *
Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor * D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
89.00 |
-11.0% |
0.89 |
$0.0007 |
$0.0007 |
-$0.01096 |
$99.99 |
$66.75 |
$33.24 |
32.95% |
2 |
92.56 |
4.0% |
1.04 |
$0.0009 |
$0.0015 |
-$0.01457 |
$132.94 |
$103.70 |
$29.23 |
-12.05% |
3 |
95.34 |
3.0% |
1.03 |
$0.0008 |
$0.0023 |
-$0.01282 |
$116.92 |
$90.33 |
$26.59 |
-9.05% |
4 |
103.92 |
9.0% |
1.09 |
$0.0007 |
$0.0030 |
-$0.01166 |
$106.35 |
$86.95 |
$19.40 |
-27.05% |
5 |
109.11 |
5.0% |
1.05 |
$0.0005 |
$0.0035 |
-$0.00850 |
$77.58 |
$61.10 |
$16.48 |
-15.05% |
6 |
121.12 |
11.0% |
1.11 |
$0.0004 |
$0.0039 |
-$0.00722 |
$65.91 |
$54.88 |
$11.03 |
-33.05% |
7 |
128.38 |
6.0% |
1.06 |
$0.0003 |
$0.0042 |
-$0.00484 |
$44.13 |
$35.09 |
$9.04 |
-18.05% |
8 |
134.80 |
5.0% |
1.05 |
$0.0002 |
$0.0044 |
-$0.00396 |
$36.17 |
$28.48 |
$7.68 |
-15.05% |
9 |
161.76 |
20.0% |
1.20 |
$0.0002 |
$0.0046 |
-$0.00337 |
$30.72 |
$27.65 |
$3.07 |
-60.05% |
10 |
127.79 |
-21.0% |
0.79 |
$0.0001 |
$0.0047 |
-$0.00135 |
$12.28 |
$7.27 |
$5.00 |
62.95% |
11 |
122.68 |
-4.0% |
0.96 |
$0.0001 |
$0.0048 |
-$0.00219 |
$20.00 |
$14.40 |
$5.60 |
11.95% |
12 |
131.27 |
7.0% |
1.07 |
$0.0001 |
$0.0050 |
-$0.00245 |
$22.39 |
$17.97 |
$4.42 |
-21.05% |
13 |
154.90 |
18.0% |
1.18 |
$0.0001 |
$0.0051 |
-$0.00194 |
$17.68 |
$15.65 |
$2.03 |
-54.05% |
14 |
165.74 |
7.0% |
1.07 |
$0.0001 |
$0.0051 |
-$0.00089 |
$8.12 |
$6.52 |
$1.60 |
-21.05% |
15 |
159.11 |
-4.0% |
0.96 |
$0.0000 |
$0.0052 |
-$0.00070 |
$6.41 |
$4.62 |
$1.80 |
11.95% |
16 |
120.92 |
-24.0% |
0.76 |
$0.0000 |
$0.0052 |
-$0.00079 |
$7.18 |
$4.09 |
$3.09 |
71.95% |
17 |
106.41 |
-12.0% |
0.88 |
$0.0001 |
$0.0053 |
-$0.00135 |
$12.35 |
$8.15 |
$4.20 |
35.95% |
18 |
92.58 |
-13.0% |
0.87 |
$0.0001 |
$0.0054 |
-$0.00184 |
$16.79 |
$10.96 |
$5.83 |
38.95% |
19 |
82.39 |
-11.0% |
0.89 |
$0.0002 |
$0.0056 |
-$0.00256 |
$23.33 |
$15.57 |
$7.76 |
32.95% |
20 |
76.63 |
-7.0% |
0.93 |
$0.0002 |
$0.0058 |
-$0.00340 |
$31.02 |
$21.64 |
$9.38 |
20.95% |
21 |
70.50 |
-8.0% |
0.92 |
$0.0002 |
$0.0060 |
-$0.00411 |
$37.52 |
$25.89 |
$11.63 |
23.95% |
22 |
80.37 |
14.0% |
1.14 |
$0.0003 |
$0.0063 |
-$0.00510 |
$46.50 |
$39.76 |
$6.74 |
-42.05% |
Example 10: The Index level increases and decreases in a volatile
manner, ending at the same level.
Assumptions |
|
Fee Rate |
0.95% per annum |
Daily Leverage Factor |
3 |
Daily Deposit Factor |
4 |
Daily Interest Rate |
-4.00% |
Principal Amount |
$25.00 |
Initial Index Level |
100 |
Note Return |
-37.57% |
Cumulative Index Return |
-0.02% |
Day |
Index
Level |
Daily Index
Performance |
Index
Performance
Factor |
Daily
Investor
Fee |
Fee
Accrual |
Daily
Interest |
Deposit
Amount |
Short
Index
Amount |
Indicative
Note
Value |
Note Return |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
K |
|
Previous
Index
Level *
(1+C) |
|
Current
Index Level
/
Previous
Index Level |
Previous
Indicative
Note
Value *
Fee Rate /
365 |
Total of
E |
Previous
Indicative
Note Value *
Daily
Deposit
Factor *
Daily
Interest Rate
/ 365 |
Previous
Indicative
Note Value
* Daily
Financing
Factor
+ G - E |
Previous
Indicative
Note
Value *
Daily
Leverage
Factor *
D |
H - I |
(Current
Indicative
Note Value -
Previous
Indicative
Note Value)/
Previous
Indicative
Note Value |
|
|
|
|
|
|
|
|
|
|
|
0 |
100.00 |
|
|
|
|
|
$100 |
$75 |
$25 |
|
1 |
102.00 |
2.0% |
1.02 |
$0.0007 |
$0.0007 |
-$0.01096 |
$99.99 |
$76.50 |
$23.49 |
-6.05% |
2 |
105.06 |
3.0% |
1.03 |
$0.0006 |
$0.0013 |
-$0.01030 |
$93.94 |
$72.58 |
$21.36 |
-9.05% |
3 |
109.26 |
4.0% |
1.04 |
$0.0006 |
$0.0018 |
-$0.00936 |
$85.44 |
$66.65 |
$18.79 |
-12.05% |
4 |
98.34 |
-10.0% |
0.90 |
$0.0005 |
$0.0023 |
-$0.00824 |
$75.15 |
$50.73 |
$24.42 |
29.95% |
5 |
100.30 |
2.0% |
1.02 |
$0.0006 |
$0.0029 |
-$0.01070 |
$97.66 |
$74.72 |
$22.94 |
-6.05% |
6 |
103.31 |
3.0% |
1.03 |
$0.0006 |
$0.0035 |
-$0.01006 |
$91.76 |
$70.89 |
$20.87 |
-9.05% |
7 |
92.98 |
-10.0% |
0.90 |
$0.0005 |
$0.0041 |
-$0.00915 |
$83.46 |
$56.34 |
$27.12 |
29.95% |
8 |
94.84 |
2.0% |
1.02 |
$0.0007 |
$0.0048 |
-$0.01189 |
$108.45 |
$82.98 |
$25.48 |
-6.05% |
9 |
96.74 |
2.0% |
1.02 |
$0.0007 |
$0.0055 |
-$0.01117 |
$101.90 |
$77.96 |
$23.94 |
-6.05% |
10 |
87.06 |
-10.0% |
0.90 |
$0.0006 |
$0.0061 |
-$0.01049 |
$95.74 |
$64.63 |
$31.11 |
29.95% |
11 |
88.80 |
2.0% |
1.02 |
$0.0008 |
$0.0069 |
-$0.01364 |
$124.41 |
$95.19 |
$29.23 |
-6.05% |
12 |
90.58 |
2.0% |
1.02 |
$0.0008 |
$0.0076 |
-$0.01281 |
$116.89 |
$89.43 |
$27.46 |
-6.05% |
13 |
81.52 |
-10.0% |
0.90 |
$0.0007 |
$0.0084 |
-$0.01204 |
$109.82 |
$74.14 |
$35.68 |
29.95% |
14 |
83.15 |
2.0% |
1.02 |
$0.0009 |
$0.0093 |
-$0.01564 |
$142.72 |
$109.19 |
$33.53 |
-6.05% |
15 |
84.82 |
2.0% |
1.02 |
$0.0009 |
$0.0102 |
-$0.01470 |
$134.09 |
$102.59 |
$31.50 |
-6.05% |
16 |
76.33 |
-10.0% |
0.90 |
$0.0008 |
$0.0110 |
-$0.01381 |
$125.98 |
$85.05 |
$40.93 |
29.95% |
17 |
77.86 |
2.0% |
1.02 |
$0.0011 |
$0.0120 |
-$0.01794 |
$163.72 |
$125.26 |
$38.46 |
-6.05% |
18 |
79.42 |
2.0% |
1.02 |
$0.0010 |
$0.0130 |
-$0.01686 |
$153.82 |
$117.68 |
$36.13 |
-6.05% |
19 |
81.01 |
2.0% |
1.02 |
$0.0009 |
$0.0140 |
-$0.01584 |
$144.52 |
$110.57 |
$33.95 |
-6.05% |
20 |
89.11 |
10.0% |
1.10 |
$0.0009 |
$0.0149 |
-$0.01488 |
$135.78 |
$112.03 |
$23.75 |
-30.05% |
21 |
90.89 |
2.0% |
1.02 |
$0.0006 |
$0.0155 |
-$0.01041 |
$94.98 |
$72.67 |
$22.31 |
-6.05% |
22 |
99.98 |
10.0% |
1.10 |
$0.0006 |
$0.0161 |
-$0.00978 |
$89.24 |
$73.63 |
$15.61 |
-30.05% |
Table 1: Expected return on the notes over one year of Index
performance, without giving effect to the Daily Investor Fee and the Daily Interest and assuming a constant daily inverse leverage and
volatility over time.
Table 1 illustrates
the effect of two factors that affect the notes’ performance: Index volatility and Index return. Index volatility is a statistical
measure of the magnitude of fluctuations in the returns of the Index and is calculated as the standard deviation of the natural logarithms
of the Index Performance Factor (calculated daily), multiplied by the square root of the number of Index Business Days per year (assumed
to be 252). Table 1 shows estimated note returns for a number of combinations of Index volatility and Index return over a one-year period.
To isolate the impact of daily leveraged exposure, the table assumes no Daily Investor Fees and Daily Interest of 0% and that the volatility
of the Index remains constant over time. If these assumptions were different, the notes’ performance would be different than that
shown. If the effect of the Daily Investor Fee and the Daily Interest were included, the notes’ performance would be different than
shown.
Because the return
on the notes is linked to a three times leveraged participation in the inverse performance of the Index, compounded daily, the notes might
be incorrectly expected to achieve a 30% return on a yearly basis if the Index return was -10%, absent the effects of compounding. However,
as Table 1 shows, with an Index volatility of 40%, and given the assumptions listed above, the notes would return -47.48%. In Table 1,
shaded areas represent those scenarios where the notes will outperform (i.e., return more than) the inverse Index performance times 3.0
leverage; conversely, areas not shaded represent those scenarios where the notes will underperform (i.e., return less than) the inverse
Index performance times 3.0 leverage.
This table highlights
the impact of leverage and compounding on the payment at maturity under different circumstances. Many other factors will affect the value
of the notes, and these figures are provided for illustration only. This table should not be taken as an indication or a prediction of
future Index performance or investment results and are intended to illustrate a few of the possible returns on the notes. Because the
Indicative Note Value takes into account the net effect of the Daily Investor Fee, which is a fixed percentage of the value of the notes,
and the performance of the Index, the Indicative Note Value is dependent on the path taken by the Index level to arrive at its ending
level. The figures in this table have been rounded for convenience.
|
|
One Year Index Volatility |
One
Year
Index
Perform-
ance |
Three
Times the
Inverse
(-3x)
of One
Year
Index
Perform-
ance |
0% |
5% |
10% |
15% |
20% |
25% |
30% |
35% |
40% |
45% |
50% |
55% |
60% |
65% |
70% |
-75% |
225% |
6300.00% |
6204.72% |
5927.29% |
5491.78% |
4934.42% |
4298.65% |
3629.59% |
2968.83% |
2350.51% |
1798.94% |
1328.03% |
942.16% |
638.08% |
407.28% |
238.34% |
-70% |
210% |
3603.70% |
3548.56% |
3388.02% |
3135.98% |
2813.44% |
2445.52% |
2058.33% |
1675.95% |
1318.12% |
998.93% |
726.41% |
503.10% |
327.13% |
193.56% |
95.80% |
-65% |
195% |
2232.36% |
2197.64% |
2096.54% |
1937.82% |
1734.70% |
1503.01% |
1259.18% |
1018.38% |
793.04% |
592.04% |
420.42% |
279.80% |
168.98% |
84.87% |
23.30% |
-60% |
180% |
1462.50% |
1439.24% |
1371.51% |
1265.18% |
1129.11% |
973.89% |
810.54% |
649.23% |
498.27% |
363.61% |
248.64% |
154.43% |
80.20% |
23.85% |
-17.40% |
-55% |
165% |
997.39% |
981.06% |
933.49% |
858.81% |
763.24% |
654.23% |
539.50% |
426.21% |
320.18% |
225.61% |
144.86% |
78.70% |
26.56% |
-13.02% |
-41.99% |
-50% |
150% |
700.00% |
688.09% |
653.41% |
598.97% |
529.30% |
449.83% |
366.20% |
283.60% |
206.31% |
137.37% |
78.50% |
30.27% |
-7.74% |
-36.59% |
-57.71% |
-45% |
135% |
501.05% |
492.10% |
466.05% |
425.15% |
372.80% |
313.10% |
250.26% |
188.21% |
130.14% |
78.34% |
34.11% |
-2.13% |
-30.68% |
-52.36% |
-68.22% |
-40% |
120% |
362.96% |
356.07% |
336.00% |
304.50% |
264.18% |
218.19% |
169.79% |
121.99% |
77.27% |
37.37% |
3.30% |
-24.61% |
-46.61% |
-63.30% |
-75.53% |
-35% |
105% |
264.13% |
258.71% |
242.93% |
218.15% |
186.44% |
150.26% |
112.20% |
74.60% |
39.42% |
8.04% |
-18.75% |
-40.71% |
-58.01% |
-71.14% |
-80.75% |
-30% |
90% |
191.55% |
187.20% |
174.57% |
154.73% |
129.34% |
100.38% |
69.90% |
39.80% |
11.63% |
-13.50% |
-34.95% |
-52.53% |
-66.38% |
-76.89% |
-84.59% |
-25% |
75% |
137.04% |
133.51% |
123.23% |
107.10% |
86.46% |
62.91% |
38.13% |
13.66% |
-9.24% |
-29.67% |
-47.11% |
-61.40% |
-72.66% |
-81.21% |
-87.47% |
-20% |
60% |
95.31% |
92.40% |
83.94% |
70.65% |
53.64% |
34.24% |
13.82% |
-6.35% |
-25.22% |
-42.05% |
-56.42% |
-68.20% |
-77.48% |
-84.52% |
-89.67% |
-15% |
45% |
62.83% |
60.41% |
53.35% |
42.27% |
28.09% |
11.91% |
-5.11% |
-21.92% |
-37.65% |
-51.69% |
-63.67% |
-73.48% |
-81.22% |
-87.09% |
-91.39% |
-10% |
30% |
37.17% |
35.13% |
29.19% |
19.85% |
7.91% |
-5.72% |
-20.06% |
-34.22% |
-47.48% |
-59.30% |
-69.39% |
-77.66% |
-84.18% |
-89.13% |
-92.75% |
-5% |
15% |
16.64% |
14.90% |
9.84% |
1.91% |
-8.25% |
-19.84% |
-32.03% |
-44.07% |
-55.34% |
-65.39% |
-73.98% |
-81.01% |
-86.55% |
-90.76% |
-93.83% |
0% |
0% |
0.00% |
-1.49% |
-5.82% |
-12.63% |
-21.34% |
-31.27% |
-41.73% |
-52.05% |
-61.71% |
-70.33% |
-77.69% |
-83.72% |
-88.47% |
-92.07% |
-94.71% |
5% |
-15% |
-13.62% |
-14.90% |
-18.65% |
-24.53% |
-32.05% |
-40.63% |
-49.66% |
-58.58% |
-66.92% |
-74.37% |
-80.73% |
-85.93% |
-90.04% |
-93.15% |
-95.43% |
10% |
-30% |
-24.87% |
-25.99% |
-29.24% |
-34.36% |
-40.90% |
-48.36% |
-56.22% |
-63.97% |
-71.23% |
-77.71% |
-83.24% |
-87.77% |
-91.34% |
-94.04% |
-96.03% |
15% |
-45% |
-34.25% |
-35.23% |
-38.08% |
-42.55% |
-48.28% |
-54.81% |
-61.68% |
-68.47% |
-74.82% |
-80.49% |
-85.33% |
-89.29% |
-92.42% |
-94.79% |
-96.52% |
20% |
-60% |
-42.13% |
-42.99% |
-45.50% |
-49.44% |
-54.48% |
-60.23% |
-66.28% |
-72.25% |
-77.84% |
-82.83% |
-87.09% |
-90.58% |
-93.33% |
-95.41% |
-96.94% |
25% |
-75% |
-48.80% |
-49.56% |
-51.78% |
-55.27% |
-59.72% |
-64.81% |
-70.16% |
-75.45% |
-80.40% |
-84.81% |
-88.58% |
-91.66% |
-94.10% |
-95.94% |
-97.29% |
30% |
-90% |
-54.48% |
-55.16% |
-57.13% |
-60.23% |
-64.20% |
-68.72% |
-73.48% |
-78.17% |
-82.57% |
-86.49% |
-89.84% |
-92.59% |
-94.75% |
-96.39% |
-97.59% |
35% |
-105% |
-59.36% |
-59.96% |
-61.72% |
-64.49% |
-68.03% |
-72.07% |
-76.31% |
-80.51% |
-84.44% |
-87.94% |
-90.93% |
-93.38% |
-95.31% |
-96.78% |
-97.85% |
40% |
-120% |
-63.56% |
-64.10% |
-65.68% |
-68.16% |
-71.33% |
-74.95% |
-78.76% |
-82.53% |
-86.05% |
-89.19% |
-91.87% |
-94.07% |
-95.80% |
-97.11% |
-98.07% |
45% |
-135% |
-67.20% |
-67.69% |
-69.11% |
-71.34% |
-74.20% |
-77.46% |
-80.88% |
-84.27% |
-87.44% |
-90.27% |
-92.68% |
-94.66% |
-96.22% |
-97.40% |
-98.27% |
50% |
-150% |
-70.37% |
-70.81% |
-72.10% |
-74.11% |
-76.69% |
-79.64% |
-82.73% |
-85.79% |
-88.66% |
-91.21% |
-93.39% |
-95.18% |
-96.58% |
-97.65% |
-98.43% |
55% |
-165% |
-73.15% |
-73.55% |
-74.71% |
-76.54% |
-78.88% |
-81.54% |
-84.35% |
-87.12% |
-89.72% |
-92.03% |
-94.01% |
-95.63% |
-96.90% |
-97.87% |
-98.58% |
60% |
-180% |
-75.59% |
-75.95% |
-77.01% |
-78.67% |
-80.80% |
-83.22% |
-85.77% |
-88.29% |
-90.65% |
-92.76% |
-94.55% |
-96.02% |
-97.18% |
-98.06% |
-98.71% |
65% |
-195% |
-77.74% |
-78.07% |
-79.04% |
-80.55% |
-82.49% |
-84.70% |
-87.03% |
-89.33% |
-91.48% |
-93.39% |
-95.03% |
-96.38% |
-97.43% |
-98.24% |
-98.82% |
70% |
-210% |
-79.65% |
-79.95% |
-80.83% |
-82.22% |
-83.99% |
-86.01% |
-88.14% |
-90.24% |
-92.21% |
-93.96% |
-95.46% |
-96.69% |
-97.65% |
-98.39% |
-98.92% |
75% |
-225% |
-81.34% |
-81.62% |
-82.43% |
-83.70% |
-85.32% |
-87.18% |
-89.13% |
-91.05% |
-92.86% |
-94.46% |
-95.84% |
-96.96% |
-97.85% |
-98.52% |
-99.01% |
Numbers in red font
highlight scenarios where the notes are expected to perform negatively. Shaded areas represent those scenarios where the notes will outperform
(i.e., return more than) the inverse Index performance times the Daily Leverage Factor; conversely, areas not shaded represent those
scenarios where the notes will underperform (i.e., return less than) the inverse Index performance times the Daily Leverage Factor. Please
note that the table above is not a representation as to the notes' actual returns, which may be materially different than the scenarios
shown above, as a result of a variety of factors, including the decay effects described above, as well as the Daily Interest and the
Daily Investor Fee.
Illustrations
of the “Decay” Effect on the Notes
The daily resetting of the notes’ leveraged
exposure to the inverse performance of the Index is expected to cause the notes to experience a “decay” effect, which worsens
over time and increases with the volatility of the Index. The decay effect refers to the tendency of the notes to lose value over time,
regardless of the performance of the Index. The decay effect occurs any time the Index moves in a direction on one day that is different
from the direction it moved on the prior day. If the Index decreases one day and increases the next, the resetting of the leveraged exposure
based on the lower Index value after the first day means that a higher Indicative Note Value is exposed to the increase of the level of
the Index on the next day than if the leveraged exposure had not been reset; and if the Index increases one day and decreases the next,
the resetting of the leveraged exposure based on the lower Index value after the first day means that a lower Indicative Note Value is
exposed to the decrease on the next day. One consequence of this daily resetting of leverage is that, if the Index moves in one direction
from Day 0 to Day 1 and then returns to its Day 0 level on Day 2, the Closing Indicative Note Value of the notes will be lower on Day
2 than it was on Day 0, even though the closing level of the Index is the same on Day 2 as it was on Day 0. As a result of this decay
effect, it is extremely likely that the value of the notes will decline to near zero (absent reverse splits) by the maturity date, and
likely significantly sooner. Accordingly, the notes are not suitable for intermediate- or long-term investment, as any intermediate-or
long-term investment is very likely to sustain significant losses, even if the level of the Index decreases over the relevant time period.
Although the decay effect is more likely to manifest itself the longer the notes are held, the decay effect can have a significant impact
on the performance of the notes, even over a period as short as two days. The notes are not intended to be “buy and hold”
investments. If you invest in the notes, you should continuously monitor your holding of the notes and make investment decisions at least
on each Index Business Day, or even intraday.
The examples below are designed to illustrate the
decay effect on the Closing Indicative Note Value of the notes over a short period of time. To isolate the decay effect, the examples
below disregard the effects of the Daily Investor Fee and the Daily Interest. If the Daily Investor Fee and any negative Daily Interest
were also taken into account, then the hypothetical Closing Indicative Note Values below would be even lower.
Each of the examples below illustrates hypothetical
daily fluctuations in the closing level of the Index over a period of 10 Index Business Days. By showing changes over 10 Index Business
Days, we are not suggesting that 10 Index Business Days is an appropriate period of time to hold the notes. Rather, we are showing changes
over 10 Index Business Days to illustrate how the decay effect increases over a number of days, and to illustrate the risks of holding
the notes for more than one Index Business Day. As described elsewhere in this pricing supplement, the notes are intended to be daily
trading tools for sophisticated investors to manage daily trading risks.
In each of the examples below, the closing level
of the Index is the same at the end of the hypothetical 10 Index Business Day period as it was at the beginning of the period. We are
showing examples on this basis to illustrate how the decay effect has an impact on the Closing Indicative Note Value of the notes that
is independent from the directional performance of the Index. If the Index were to move in an adverse direction (i.e., higher in
the case of the notes) over the relevant time period, the Closing Indicative Note Values would be lower than in the examples illustrated
below.
The examples below are based on a hypothetical
closing level of the Index of 100 and a hypothetical Closing Indicative Note Value of $100 at the beginning of the hypothetical 10 Index
Business Day period.
Example 1. The closing level of the Index fluctuates by 1% per day.
In this example, the Index fluctuates by 1% per
day (as a percentage of the initial level) over a 10 Index Business Day period.
Day |
Index
Level |
% Change of Index
Level from Day 0 |
Closing Indicative
Note Value ($) |
% Change of Closing
Indicative Note Value
from Day 0 |
0 |
100.00 |
|
100.00 |
|
1 |
101.00 |
1.00% |
97.00 |
-3.00% |
2 |
100.00 |
0.00% |
99.88 |
-0.12% |
3 |
99.00 |
-1.00% |
102.88 |
2.88% |
4 |
100.00 |
0.00% |
99.76 |
-0.24% |
5 |
101.00 |
1.00% |
96.77 |
-3.23% |
6 |
100.00 |
0.00% |
99.64 |
-0.36% |
7 |
99.00 |
-1.00% |
102.63 |
2.63% |
8 |
100.00 |
0.00% |
99.52 |
-0.48% |
9 |
101.00 |
1.00% |
96.54 |
-3.46% |
10 |
100.00 |
0.00% |
99.40 |
-0.60% |
In this example, although the closing level of
the Index fluctuated within a narrow range around the initial level and concluded the hypothetical 10 Index Business Day period at the
same level at which it started, the Closing Indicative Note Value of the notes experienced a decay of -0.60% (before giving effect to
the Daily Investor Fee and any negative Daily Interest).
Example 2. The closing level of the Index fluctuates by 5% per day.
In this example, the Index fluctuates by 5% per
day (as a percentage of the initial level) over a 10 Index Business Day period.
Day |
Index
Level |
% Change of Index
Level from Day 0 |
Closing Indicative
Note Value ($) |
% Change of Closing
Indicative Note Value
from Day 0 |
0 |
100.00 |
|
100.00 |
|
1 |
105.00 |
5.00% |
85.00 |
-15.00% |
2 |
100.00 |
0.00% |
97.14 |
-2.86% |
3 |
95.00 |
-5.00% |
111.71 |
11.71% |
4 |
100.00 |
0.00% |
94.08 |
-5.92% |
5 |
105.00 |
5.00% |
79.96 |
-20.04% |
6 |
100.00 |
0.00% |
91.39 |
-8.61% |
7 |
95.00 |
-5.00% |
105.10 |
5.10% |
8 |
100.00 |
0.00% |
88.50 |
-11.50% |
9 |
105.00 |
5.00% |
75.23 |
-24.77% |
10 |
100.00 |
0.00% |
85.97 |
-14.03% |
In this example, although the closing level of
the Index fluctuated around the initial level and concluded the hypothetical 10 Index Business Day period at the same level at which it
started, the Closing Indicative Note Value of the notes experienced a decay of -14.03% (before giving effect to the Daily Investor Fee
and any negative Daily Interest).
Example 3. The closing level of the Index fluctuates by 12% per
day.
In this example, the Index fluctuates by 12% per
day (as a percentage of the initial level) over a 10 Index Business Day period.
Day |
Index
Level |
% Change of Index
Level from Day 0 |
Closing Indicative
Note Value ($) |
% Change of Closing
Indicative Note Value
from Day 0 |
0 |
100.00 |
|
100.00 |
|
1 |
112.00 |
12.00% |
64.00 |
-36.00% |
2 |
100.00 |
0.00% |
84.57 |
-15.43% |
3 |
88.00 |
-12.00% |
115.02 |
15.02% |
4 |
100.00 |
0.00% |
67.96 |
-32.04% |
5 |
112.00 |
12.00% |
43.50 |
-56.50% |
6 |
100.00 |
0.00% |
57.48 |
-42.52% |
7 |
88.00 |
-12.00% |
78.17 |
-21.83% |
8 |
100.00 |
0.00% |
46.19 |
-53.81% |
9 |
112.00 |
12.00% |
29.56 |
-70.44% |
10 |
100.00 |
0.00% |
39.07 |
-60.93% |
In this example, although the closing level of
the Index fluctuated around the initial level and concluded the hypothetical 10 Index Business Day period at the same level at which it
started, the Closing Indicative Note Value of the notes experienced a decay of -60.93% (before giving effect to the Daily Investor Fee
and any negative Daily Interest).
In this example, the greater magnitude of the daily
changes in the closing level of the Index as compared to both of the prior examples results in significantly greater decay, with a decay
of -60.93%. The Closing Indicative Note Value experienced this significant decay even though the closing level of the Index concluded
the hypothetical 10 Index Business Day period at the same level at which it started. As this example illustrates, the greater the daily
fluctuations in the closing level of the Index (i.e., the greater the volatility), the greater the decay.
* * *
In each example, there is no change in the closing
level of the Index from Day 0 to Day 10, in order to isolate the decay effect from other factors that affect the Closing Indicative Note
Value. If the Index level increases over the same time period, that adverse Index movement would have caused the Closing Indicative Note
Value to be even lower. For example, on Day 9 of Example 3 above, the Index level was 12% higher than it was on Day 0, and the Closing
Indicative Note Value was 70.44% lower on that day than it was on Day 0, for a loss that is greater than 3 times the increase of the Index
from Day 0 to Day 9.
The above examples illustrate the following important
points about the decay effect over any holding period of more than one day:
The decay effect worsens over time. In each
of the examples above, the closing level of the Index returns to the original level of 100 on multiple days during the 10 Index Business
Day period. Each time the level returns to 100, the Closing Indicative Note Value is lower than it was on any earlier date on which the
closing level was 100. The same is true for each of the other closing levels shown in the examples above.
Although the decay effect worsens over time,
it can have a meaningful effect even over a period as short as two days. In Example 3 above, the closing level of the Index falls
from 100 to 88 from Day 2 to Day 3 and then returns to 100 on Day 4. Although the closing level of the Index is the same on Day 4 as it
was on Day 2, the Closing Indicative Note Value of the notes on Day 4 was lower, and in the case of Example 3, significantly lower, than
it was on Day 2.
The decay effect worsens as volatility increases.
Volatility refers to the average magnitude of daily fluctuations in the closing level of the Index over any period of time. The daily
fluctuations in Example 2 are significantly larger than they are in Example 1, and the daily fluctuations in Example 3 are significantly
larger than they are in Example 2. As a result, the decline in the Closing Indicative Note Value in Example 2 is significantly greater
than it is in Example 1, and the decline in the Closing Indicative Note Value in Example 3 is significantly greater than it is in Example
2.
The daily compounding of returns will adversely
affect the Closing Indicative Note Value of the notes any time the closing level of the Index moves in a different direction on one day
than it did on the prior day. If the closing level of the Index increases from Day 0 to Day 1 and then decreases by the same amount from
Day 1 to Day 2, or if the closing level decreases from Day 0 to Day 1 and then increases by the same amount from Day 1 to Day 2, the Closing
Indicative Note Value on Day 2 will be lower than it was on Day 0, even though the closing level of the Index on Day 2 is the same as
it was on Day 0.
The 3-to-1 inverse leverage ratio does not hold
for any period longer than one day. In Example 3 above, the 70.44% loss reflected in the Closing Indicative Note Value from Day 0
to Day 9 was approximately 5.87 times greater than the 12% decline in the closing level of the Index over the same period.
In fact, the Closing Indicative Note Value of the
notes may decline significantly over any given time period even if the closing level of the Index from the beginning to the end of that
time period decreases. For example, in Example 3 above, the closing level of the Index has decreased by 12% from Day 0 to Day 7, but the
Closing Indicative Note Value was 21.83% lower on Day 7 than it was on Day 0.
INTRADAY
VALUE OF THE INDEX AND THE NOTES
Intraday Index Values
Each Index Business Day, the Index Sponsor will
calculate and publish the intraday Index value every 15 seconds during normal trading hours on Bloomberg under the ticker symbol “SOLFANGT<Index>.”
The Index Sponsor is not affiliated with Bank of
Montreal and does not approve, endorse, review or recommend the Index or the notes. The information used in the calculation of the intraday
Index value will be derived from sources the Index Sponsor deems reliable, but the Index Sponsor and its affiliates do not guarantee the
correctness or completeness of the intraday Index value or other information furnished in connection with the notes or the calculation
of the Index. The Index Sponsor makes no warranty, express or implied, as to results to be obtained by Bank of Montreal, holders of the
notes, or any other person or entity from the use of the intraday Index value or any data included therein. The Index Sponsor makes no
express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect
to the intraday Index value or any data included therein. The Index Sponsor, its employees, subcontractors, agents, suppliers and vendors
shall have no liability or responsibility, contingent or otherwise, for any injury or damages, whether caused by the negligence of the
Index Sponsor, its employees, subcontractors, agents, suppliers or vendors or otherwise, arising in connection with the intraday Index
value or the notes, and shall not be liable for any lost profits, losses, punitive, incidental or consequential damages. The Index Sponsor
shall not be responsible for or have any liability for any injuries or damages caused by errors, inaccuracies, omissions or any other
failure in, or delays or interruptions of, the intraday Index value from whatever cause. The Index Sponsor is not responsible for the
selection of or use of the Index or the notes, the accuracy and adequacy of the Index or information used by Bank of Montreal and the
resultant output thereof.
The intraday calculation of the level of the Index
will be provided for reference purposes only. Published calculations of the level of the Index from the Index Sponsor may occasionally
be subject to delay or postponement. Any such delays or postponements will affect the current level of the Index and therefore the value
of the notes in the secondary market. The intraday Index value published every 15 seconds will be based on the intraday prices of the
Index constituents.
Intraday Indicative Note Values
An Intraday Indicative Value, which is an
approximation of the value of the notes, will be calculated and published by Solactive AG or a successor on Bloomberg under the
ticker symbol “BERZIV” every 15 seconds during normal trading hours. The actual trading price of the notes may vary
significantly from their Intraday Indicative Value. In connection with the notes, we use the term “indicative
value” to refer to the value at a given time equal to (a) the Deposit Amount minus (b) the Intraday Short
Index Amount; provided that if such calculation results in a value equal to or less than $0, then both the Intraday Indicative Value
and the closing Indicative Note Value will be $0. The Intraday Short Index Amount will equal the product of (a) the closing
Indicative Note Value on the immediately preceding Exchange Business Day times (b) the Daily Leverage Factor times
(c) the Intraday Index Performance Factor. The Intraday Index Performance Factor equals (a) the most recently published
Index level divided by (b) the Index Closing Level on the preceding Index Business Day.
If the Intraday Indicative Value of the notes is
equal to or less than $0 at any time on any Exchange Business Day, then both the Intraday Indicative Value and the closing Indicative
Note Value of the notes on that day, and for the remainder of the term of the notes, will be $0 (a total loss of value).
The Intraday Indicative Value is meant to approximate
the value of the notes at a particular time. There are three elements of the formula: the Intraday Short Index Amount, the Deposit Amount
and the Intraday Index Performance Factor (using, instead of the Index Closing Level for the date of determination, the intraday Index
level at the time of determination), as described immediately above. Because the intraday Index level and the Intraday Short Index Amount
are variable, the Intraday Indicative Value translates the change in the Index level from the previous Exchange Business Day, as measured
at the time of measurement, into an approximation of the expected value of the notes. The Intraday Indicative Value uses an intraday Index
level for its calculation; therefore, a variation in the intraday level of the Index from the previous Exchange Business Day’s Index
Closing Level may cause a significant variation between the closing Indicative Note Value and the Intraday Indicative Value on any date
of determination. The Intraday Indicative Value also does not reflect intraday changes in the leverage; it is based on the constant Daily
Leverage Factor of 3. Consequently, the Intraday Indicative Value may vary significantly from the previous or next Exchange Business Day’s
closing Indicative Note Value or the price of the notes purchased intraday. See “Risk Factors — The notes are subject to intraday
purchase risk” and “—The leverage of the notes is reset on each day, and the leverage of the notes during any given
day may be greater than or less than -3.0.” The Intraday Indicative Value may be useful as an approximation of what price an investor
in the notes would receive if the notes were to be redeemed or if they matured, each at the time of measurement. The Intraday Indicative
Value may be helpful to an investor in the notes when comparing it against the notes’ trading price on the NYSE and the most recently
published level of the Index.
The Intraday Indicative Value calculation will
be provided for reference purposes only. It is not intended as a price or quotation, or as an offer to solicitation for the purpose, sale,
or termination of your notes, nor will it reflect hedging or other transactional costs, credit considerations, market liquidity or bid-offer
spreads. The levels of the Index provided by the Index Sponsor will not necessarily reflect the depth and liquidity of the Index constituents.
For this reason and others, the actual trading price of the notes may be different from their indicative value. For additional information,
please see “Risk Factors — The Intraday Indicative Value and the Indicative Note Value are not the same as the closing price
or any other trading price of the notes in the secondary market” in this pricing supplement.
The calculation of the Intraday Indicative Value
shall not constitute a recommendation or solicitation to conclude a transaction at the level stated, and should not be treated as giving
investment advice.
The publication of the Intraday Indicative Value
of the notes by Solactive AG may occasionally be subject to delay or postponement. If the intraday Index value is delayed, then the Intraday
Indicative Value of the notes will also be delayed. The actual trading price of the notes may be different from their Intraday Indicative
Value. The Intraday Indicative Value of the notes published at least every 15 seconds from 9:30 a.m. to 6:00 p.m., New York City time,
will be based on the intraday values of the Index, and may not be equal to the payment at maturity, call or redemption.
The indicative value calculations will have been
prepared as of a particular date and time and will therefore not reflect subsequent changes in market values or prices or in any other
factors relevant to their determination.
If you want to sell your notes but are unable to
satisfy the minimum redemption requirements, you may sell your notes into the secondary market at any time, subject to the risks described
under “Risk Factors — Risks Relating to Liquidity and the Secondary Market — There is no assurance that your notes will
continue to be listed on a securities exchange, and they may not have an active trading market” and “— The value of
the notes in the secondary market may be influenced by many unpredictable factors.” Also, the price you may receive for the notes
in the secondary market may differ from, and may be significantly less than, the Redemption Amount.
Neither the Index Sponsor nor any of its affiliates
are affiliated with Bank of Montreal or BMOCM and do not approve, endorse, review or recommend Bank of Montreal, BMOCM or the notes.
The Intraday Indicative Values of the notes calculated
by Solactive are derived from sources deemed reliable, but Solactive and its affiliates and suppliers do not guarantee the correctness
or completeness of the notes, their values or other information furnished in connection with the notes. Solactive and its affiliates make
no warranty, express or implied, as to results to be obtained by BMOCM, Bank of Montreal, the holders of the notes, or any other person
or entity from the use of the notes, or any date or values included therein or in connection therewith. Solactive and its affiliates make
no express or implied warranties, and expressly disclaim all warranties of merchantability or fitness for a particular purpose with respect
to the notes, or any data or values included therein or in connection therewith.
THE
INDEX
We have derived all information contained in this
pricing supplement regarding the Index, including, without limitation, its make-up, performance, method of calculation and changes in
its constituents, from publicly available sources. Such information reflects the policies of and is subject to change by the Index Sponsor.
We have not undertaken any independent review or due diligence of such information. The Index Sponsor has no obligation to continue to
publish, and may discontinue the publication of, the Index. The description of the Index is summarized from its governing methodology,
which is available on the website maintained by the Index Sponsor, www.solactive.com. Neither the methodology nor any other information
included on any website maintained by the Index Sponsor is included or incorporated by reference into this pricing supplement.
Introduction
The Index measures the performance
of 15 large capitalization technology companies that are based in the U.S. Unless they cease to satisfy certain requirements, the Index
will always include the common stock of eight “Core Components”: Alphabet Inc., Amazon.com, Inc., Apple Inc., Meta Platforms,
Inc., Microsoft Corporation, NVIDIA Corporation, Netflix, Inc. and Tesla, Inc.
The Index is a total return
index, in which dividends paid on the components stocks are reflected in the level of the Index.
The ticker symbol of the Index
is “SOLFANGT”. The initial Index level was set to 1,000 as of December 19, 2014. The Index was initially calculated on June
8, 2021. The Index Sponsor calculates the level of the Index to two decimal places.
Index Constituents and Selection
The Index components are selected on the first
day of March, June, September and December of each year. The Index sponsor selects the securities that are eligible for inclusion in the
Index based on the following criteria:
| · | the company must be included in the Solactive GBS United States Large & Mid Cap Index, an index sponsored by Solactive that includes
the largest 85% of the free-float market capitalization of U.S. companies; |
| · | the company has its headquarters in the U.S.; |
| · | the company’s common stock is listed on a U.S. securities exchange; |
| · | the company is engaged in one of the following FactSet Industries (Level 3 of FactSet Industries and Economic Sectors Classification): |
| o | Electronic Equipment/Instruments |
| o | Telecommunications Equipment |
| o | Computer Processing Hardware |
| o | Electronic Production Equipment |
| o | Data Processing Services |
| o | Information Technology Services |
| o | Internet Software/Services. |
Alternatively, the company will be included
in the Index if it is a Core Component.
The Index constituents are determined quarterly,
in March, June, September and December. To determine the Index components, in a first step, all potential stocks with a free float market
capitalization (as defined in the Index rules) of less than US$10 billion are excluded from the Index. The Index is then composed of 15
stocks. All of the eligible eight Core Components are selected for the Index (as long as the free float market capitalization requirement
set forth above is satisfied), and the remaining Index components are selected as follows:
1. The
remaining eligible stocks are ranked in descending order by free float market capitalization. The top 30 stocks are selected for the next
step.
2. The
30 stocks are ranked in descending order by 12-month average daily value traded (as defined in the Index rules). The top stocks are selected
for inclusion in the Index, starting with the highest-ranked security, until the final number of 15 stocks for the Index is reached.
Weighting and Rebalancing
Monthly Rebalancing
Each month, the Index is rebalanced so that the
Index is equally weighted. The rebalancing takes place after the close of the markets on the third Friday of each month. If that day is
not a trading day, the rebalancing will occur on the next trading day.
Extraordinary Rebalancing
The Index will also be rebalanced upon the occurrence of
certain events.
If an index constituent “spins-off”
another company, the other company will not be included in the Index, and its weight will redistributed proportionally among the remaining
index constituents.
If there is any event that occurs that leads to
the removal of a security from the index (for example, as a result of an acquisition, delisting or bankruptcy), the security will be replaced
with the security with the largest 12-month average daily value traded that is not then included in the Index.
Index Calculation
The Index Sponsor calculates the Index level, including
the reinvestment of dividends, according to the Solactive Equity Index Methodology. The methodology also addresses how the Index may be
affected by corporate events affecting components stocks, including, but not limited stock dividends, stock splits, share repurchases
and merger transactions.
Index Oversight and Changes to Index Methodology
An oversight committee consisting of the Index
Sponsor’s personnel is responsible for decisions regarding any amendments to the rules of the Index. The methodology of the Index
is subject to periodic review, and may be changed from time to time by the Index Sponsor, subject to the approval of the oversight committee.
Hypothetical Back-Tested and Historical Index and Information
This section contains historical and hypothetical back tested performance
data for the Index from December 19, 2014 to June 22, 2023. The hypothetical back-tested and historical performance data shown below
is not an indication of future performance, which is impossible to predict. The Index was first published on June 8, 2021, and therefore
has no actual historical information to report prior to that date. This section also contains actual historical performance data for the
Index since its first date of publication.
All index performance data prior to the first publication
date is hypothetical. Hypothetical index performance data is subject to significant limitations. No representation is made that the Index
is likely to achieve gains or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance
results and the actual results subsequently achieved by any particular investment. One of the limitations of hypothetical performance
information is that it did not involve financial risk, and cannot account for all factors that would affect actual performance.
The hypothetical back-tested and historical performance
data were calculated by the Index Sponsor, and we have not independently verified their accuracy. The Index Sponsor has advised us that
the hypothetical back-tested performance data were calculated in a manner consistent with the Index methodology described above, using
published historical values to determine the Index constituents and the levels of the Index.
The vertical line in the graph below represents June 8, 2021, which
is the date on which the Index was first published. The performance shown to the left of that line reflects the hypothetical back-tested
performance of the Index, and the performance shown to the right of that line reflects the actual historical performance after the date
of initial publication, through June 22, 2023.
![](https://content.edgar-online.com/edgar_conv_img/2023/06/26/0001214659-23-008825_ps44_chart.jpg)
Historical results are not indicative of future
results.
License Agreement
We have entered into a sub-license agreement with
REX Shares, LLC (“REX” or the “Structuring Agent”), which licenses the Index from Solactive AG. The license agreement
with the Structuring Agent also provides for the use of certain trade names, trademarks and service marks. We have also entered into a
services agreement with REX to provide certain services related to product design, content generation and document dissemination.
Solactive AG (“Solactive”) is the licensor
of the Index. The notes are not sponsored, endorsed, promoted or sold by Solactive in any way, and Solactive makes no express or implied
representation, guarantee or assurance with regard to: (a) the advisability in investing in the notes; (b) the quality, accuracy and/or
completeness of the Index; and/or (c) the results obtained or to be obtained by any person or entity from the use of the Index. Solactive
does not guarantee the accuracy and/or the completeness of the Index and shall not have any liability for any errors or omissions with
respect thereto. Notwithstanding Solactive’s obligations to its licensees, Solactive reserves the right to change the methods of
calculation or publication of the Index, and Solactive shall not be liable for any miscalculation of or any incorrect, delayed or interrupted
publication with respect to the Index. Solactive shall not be liable for any damages, including, without limitation, any loss of profits
or business, or any special, incidental, punitive, indirect or consequential damages suffered or incurred as a result of the use (or inability
to use) of the Index.
MicroSectorsTM and REXTM
are registered trademarks of REX. The trademarks have been licensed for use for certain purposes by Bank of Montreal. The notes are not
sponsored, endorsed, sold or promoted by REX or any of its affiliates or third party licensors (collectively, “REX Index Parties”).
REX Index Parties make no representation or warranty, express or implied, to the owners of the notes or any member of the public regarding
the advisability of investing in securities generally or in the notes particularly or the ability of the Index to track general market
performance. REX Index Parties’ only relationship to Bank of Montreal with respect to the Index is the licensing of the Index and
certain trademarks, service marks and/or trade names of REX Index Parties. REX Index Parties are not responsible for and have not participated
in the determination of the prices, and amount of the notes or the timing of the issuance or sale of the notes or in the determination
or calculation of the equation by which the notes are to be converted into cash. REX Index Parties have no obligation or liability in
connection with the administration, marketing or trading of the notes. Inclusion of a security within an index is not a recommendation
by REX Index Parties to buy, sell, or hold such security, nor is it considered to be investment advice.
REX INDEX PARTIES DO NOT GUARANTEE THE ADEQUACY,
ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED
TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. REX INDEX PARTIES SHALL NOT BE SUBJECT TO
ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. REX INDEX PARTIES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIM ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY BANK OF MONTREAL,
OWNERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL REX INDEX PARTIES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL
DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE.
SUPPLEMENTAL
TAX CONSIDERATIONS
The following is a general description of certain
tax considerations relating to the notes. It does not purport to be a complete analysis of all tax considerations relating to the notes.
Prospective purchasers of the notes should consult their tax advisors as to the consequences under the tax laws of the country of which
they are resident for tax purposes and the tax laws of Canada and the U.S. of acquiring, holding and disposing of the notes and receiving
payments under the notes. This summary is based upon the law as in effect on the date of this pricing supplement and is subject to any
change in law that may take effect after such date.
Supplemental Canadian Tax Considerations
In the opinion of Torys LLP, our Canadian federal
income tax counsel, the following summary describes the principal Canadian federal income tax considerations generally applicable to a
purchaser who acquires from us as the beneficial owner the notes offered by this document, and who, at all relevant times, for purposes
of the Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “Tax Act”), (1) is not, and is not deemed
to be, resident in Canada; (2) deals at arm’s length with us and with any transferee resident (or deemed to be resident) in Canada
to whom the purchaser disposes of notes, (3) is not affiliated with us, (4) does not receive any payment of interest on a note in respect
of a debt or other obligation to pay an amount to a person with whom we do not deal at arm’s length, (5) does not use or hold notes
in a business carried on in Canada and (6) is not a “specified shareholder” of ours as defined in the Tax Act for this purpose
or a non-resident person not dealing at arm’s length with such “specified shareholder” (a “Holder”). Special
rules, which are not discussed in this summary, may apply to a non-Canadian holder that is an insurer that carries on an insurance business
in Canada and elsewhere.
This summary does not address the possible application
of the “hybrid mismatch arrangement” rules contained in proposals to amend the Tax Act released by the Minister of Finance
(Canada) on April 29, 2022 (the “Hybrid Mismatch Proposals”) to a Holder (i) that disposes of a note to a person or entity
with which it does not deal at arm’s length or to an entity that is a “specified entity” (as defined in the Hybrid Mismatch
Proposals) with respect to the Holder or in respect of which the Holder is a “specified entity”, (ii) that disposes of a note
under, or in connection with, a “structured arrangement” (as defined in such Hybrid Mismatch Proposals), or (iii) in respect
of which we are a “specified entity”. Such Holders should consult their own tax advisors.
This summary supersedes and replaces in its entirety
the section of the prospectus entitled “Canadian Taxation.”
This summary is based on the current provisions
of the Tax Act and on counsel’s understanding of the current administrative policies and assessing practices of the Canada Revenue
Agency published in writing prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act publicly
announced by or on behalf of the Minister of Finance (Canada) prior to the date of this document (the “Proposed Amendments”),
including the Hybrid Mismatch Proposals, and assumes that all Proposed Amendments will be enacted in the form proposed. However, no assurances
can be given that the Proposed Amendments will be enacted as proposed, or at all. This summary does not otherwise take into account or
anticipate any changes in law or administrative policy or assessing practice whether by legislative, administrative or judicial action
nor does it take into account tax legislation or considerations of any province, territory or foreign jurisdiction, which may differ from
those discussed herein.
This summary is of a general nature only and is
not, and is not intended to be, legal or tax advice to any particular holder. This summary is not exhaustive of all Canadian federal income
tax considerations. Accordingly, prospective purchasers of the notes should consult their own tax advisors having regard to their own
particular circumstances.
Interest paid or credited or deemed to be paid
or credited by us on a note (including amounts on account or in lieu of payment of, or in satisfaction of interest) to a Holder generally
will not be subject to Canadian non-resident withholding tax, unless any portion of such interest (other than on a “prescribed obligation,”
as defined in the Tax Act for this purpose) is contingent or dependent on the use of or production from property in Canada or is computed
by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable
to shareholders of any class or series of shares of the capital stock of a corporation. The administrative policy of the Canada Revenue
Agency is that interest paid on a debt obligation is not subject to withholding tax unless, in general, it is reasonable to consider that
there is a material connection between the index or formula to which any amount payable under the debt obligation is calculated and the
profits of the issuer. With respect to any interest on a note, or any portion of the principal amount of a note in excess of the issue
price, such interest or principal, as the case may be, paid or credited to a Holder should not be subject to Canadian non-resident withholding
tax.
In the event that a note, interest on which is
not exempt from Canadian non-resident withholding tax (other than a note which is an “excluded obligation,” as defined in
the Tax Act for this purpose) is redeemed in whole or in part, cancelled, repurchased or purchased by us or any other person resident
or deemed to be resident in Canada from a Holder or is otherwise assigned or transferred by a Holder to a person resident or deemed to
be resident in Canada for an amount which exceeds, generally, the issue price thereof, or in certain cases, the price for which such note
was assigned or transferred to the Holder by a person resident or deemed resident in Canada, the excess may be deemed to be interest and
may, together with any interest that has accrued on the note to that time, be subject to Canadian non-resident withholding tax.
If an amount of interest paid by us on a note were
to be non-deductible by us in computing our income as a result of the application of proposed subsection 18.4(4) of the Tax Act, such
amount of interest would be deemed to have been paid by us as a dividend, and not to have been paid by us as interest, and be subject
to Canadian non-resident withholding tax. Proposed subsection 18.4(4) would apply only if a payment of interest by us on a note constituted
the deduction component of a “hybrid mismatch arrangement” under which the payment arises within the meaning of proposed paragraph
18.4(3)(b) of the Tax Act.
No payment of interest by us on a note should be
considered to arise under a “hybrid mismatch arrangement” as no such payment should be considered to arise under or in connection
with a “structured arrangement”, both as defined in proposed subsection 18.4(1) of the Tax Act, on the basis that (i) based
on pricing data and analysis provided to Torys LLP by us in relation to these notes, it should not be reasonable to consider that any
economic benefit arising from any “deduction/non-inclusion mismatch” as defined in proposed subsection 18.4(6) of the Tax
Act is reflected in the pricing of the notes, and (ii) it should also not be reasonable to consider that the notes were designed to, directly
or indirectly, give rise to any “deduction/non-inclusion mismatch”.
Generally, there are no other taxes on income (including
taxable capital gains) payable by a Holder on interest, discount, or premium in respect of a note or on the proceeds received by a Holder
on the disposition of a note (including redemption, cancellation, purchase or repurchase).
U.S. Federal Income Tax Considerations
By purchasing the notes, each holder agrees (in
the absence of a change in law, an administrative determination or a judicial ruling to the contrary) to treat each note as a pre-paid
cash-settled derivative contract for U.S. federal income tax purposes. However, the U.S. federal income tax consequences of your investment
in the notes are uncertain and the Internal Revenue Service could assert that the notes should be taxed in a manner that is different
from that described in the preceding sentence. Please see the discussion (including the opinion of our special U.S. tax counsel, Ashurst
LLP) in the product supplement under “Supplemental Tax Considerations—U.S. Federal Income Tax Considerations,” which
applies to the notes, except that the following disclosure supplements the discussion in the product supplement.
Under Section 871(m) of the Code, a “dividend equivalent”
payment is treated as a dividend from sources within the United States. Such payments generally would be subject to a 30% U.S. withholding
tax if paid to a non-U.S. holder. Under U.S. Treasury Department regulations, payments (including deemed payments) with respect to equity
-linked instruments (“ELIs”) that are “specified ELIs” may be treated as dividend equivalents if such specified
ELIs reference an interest in an “underlying security,” which generally is any interest in an entity taxable as a corporation
for U.S. federal income tax purposes if a payment with respect to such interest could give rise to a U.S. -source dividend. However, the
IRS has issued guidance that states that the U.S. Treasury Department and the IRS intend to amend the effective date of the U.S. Treasury
Department regulations to provide that withholding on “dividend equivalent” payments will not apply to specified ELIs that
are not delta-one instruments and that are issued before January 1, 2025. Based on our determination that the notes are not delta-one
instruments, non-U.S. holders should not generally be subject to withholding on dividend equivalent payments, if any, under the notes.
We will not pay additional amounts in respect of any dividend equivalent withholding.
SUPPLEMENTAL
PLAN OF DISTRIBUTION (CONFLICTS OF INTEREST)
The terms and conditions set forth in a distribution
agreement between Bank of Montreal and the Agents party thereto, including BMOCM, govern the sale and purchase of the notes.
On the Initial Trade Date, we sold an aggregate
of $4,000,000 principal amount of the notes through BMOCM and through one or more dealers purchasing as principal through BMOCM for $25
per note. We received proceeds equal to 100% of the offering price of those notes. After giving effect to the $25,000,000 in principal
amount of the notes that we will issue on June 23, 2023, an aggregate of $62,500,000 in principal amount of the notes will be outstanding.
Additional notes may be offered and sold after
the date of this document from time to time through BMOCM and one or more dealers at a price that is higher or lower than the stated principal
amount, based on the Indicative Note Value at that time. Sales of the notes after the Initial Trade Date will be made at market prices
prevailing at the time of sale, at prices related to market prices or at negotiated prices. We will receive proceeds equal to 100% of
the price that the notes are sold to the public, less any commissions paid to BMOCM or any other dealer. In addition, BMOCM may receive
a portion of the Daily Investor Fee. We may not sell the full amount of notes offered by this pricing supplement, and may discontinue
sales of the notes at any time.
We may deliver notes against payment therefor on
a date that is greater than two business days following the date of sale of any notes. Under Rule 15c6-1 of the Securities Exchange
Act of 1934, trades in the secondary market generally are required to settle in two business days, unless parties to any such trade expressly
agree otherwise. Accordingly, purchasers who wish to transact in notes that are to be issued more than two business days after the related
trade date will be required to specify alternative settlement arrangements to prevent a failed settlement.
BMOCM and any other agent and dealer in the initial
and any subsequent distribution are expected to charge normal commissions for the purchase of the notes.
Broker-dealers may make a market in the notes,
although none of them are obligated to do so and any of them may stop doing so at any time without notice. This prospectus (such term
includes this pricing supplement and the accompanying product supplement, prospectus supplement and prospectus) may be used by such dealers
and our affiliates in connection with market-making transactions. In these transactions, dealers may resell a note covered by this prospectus
that they acquire from us, BMOCM or other holders after the original offering and sale of the notes, or they may sell any notes covered
by this prospectus in short sale transactions. This prospectus will be deemed to cover any short sales of notes by market participants
who cover their short positions with notes borrowed or acquired from us or our affiliates in the manner described above.
Broker-dealers and other market participants are
cautioned that some of their activities, including covering short sales with notes borrowed from us or one of our affiliates, may result
in their being deemed participants in the distribution of the notes in a manner that would render them statutory underwriters and subject
them to the prospectus delivery and liability provisions of the Securities Act of 1933 (the “Securities Act”). A determination
of whether a particular market participant is an underwriter must take into account all the facts and circumstances pertaining to the
activities of the participant in the particular case, and the example mentioned above should not be considered a complete description
of all the activities that would lead to designation as an underwriter and subject a market participant to the prospectus delivery and
liability provisions of the Securities Act.
BMOCM or another FINRA member will provide certain
services relating to the distribution of the notes and may be paid a fee for its services equal to all, or a portion of, the Daily Investor
Fee. BMOCM may also pay fees to other dealers pursuant to one or more separate agreements. Any portion of the Daily Investor Fee paid
to BMOCM or such other FINRA member will be paid on a periodic basis over the term of the notes. Although BMOCM will not receive any discounts
in connection with such sales, BMOCM is expected to charge normal commissions for the purchase of any such notes.
BMOCM will act as our agent in connection with
any redemptions at the investor’s option, and the Redemption Fee Amount applicable to any such redemptions will be paid to us. Additionally,
it is possible that BMOCM and its affiliates may profit from expected hedging activities related to this offering, even if the value of
the notes declines.
Each of BMOCM and any other broker-dealer offering
the notes have not offered, sold or otherwise made available and will not offer, sell or otherwise make available any of the notes to,
any retail investor in the European Economic Area (“EEA”). For these purposes, a “retail investor” means a person
who is one (or more) of: (a) a retail client, as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID
II”); or (b) a customer, within the meaning of Directive (EU) 2016/97, as amended, where that customer would not qualify as a professional
client as defined in point (10) of Article 4(1) of MiFID II; or (c) not a qualified investor as defined in Regulation (EU) (2017/1129)
(the “EU Prospectus Regulation”). Consequently, no key information document required by Regulation (EU) No 1286/2014 (as amended,
the “EU PRIIPs Regulation”) for offering or selling the notes or otherwise making them available to retail investors in the
EEA has been prepared, and therefore, offering or selling the notes or otherwise making them available to any retail investor in the EEA
may be unlawful under the EU PRIIPs Regulation.
Each of BMOCM and any other broker-dealer offering
the notes have not offered, sold or otherwise made available and will not offer, sell or otherwise make available any of the notes to,
any retail investor in the United Kingdom. For these purposes, a retail investor means a person who is one (or more) of: (i) a retail
client, as defined in point (8) of Article 2 of Regulation (EU) No 2017/565 as it forms part of domestic law by virtue of the European
Union (Withdrawal) Act 2018 (the "EUWA"); or (ii) a customer within the meaning of the provisions of the Financial Services
and Markets Act 2000 (the "FSMA") and any rules or regulations made under the FSMA to implement Directive (EU) 2016/97, where
that customer would not qualify as a professional client, as defined in point (8) of Article 2(1) of Regulation (EU) No 600/2014 as it
forms part of domestic law by virtue of the EUWA. Consequently no key information document required by Regulation (EU) No 1286/2014 as
it forms part of domestic law by virtue of the EUWA (the "UK PRIIPs Regulation") for offering or selling the notes or otherwise
making them available to retail investors in the UK has been prepared and therefore offering or selling the notes or otherwise making
them available to any retail investor in the UK may be unlawful under the UK PRIIPs Regulation.
We may use this pricing supplement in the initial
sale of the notes. In addition, BMOCM or another of our affiliates may use this pricing supplement in market-making transactions in the
notes after their initial sale. Unless we or our agent informs you otherwise in the confirmation of sale or in a notice delivered
at the same time as the confirmation of sale, this pricing supplement is being used in a market-making transaction.
Reissuances or Reopened Issues
We may, at our sole discretion, “reopen”
or reissue the notes. We will issue the notes initially in an amount having the aggregate offering price specified on the cover page of
this pricing supplement. However, we may issue additional notes in amounts that exceed the amount on the cover at any time, without your
consent and without notifying you. The notes do not limit our ability to incur other indebtedness or to issue other securities. Also,
we are not subject to financial or similar restrictions by the terms of the notes. For more information, please refer to “Description
of the Notes We May Offer — General” in the accompanying prospectus supplement and “Description of Debt Securities We
May Offer — General” in the accompanying prospectus.
These further issuances, if any, will be consolidated
to form a single class with the originally issued notes and will have the same CUSIP number and will trade interchangeably with the notes
immediately upon settlement. Any additional issuances will increase the aggregate principal amount of the outstanding notes of the class,
plus the aggregate principal amount of any notes bearing the same CUSIP number that are issued pursuant to any future issuances of notes
bearing the same CUSIP number. The price of any additional offering will be determined at the time of pricing of that offering.
VALIDITY
OF THE NOTES
In the opinion of Osler, Hoskin &
Harcourt LLP, the issue and sale of the notes has been duly authorized by all necessary corporate action of the Bank in conformity with
the senior indenture, and when the notes have been duly completed in accordance with the senior indenture, the notes will have been validly
executed, authenticated, issued and delivered, to the extent that validity of the notes is a matter governed by the laws of the Province
of Ontario and the federal laws of Canada applicable therein and will be valid obligations of the Bank, subject to the following limitations
(i) the enforceability of the senior indenture may be limited by the Canada Deposit Insurance Corporation Act (Canada), the Winding-up
and Restructuring Act (Canada) and bankruptcy, insolvency, reorganization, receivership, moratorium, arrangement or winding-up laws or
other similar laws affecting the enforcement of creditors’ rights generally; (ii) the enforceability of the senior indenture may
be limited by equitable principles, including the principle that equitable remedies such as specific performance and injunction may only
be granted in the discretion of a court of competent jurisdiction; (iii) pursuant to the Currency Act (Canada) a judgment by a Canadian
court must be awarded in Canadian currency and that such judgment may be based on a rate of exchange in existence on a day other than
the day of payment; and (iv) the enforceability of the senior indenture will be subject to the limitations contained in the Limitations
Act, 2002 (Ontario), and such counsel expresses no opinion as to whether a court may find any provision of the senior indenture to be
unenforceable as an attempt to vary or exclude a limitation period under that Act. This opinion is given as of the date hereof and is
limited to the laws of the Provinces of Ontario and the federal laws of Canada applicable therein. In addition, this opinion is subject
to certain assumptions about (i) the Trustees’ authorization, execution and delivery of the senior indenture, (ii) the genuineness
of signatures and (iii) certain other matters, all as stated in the letter of such counsel dated May 26, 2022, which has been filed as
Exhibit 5.3 to Bank of Montreal’s Form 6-K filed with the SEC and dated May 26, 2022.
In the opinion of
Ashurst LLP, when the notes have been duly completed in accordance with the senior indenture, and the notes have been issued and sold
as contemplated by the prospectus supplement and the prospectus, the notes will be valid, binding and enforceable obligations of the Bank,
entitled to the benefits of the senior indenture, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting creditors’ rights and subject to general principles of equity,
public policy considerations and the discretion of the court before which any suit or proceeding may be brought. This opinion is given
as of the date hereof and is limited to the laws of the State of New York. This opinion is subject to customary assumptions about the
Trustee’s authorization, execution and delivery of the senior indenture and the genuineness of signatures and to such counsel’s
reliance on the Bank and other sources as to certain factual matters, all as stated in the legal opinion dated May 26, 2022, which has
been filed as Exhibit 5.4 to the Bank’s Form 6-K dated May 26, 2022.
ANNEX A
NOTICE
OF EARLY REDEMPTION
To: [ ].com
Subject: Notice of Early Redemption, CUSIP No.:
063679591
[BODY OF EMAIL]
Name of broker: [ ]
Name of beneficial holder: [ ]
Number of Notes to be redeemed: [ ]
Applicable Redemption Measurement Date: [ ], 20[
]*
Broker Contact Name: [ ]
Broker Telephone #: [ ]
Broker DTC # (and any relevant sub-account): [
]
The undersigned acknowledges that in addition to any other requirements
specified in the pricing supplement relating to the notes being satisfied, the notes will not be redeemed unless (i) this notice of redemption
is delivered to BMO Capital Markets Corp. (“BMO Capital Markets”) by 2:00 p.m. (New York City time) on the Index Business
Day prior to the applicable Redemption Measurement Date; (ii) the confirmation, as completed and signed by the undersigned is delivered
to BMO Capital Markets by 5:00 p.m. (New York City time) on the same day the notice of redemption is delivered; (iii) the undersigned
has booked a delivery vs. payment (“DVP”) trade on the applicable Redemption Measurement Date, facing BMO Capital Markets
DTC 5257 and (iv) the undersigned instructs DTC to deliver the DVP trade to BMO Capital Markets as booked for settlement via DTC at or
prior to 10:00 a.m. (New York City time) on the applicable Redemption Date.
The undersigned further acknowledges that the undersigned has read
the section “Risk Factors — You will not know the Redemption Amount at the time you elect to request that we redeem your notes”
in the pricing supplement relating to the notes and the undersigned understands that it will be exposed to market risk on the Redemption
Measurement Date.
*Subject
to adjustment as described in the pricing supplement relating to the notes.
ANNEX B
BROKER’S
CONFIRMATION OF REDEMPTION
[TO BE COMPLETED BY BROKER]
Dated:
BMO Capital Markets Corp.
BMO Capital Markets, as Calculation Agent
e-mail: [ ]
To Whom It May Concern:
The holder of $[ ] MicroSectorsTM FANG & Innovation
-3X Inverse Leveraged Exchange Traded Notes due June 28, 2041, CUSIP No. 063679591 (the “notes”) hereby irrevocably elects
to receive a cash payment on the Redemption Date*
of [holder to specify] with respect to the number of notes indicated below, as of the date hereof, the redemption right as described in
the pricing supplement relating to the notes (the “Prospectus”). Terms not defined herein have the meanings given to such
terms in the Prospectus.
The undersigned certifies to you that it will (i) book a DVP trade
on the applicable Redemption Measurement Date with respect to the number of notes specified below at a price per note equal to the Redemption
Amount, facing BMO Capital Markets DTC 5257 and (ii) deliver the trade as booked for settlement via DTC at or prior to 10:00 a.m. (New
York City time) on the applicable Redemption Date.
The undersigned acknowledges that in addition to any other requirements
specified in the Prospectus being satisfied, the notes will not be redeemed unless (i) this confirmation is delivered to BMO Capital Markets
by 5:00 p.m. (New York City time) on the same day the notice of redemption is delivered; (ii) the undersigned has booked a DVP trade on
the applicable Redemption Measurement Date, facing BMO Capital Markets DTC 5257; and (iii) the undersigned will deliver the DVP trade
to BMO Capital Markets as booked for settlement via DTC at or prior to 10:00 a.m. (New York City time) on the applicable Redemption Date.
|
Very truly yours, |
|
[NAME OF DTC PARTICIPANT HOLDER] |
|
|
|
Name: |
|
Title: |
|
Telephone: |
|
Fax: |
|
E-mail: |
Number of notes surrendered for redemption: ________
DTC # (and any relevant sub-account): ________
Contact Name: ________
Telephone: ________
Fax: ________
E-mail: ________
(At least 25,000 notes must be redeemed at
one time (except as specified in the pricing supplement) to receive a cash payment on any Redemption Date.)
*
Subject to adjustment as described in the pricing supplement relating to the notes.
Product Supplement ETN -2-3X dated August
17, 2021 to the Prospectus dated April 20, 2020 and
the Series G Senior Medium-Term Notes
Prospectus Supplement dated May 27, 2021
![](https://content.edgar-online.com/edgar_conv_img/2023/06/26/0001214659-23-008825_bmologo.jpg)
Exchange Traded Notes Linked to the Inverse Leveraged Performance
of an Index
This product supplement relates to exchange traded notes that Bank of Montreal may
issue from time to time. The specific terms of each issuance will be described in a pricing supplement to this product supplement.
The return on the notes will be linked to a two or three times leveraged participation
in the daily inverse performance of an equity index (each, an “Index”), as described in the applicable pricing supplement.
The notes are unsecured and unsubordinated obligations of Bank of Montreal. The notes do not guarantee any return of principal at maturity,
call or upon early redemption, and do not pay interest. Instead, you will receive a cash payment in U.S. dollars at maturity, call or
redemption based on the leveraged participation in the inverse performance of the applicable Index, less a Daily Investor Fee (as described
below), any negative Daily Interest and, if upon early redemption, a Redemption Fee Amount. You may lose some or all of your principal.
An investment in the notes involves significant risks and is not appropriate for
every investor. Investors should regularly monitor their holdings of the notes to ensure that they remain consistent with their investment
strategies. Any payment on the notes is subject to the credit risk of Bank of Montreal.
The notes are not intended to be “buy and hold” investments. The notes
are intended to be daily trading tools for sophisticated investors, and are not intended to be held to maturity. The returns on the notes
are path dependent. The notes are designed to reflect a leveraged exposure to the inverse performance of the Index on a daily basis.
The notes will be listed on a U.S. securities exchange, as described in the applicable
pricing supplement.
Neither the Securities and Exchange Commission nor any state securities commission
has approved or disapproved of the notes or passed upon the accuracy or the adequacy of this product supplement, the accompanying prospectus
supplement and prospectus. Any representation to the contrary is a criminal offense.
The notes will not be subject to conversion into our common
shares or the common shares of any of our affiliates under subsection 39.2(2.3) of the Canada Deposit Insurance Corporation Act (the “CDIC
Act”).
Investing in the notes involves risks, including those
described in the “Risk Factors” section beginning on page PS-7 of this product supplement, and the “Risk Factors”
sections beginning on page S-1 of the prospectus supplement and on page 8 of the prospectus.
The notes will be our unsecured obligations and will not be savings accounts or deposits
that are insured by the United States Federal Deposit Insurance Corporation, the Deposit Insurance Fund, the Canada Deposit Insurance
Corporation or any other governmental agency or instrumentality or other entity.
BMO CAPITAL MARKETS
TABLE OF CONTENTS
Page
Product Supplement
You should read this product supplement together
with the prospectus supplement dated May 27, 2021 and the prospectus dated April 20, 2020. You should also read the specific pricing supplement
relating to your notes, which may contain terms that are different from, or additional to, the terms described in this product supplement.
If there is any inconsistency between the disclosures in this product supplement and the applicable pricing supplement, the terms set
forth in the applicable pricing supplement will control.
We urge you to consult your investment, legal,
tax, accounting and other advisers before you invest in the notes.
You may access these documents on the SEC website
at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant
date on the SEC website):
Our Central Index Key, or CIK, on the SEC website is 927971.
As used in this product supplement, “we,” “us” or “our” refers to Bank of Montreal.
SUMMARY
The following is a summary of terms of the notes, as well
as a discussion of factors you should consider before purchasing the notes. The information in this section is qualified in its entirety
by the more detailed explanations set forth elsewhere in this product supplement, in the accompanying prospectus supplement and accompanying
prospectus and in the applicable pricing supplement.
What are the notes?
The notes are senior unsecured medium-term notes issued by
Bank of Montreal with a return linked to a two or three times leveraged participation in the inverse performance of the applicable Index,
compounded daily, less a Daily Investor Fee, any negative Daily Interest and, if applicable, the Redemption Fee Amount. Accordingly, the
notes generally appreciate in value as the level of the applicable Index decreases, provided such decrease is sufficient to offset the
cumulative negative effect of the Daily Investor Fee and any negative Daily Interest. We refer to the securities included in the applicable
Index as the “Index constituents” and the issuers of those securities as the “constituent issuers.”
The notes will not guarantee any return of principal at,
or prior to, maturity or call, or upon early redemption. Instead, at maturity, you will receive a cash payment equal to the arithmetic
mean of the closing Indicative Note Values on each Index Business Day in the Final Measurement Period. We refer to this cash payment as
the “Cash Settlement Amount.” This amount will not be less than $0.
The notes are not intended to be “buy and hold”
investments. The notes are intended to be daily trading tools for sophisticated investors, and are not intended to be held to maturity.
You may lose some or all of your investment at maturity or call, or upon early redemption. Because the Daily Investor Fee and any negative
Daily Interest will reduce your final payment, the level of the applicable Index will need to have decreased over the term of the notes
by an amount, after giving effect to the daily leverage and the compounding effect thereof, sufficient to offset the decrease in the principal
amount represented by the applicable Daily Investor Fee and any negative Daily Interest in order for you to receive an aggregate amount
over the term of the notes equal to at least the principal amount of your notes. Due to leverage and compounding, the notes are very sensitive
to changes in the level of the Index and the path of such changes. If the decrease in the level of the applicable Index, measured as a
component of the closing Indicative Note Value during the Final Measurement Period, is insufficient to offset the cumulative negative
effect of the Daily Investor Fee and any negative Daily Interest, you will lose some or all of your investment at maturity or call, or
upon early redemption. This loss may occur even if the Index Closing Level at any time during the Final Measurement Period is less than
the Index Closing Level on the Initial Trade Date. In addition, if the closing Indicative Note Value or the Intraday Indicative Value
of the notes is equal to or less than $0, then the notes will be permanently worth $0 and the Cash Settlement Amount will be $0 (a total
loss of value).
The performance of the notes is linked
to the leveraged participation in the inverse performance of the applicable Index, compounded daily. There is no maximum limit to the
level of the Index. Moreover, the notes are not principal protected. Therefore, an increase in the level of the Index could cause you
to lose up to your entire investment in the notes. Furthermore, because your investment in the notes is linked to a two or three times
leveraged participation in the inverse performance of the Index, an increase in the level of the applicable Index will have a negative
effect on the Cash Settlement Amount, Call Settlement Amount or Redemption Amount, as applicable, whereas any decrease in the level
of the Index will have a positive effect on those payment amounts. Because your investment in the notes will be leveraged, any increase
in the level of the applicable Index will result in a significantly greater decrease in the Cash Settlement Amount, Call Settlement
Amount or Redemption Amount, as applicable (before taking into account any negative Daily Interest, the Daily Investor Fee, and any Redemption
Fee Amount), and you may receive less than your original investment in the notes at maturity, call or upon redemption, or if you sell
your notes in the secondary market. Moreover, because the Daily Investor Fee, any negative Daily Interest and any Redemption Fee Amount
may substantially reduce the amount of your return at maturity, call or upon redemption, or if you sell your notes, the level of the Index
must decrease significantly in order for you to receive at least the principal amount of your notes. If the level of the Index increases
or does not decrease sufficiently to offset the cumulative negative effect of the Daily Investor Fee, any negative Daily Interest and
any Redemption Fee Amount, you will receive less than the principal amount of your investment at maturity, call or upon redemption, or
if you sell your notes.
The returns on the notes are path dependent. The notes
are designed to reflect a leveraged inverse exposure to the performance of the applicable Index on a daily basis; their returns over different
periods of time can, and most likely will, differ significantly from two or three times the inverse performance of the Index over such
other periods of time. The notes are very sensitive to changes in the level of the Index, and returns on the notes may be negatively affected
in complex ways by the volatility of the Index on a daily or intraday basis. Accordingly, the notes should be purchased only by knowledgeable
investors who understand the potential consequences of investing in the Index and of seeking daily compounding leveraged inverse investment
results. The notes are not intended to be “buy and hold” investments. The notes are intended to be daily trading tools for
sophisticated investors, and are not intended to be held to maturity. It is possible that you will suffer significant losses in the notes
even if the long-term performance of the Index is flat or negative (before taking into account the negative effect of the Daily Investor
Fee and any negative Daily Interest, and the Redemption Fee Amount, if applicable). Investors should actively and continuously
monitor their investments in the notes.
The Daily Investor Fee will accrue at the rate set forth
in the applicable pricing supplement. Because the Daily Investor Fee is subtracted from the Deposit Amount, and the Deposit Amount is
calculated as part of the closing Indicative Note Value on a daily basis, the net effect of the Daily Investor Fee accumulates over time
and is subtracted at a rate per year equal to the Fee Rate. Because the net effect of the Daily Investor Fee is a fixed percentage of
the value of the notes, the aggregate effect of the Daily Investor Fee will increase or decrease in a manner directly proportional to
the value of the notes and the amount of notes that are held and the duration of your holding period.
On the applicable Initial Trade Date, the Index Performance
Factor will be 1. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Index Performance Factor
will equal (a) the Index Closing Level on such Exchange Business Day (or, if such day is not an Index Business Day, the Index Closing
Level on the immediately preceding Index Business Day) divided by (b) the Index Closing Level on the immediately preceding
Index Business Day, as determined by the Calculation Agent. If a Market Disruption Event occurs or is continuing on any Index Business
Day, the Calculation Agent will determine the Index Performance Factor for the notes on each such Index Business Day using an appropriate
closing level of the applicable Index for each such Index Business Day, taking into account the nature and duration of such Market Disruption
Event. Furthermore, if a Market Disruption Event occurs and is continuing with respect to the notes on any Index Business Day or occurred
or was continuing on the immediately preceding Index Business Day, the calculation of the Index Performance Factor will be modified so
that the applicable leveraged exposure does not reset until the first Index Business Day on which no Market Disruption Event with respect
to the notes is continuing.
The “Index Closing Level” will be the closing
level of the applicable Index on the applicable Index Business Day, determined as set forth in the applicable pricing supplement.
“Business Day” means a Monday, Tuesday, Wednesday,
Thursday or Friday that is neither a legal holiday nor a day on which banking institutions are authorized or obligated by law or executive
order to close in New York City.
“Exchange Business Day” means any day on which
the primary exchange or market for trading of the applicable notes is scheduled to be open for trading.
“Index Business Day” means any day on which the
applicable index sponsor (the “Index Sponsor”) publishes the Index Closing Level.
The scheduled Maturity Date for each of the notes will be
set forth in the applicable pricing supplement. The Maturity Date of each of the notes is expected to be the third Business Day following
the last Index Business Day in the Final Measurement Period, subject to adjustment as described in this document and under “Additional
Terms of the Notes — Market Disruption Events.” The Maturity Date may be extended at our option for up to two additional five-year
periods. We may only extend the scheduled Maturity Date for five years at a time. If we exercise our option to extend the maturity, we
will notify The Depository Trust Company (“DTC”) (the holder of the global note for the notes) and the trustee at least 45
but not more than 60 calendar days prior to the then scheduled Maturity Date. We will provide that notice to DTC and the trustee in respect
of each five-year extension of the scheduled Maturity Date.
Unlike ordinary debt securities, the notes will not guarantee
any return of principal at maturity or call, or upon early redemption. The notes will not pay any interest.
For a further description of how your payment at maturity
or call, or upon early redemption, will be calculated, see “Additional Terms of the Notes — Cash Settlement Amount at Maturity,”
“— Call Right” and “— Early Redemption at the Option of the Holders.”
Path Dependence and Daily Leverage
Reset. Because the leverage of the notes is generally only reset once each day, it is likely that due to intra-day changes in the
level of the applicable Index, the leverage at any point during an Index Business Day can be higher or lower than the target leverage
of -2.0 or -3.0, as applicable.
The performance of the notes is path-dependent.
This means that the value of the notes will depend not only upon the level of the Index at maturity, call or redemption, but also on the
performance of the Index over each day that you hold your notes. In other words, the value of the notes will be affected by not only the
increase or decrease in the level of the Index over a given time period but also the volatility of the level of the Index over such time
period. For example, a sharp spike or sharp decline in the level of the Index at the end of a particular time period will not result in
the same return as a gradual uptick or gradual decline in the Index over the same time period, even if the level of the Index at the end
of the applicable time period is the same in each scenario. Accordingly, the return on the notes may not correlate with the return on
the Index over periods longer than one day.
As a general matter, it is expected
that the notes will have better returns if the Index trends from one level to another over multiple Index Business Days, rather than experiencing
significant changes in opposite directions over multiple Index Business Days. Consequently, volatility of the Index level may have a significant
negative effect on the value of the notes.
In addition, the performance of the notes is path dependent,
insofar as their value at any time depends not only on the level of the Index at such time, but also on the Index’s level at any
prior time. As a result, the value of your investment in the notes may diverge significantly from the value you might expect on the basis
of the leverage strategy of the notes and changes in the level of the Index over the period that you hold them.
Early Redemption
You may elect to require us to redeem your notes (subject
to a minimum redemption amount that may be specified in the applicable pricing supplement) on any Business Day commencing on the first
Redemption Date specified in the applicable pricing supplement, and ending on the final Redemption Date (which will be the last scheduled
Index Business Day prior to the Calculation Date or Call Calculation Date, as applicable). If you elect to have your notes redeemed and
have done so under the redemption procedures described in “Additional Terms of the Notes—Early Redemption at the Option of
the Holders — Redemption Procedures,” you will receive a cash payment on the Redemption Date equal to the Redemption Amount,
as defined below. You must comply with the redemption procedures described below and in the applicable pricing supplement in order to
redeem your notes. To satisfy the minimum redemption amount, your broker or other financial intermediary may bundle your notes for redemption
with those of other investors to reach the applicable minimum amount of notes; however, there can be no assurance that they can or will
do so. We may from time to time in our sole discretion reduce this minimum requirement in whole or in part. Any such reduction will be
applied on a consistent basis for all holders of the applicable notes at the time the reduction becomes effective.
Upon early redemption, you will receive per note a cash payment
on the relevant Redemption Date equal to (a) the Indicative Note Value as of the Redemption Measurement Date minus (b) the Redemption
Fee Amount. We refer to this cash payment as the “Redemption Amount.” This amount will not be less than $0. You may lose
some or all of your investment upon early redemption. Because the cumulative negative effect of the Daily Investor Fee, any negative Daily
Interest and the Redemption Fee Amount reduce your final payment, the level of the applicable Index will need to have decreased over the
term of the notes by an amount, after giving effect to the daily leverage and its compounding effect, sufficient to offset the decrease
in principal amount represented by the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount in order for you
to receive an aggregate amount upon redemption equal to at least the principal amount. Due to leverage, the notes are very sensitive to
changes in the level of the Index and the path of those changes. See “—Path Dependence and Daily Leverage Reset” above.
If the decrease in the level of the applicable Index, as measured on the Redemption Measurement Date, is insufficient to offset such a
negative effect, you will lose some or all of your investment upon early redemption. It is possible that you will suffer significant
losses in the notes upon redemption even if the long-term performance of the applicable Index is flat or negative (before taking into
account the negative effect of the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount).
Redemption Fee Amount: As of any Redemption Measurement
Date, the Redemption Fee Amount will be a percentage of the Indicative Note Value that will be set forth in the applicable pricing supplement.
We reserve the right from time to time to reduce or waive the Redemption Fee Amount in our sole discretion on a case-by-case basis. In
exercising your right to have us redeem your notes, you should not assume you will be entitled to the benefit of any such waiver.
For a detailed description of the redemption procedures applicable
to an early redemption, see “Additional Terms of the Notes —Early Redemption at the Option of the Holders — Redemption
Procedures.”
Call Right
On any Call Settlement Date (as defined above),
we may at our option redeem all, but not less than all, of the outstanding notes of the relevant issuance. To exercise our Call Right,
we must provide notice to the holders of the applicable notes not less than 14 calendar days prior to the Call Settlement Date specified
by us. In the event we exercise this right, you will receive a cash payment equal to the arithmetic mean of the closing Indicative Note
Values on each Index Business Day in the Call Measurement Period. We refer to this cash payment as the “Call Settlement Amount.”
If we issue a call notice on any calendar day, the “Call Calculation Date” will be the next Index Business Day after the call
notice is issued.
Unless otherwise set forth in the applicable pricing
supplement, the Call Settlement Date will be the fifth Business Day following the last Index Business Day in the Call Measurement Period.
Call Measurement Period: Unless otherwise
set forth in the applicable pricing supplement, the five Index Business Days from and including the Call Calculation Date, subject to
adjustment as described under “Additional Terms of the Notes — Market Disruption Events.”
RISK FACTORS
Your investment in the notes will involve certain risks. The
notes are not secured debt and will not guarantee any return of principal at, or prior to, maturity, call or upon early redemption. As
described in more detail below, the trading price of the notes may vary considerably before the maturity date. Investing in the notes
is not equivalent to investing directly in the applicable Index constituents or any securities of the constituent issuers. In addition,
your investment in the notes entails other risks not associated with an investment in conventional debt securities. In addition to
the risk factors beginning on page S-1 of the prospectus supplement and page 8 of the prospectus, you should consider carefully the
following discussion of risks, together with the risk factors set forth in the applicable pricing supplement, before you decide that an
investment in the notes is suitable for you.
Risks Relating to the Terms of the Notes
The notes will be linked to the inverse performance of the applicable Index.
Your investment in the notes will be linked to the inverse, or
“short”, performance of the applicable Index. Therefore, notwithstanding the gains resulting from the Daily Interest, if any,
and the cumulative negative effect of the Daily Investor Fee, your notes will generally appreciate as the level of the Index decreases
and will decrease in value as the level of the Index increases. You may lose some or all of your investment if the level of the Index
increases over the term of your notes.
The notes do not guarantee the return of your investment.
The notes may not return any of your investment. The amount payable
at maturity, call or upon early redemption, will reflect a two or three times leveraged participation, as applicable, in the inverse performance
of the applicable Index minus the Daily Investor Fee, any negative Daily Interest and, in the case of an early redemption, the
Redemption Fee Amount. These amounts will be determined as described in this product supplement and the applicable pricing supplement.
Because the Daily Investor Fee, any negative Daily Interest and any Redemption Fee Amount reduce your final payment, the Index Closing
Levels, measured as a component of the closing Indicative Note Value during the Final Measurement Period or Call Measurement Period, or
on a Redemption Measurement Date, will need to have decreased over the term of the applicable notes by an amount, after giving effect
to the daily leverage and its compounding effect, sufficient to offset the decrease in the principal amount represented by the Daily Investor
Fee, any negative Daily Interest and any Redemption Fee Amount in order for you to receive an aggregate amount at maturity, upon a call
or redemption, or if you sell your notes, that is equal to at least the principal amount of your notes. If the decrease in the Index Closing
Levels, as measured during the Final Measurement Period or Call Measurement Period, or on a Redemption Measurement Date, is insufficient
to offset the cumulative negative effect of the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount, if applicable,
you will lose some or all of your investment at maturity, call or upon early redemption. This loss may occur even if the Index Closing
Levels during the Final Measurement Period or Call Measurement Period, on a Redemption Measurement Date, or when you elect to sell your
notes, are less than the Initial Index Level.
The negative effect of the Daily Investor Fee, any negative Daily
Interest and any Redemption Fee Amount are in addition to the losses that may be caused by leverage and volatility in the Index. See “—Leverage
increases the sensitivity of your notes to changes in the level of the Index,” “—The notes are not suitable for investors
with longer-term investment objectives” and “—The notes are not suitable for all investors. In particular, the notes
should be purchased only by sophisticated investors who do not intend to hold the notes as a buy and hold investment, who are willing
to actively and continuously monitor their investment and who understand the consequences of investing in and of seeking daily resetting
leveraged investment results” below.
If the Intraday Indicative Value for the notes is equal to or less than $0 at
any time during an Exchange Business Day, or the closing Indicative Note Value is equal to or less than $0, you will lose all of your
investment in the notes.
If the closing Indicative Note Value or the Intraday Indicative
Value of the notes is equal to or less than $0, then the notes will be permanently worth $0 (a total loss of value) and you will lose
all of your investment in the notes and the Cash Settlement Amount will be $0. We would be likely to call the notes under these circumstances,
and you will not receive any payments on the notes.
Even if the Index Closing Levels during the Final Measurement Period or Call Measurement
Period, or on a Redemption Measurement Date, are less than the Initial Index Level, you may receive less than the principal amount of
your notes due to the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount, if applicable.
The amount of the Daily Investor Fee and any negative Daily Interest,
and any Redemption Fee Amount, will reduce the payment, if any, you will receive at maturity, call or upon early redemption, or if you
sell your notes. Although the Daily Interest will be added to the Deposit Amount, the Daily Interest will be negative on any Index Business
Day on which the Daily Interest Rate is negative. On those Index Business Days, the Daily Interest will be subtracted from the Deposit
Amount. In addition, if you elect to require us to redeem your notes prior to maturity, you will be charged the Redemption Fee Amount.
If the Index Closing Levels, measured as a component of the closing Indicative Note Value during the Final Measurement Period or Call
Measurement Period, or on a Redemption Measurement Date, have decreased insufficiently to offset the cumulative negative effect of the
Daily Investor Fee, any negative Daily Interest and any Redemption Fee Amount, you will receive less than the principal amount of your
investment at maturity, call or upon early redemption of your notes.
Leverage increases the sensitivity of your notes to changes in the level of
the Index.
Because your investment in the notes is two or three times leveraged
(as applicable), changes in the level of the applicable Index will have a greater impact on the payout on your notes than on a payout
on securities that are not so leveraged. In particular, any increase in the level of the Index will result in a significantly greater
decrease in your payment at maturity, call or upon redemption, and you will suffer losses on your investment in the notes substantially
greater than you would if your notes did not contain a leverage component. Accordingly, as a result of this leverage component and without
taking into account any positive effect of the Daily Interest and the cumulative negative effect of the Daily Investor Fee, if the level
of the Index increases over the term of the notes, the leverage component will magnify any losses at maturity, call or upon redemption.
The notes are subject to our credit risk.
The notes are subject to our credit risk, and our credit ratings
and credit spreads may adversely affect the market value of the notes. The notes are senior unsecured debt obligations of the issuer,
Bank of Montreal, and are not, either directly or indirectly, an obligation of any third party. Investors are dependent on our ability
to pay all amounts due on the notes at maturity, call or upon early redemption or on any other relevant payment dates, and therefore investors
are subject to our credit risk and to changes in the market’s view of our creditworthiness. If we were to default on our payment
obligations, you may not receive any amounts owed to you under the notes and you could lose your entire investment.
Our credit ratings are an assessment of our ability to pay our
obligations, including those on the notes. Consequently, actual or anticipated changes in our credit ratings may affect the market value
of the notes. However, because the return on the notes is dependent upon certain factors in addition to our ability to pay our obligations
on the notes, an improvement in our credit ratings will not reduce the other investment risks related to the notes. Therefore, an improvement
in our credit ratings may or may not have a positive effect on the market value of the notes.
The notes are not suitable for investors with longer-term investment objectives.
The notes are not intended to be “buy
and hold” investments. The notes are intended to be daily trading tools for sophisticated investors, and are not intended to be
held to maturity. The notes are designed to achieve their stated investment objective on a daily basis, but their performance over different
periods of time can differ significantly from their stated daily objective because the relationship between the level of the applicable
Index and the closing Indicative Note Value will begin to break down as the length of an investor’s holding period increases. The
notes are not long-term substitutes for inverse positions in the Index constituents.
Investors should carefully consider whether
the notes are appropriate for their investment portfolio. As discussed below, because the notes are meant to provide leveraged inverse
exposure to changes in the daily Index Closing Level, their performance over months or years can differ significantly from the performance
of the applicable Index during the same period of time. Therefore, it is possible that you will suffer significant losses in the
notes even if the long-term performance of the Index is negative (before taking into account the negative effect of the Daily Investor
Fee and any negative Daily Interest, and the Redemption Fee Amount, if applicable). It is possible for the level of the Index to decrease
over time while the market value of the notes declines over time. You should proceed with extreme caution in considering an investment
in the notes.
The notes seek to provide a leveraged inverse
return based on the performance of the applicable Index (as adjusted for costs and fees). The notes do not attempt to, and should not
be expected to, provide returns that reflect leverage on the return of the Index for periods longer than a single day. The notes rebalance
their theoretical exposure on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response
to that day’s losses.
Daily rebalancing is likely to cause the notes
to experience a “decay” effect, which will impair the performance of the notes if the applicable Index experiences volatility
from day to day, and such performance will be dependent on the path of daily returns during the holder’s holding period. The “decay”
effect refers to a likely tendency of the notes to lose value over time. At higher ranges of volatility, there is a significant chance
of a complete loss of the value of the notes even if the performance of the Index is flat (before taking into account the negative effect
of the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount, if applicable). Although the decay effect is more
likely to manifest itself the longer the notes are held, the decay effect can have a significant impact on the performance of the notes,
even over a period as short as two days. The notes should be purchased only by knowledgeable investors who understand the potential
consequences of investing in the Index and of seeking daily compounding leveraged inverse investment results. The notes may not be
appropriate for investors who intend to hold positions in an attempt to generate returns over periods different than one day. See “Hypothetical
Examples.”
In addition, daily rebalancing will result
in leverage relative to the closing Indicative Note Value that may be greater or less than the stated leverage factor if the value of
the notes has changed since the beginning of the day in which you purchase the notes.
You should regularly monitor your holdings of the notes to ensure that they
remain consistent with your investment strategies.
The notes are designed to reflect a leveraged
inverse exposure to the performance of the applicable Index on a daily basis. As such, the notes will be more volatile than a non-leveraged
investment linked to the Index. You should regularly monitor your holdings of the notes to ensure that they remain consistent with your
investment strategies.
The notes are not suitable for all investors. In particular, the notes should
be purchased only by sophisticated investors who do not intend to hold the notes as a buy and hold investment, who are willing to actively
and continuously monitor their investment and who understand the consequences of investing in and of seeking daily resetting inverse leveraged
investment results.
The notes require an understanding of path
dependence of investment results and are intended for sophisticated investors to use as part of an overall diversified portfolio. The
notes are risky and may not be suitable for investors who plan to hold them for longer periods of time. The notes are designed to achieve
their stated investment objective on a daily basis, but the performance of the notes over different periods of time can differ significantly
from their stated daily objectives because the relationship between the level of the Index and the Indicative Note Value will begin to
break down as the length of an investor’s holding period increases. The notes are not long-term substitutes for inverse positions
in the Index constituents. Accordingly, there is a significant possibility that the returns on the notes will not correlate with returns
on the Index over periods longer than one day.
Investors should carefully consider whether
the notes are appropriate for their investment portfolio. The notes entail leverage risk and should be purchased only by investors who
understand leverage risk, including the risks inherent in maintaining a constant two or three times inverse leverage on a daily basis,
and the consequences of seeking daily inverse leveraged investment results generally. Investing in the notes is not equivalent to a direct
investment in the Index constituents because the notes rebalance their theoretical exposure to the Index on a daily basis, which means
exposure to the Index increases in response to that day’s losses and decreases in response to that day’s gains. Daily rebalancing
will impair the performance of the notes if the Index experiences volatility from day to day, and such performance is dependent on the
path of daily returns during an investor’s holding period. If the notes experience a high amount of realized volatility, there
is a significant chance of a complete loss of your investment even if the performance of the Index is flat. In addition, the notes
are meant to provide leveraged inverse exposure to changes in the Index Closing Level, which means their performance over months or years
can differ significantly from the performance of the Index over the same period of time. It is possible that you will suffer significant
losses in the notes even if the long-term performance of the Index is negative (before taking into account the effect of the Daily Investor
Fee, any negative Daily Interest and the Redemption Fee Amount, if applicable).
The amount you receive at maturity, call or
redemption will be contingent upon the compounded leveraged inverse daily performance of the Index during the term of the notes. There
is no guarantee that you will receive at maturity, call or redemption your initial investment or any return on that investment. Significant
adverse daily performances for the notes may not be offset by any beneficial daily performances of the same magnitude.
Due to the effect of compounding, if the Indicative Note Value increases, any
subsequent increase of the Index level will result in a larger dollar reduction from the Indicative Note Value than if the Indicative
Note Value remained constant.
If the Indicative Note Value increases, the
dollar amount that you can lose in any single Index Business Day from an increase of the Index level will increase correspondingly. This
is because the Index Performance Factor will be applied to a larger Indicative Note Value and, consequently, a larger Short Index Amount
in calculating any subsequent Indicative Note Value. As such, the dollar amount that you can lose from any increase will be greater than
if the Indicative Note Value were maintained at a constant level. This means that if the Indicative Note Value increases, you could lose
more than 2% or 3% (as applicable) of your initial investment for each 1% daily increase of the Index level.
Due to the effect of compounding, if the Indicative Note Value decreases, any
subsequent decrease of the Index level will result in a smaller dollar increase on the Indicative Note Value than if the Indicative Note
Value remained constant.
If the Indicative Note Value decreases, the
dollar amount that you can gain in any single Index Business Day from a decrease of the Index level will decrease correspondingly. This
is because the Index Performance Factor will be applied to a smaller Indicative Note Value and, consequently, a smaller Short Index Amount
in calculating any subsequent Indicative Note Value. As such, the dollar amount that you can gain from any decrease of the Index level
will be less than if the Indicative Note Value were maintained at a constant level. This means that if the Indicative Note Value decreases,
it will take larger daily decreases of the Index level to restore the value of your investment back to the amount of your initial investment
than would have been the case if the Indicative Note Value were maintained at a constant level. Further, if you invest in the notes, you
could gain less than 2% or 3% (as applicable) of your initial investment for each 1% daily decrease of the Index level.
The Indicative Note Value is reset daily, and the leverage of the notes during
any given Exchange Business Day may be greater than or less than -2.0 or -3.0.
The Indicative Note Value is reset daily. Resetting the Indicative
Note Value has the effect of resetting the then-current leverage to approximately -2.0 or -3.0 (as applicable). During any given Exchange
Business Day, the leverage of the notes will depend on intra-day changes in the level of the applicable Index and may be greater or less
than that amount. If the level of the Index on any Exchange Business Day has increased from the Index Closing Level on the preceding Index
Business Day, the leverage of the notes will be greater than -2.0 or -3.0 (as applicable); conversely, if the level of the Index on any
Exchange Business Day has decreased from the Index Closing Level on the preceding Index Business Day, the leverage of the notes will be
less than that amount. Thus, the leverage of the notes at the time that you purchase them may be greater or less than the target leverage,
depending on the performance of the Index since the immediately preceding Index Business Day. See “—The notes are subject
to intraday purchase risk” below.
You should regularly monitor your holdings of the notes to ensure that they remain
consistent with your investment strategies.
The notes are designed to reflect inverse exposure to the performance
of the applicable Index. There is no guarantee that you will receive at maturity, call or redemption your initial investment or any return
on that investment. You should regularly monitor your holdings of the applicable notes to ensure that they remain consistent with your
investment strategies.
The notes are subject to our Call Right, which does not allow for participation
in any future performance of the applicable Index. The exercise of our Call Right may adversely affect the value of, or your ability to
sell, your notes. We may call the notes prior to the maturity date.
We will have the right to call the notes upon 14 calendar days’
prior written notice. You will only be entitled to receive a payment on the Call Settlement Date equal to the Call Settlement Amount.
The Call Settlement Amount may be less than the stated principal amount of your notes. You will not be entitled to any further payments
after the Call Settlement Date, even if the applicable Index level decreases substantially after the Call Measurement Period. In addition,
the issuance of a notice of our election to exercise our call right may adversely impact your ability to sell your notes, and/or the price
at which you may be able to sell your notes prior to the Call Settlement Date. We have no obligation to ensure that investors will not
lose all or a portion of their investment in the notes if we call the notes; consequently, a potential conflict between our interests
and those of the note holders exists with respect to our Call Right.
If we exercise our right to call the notes prior to maturity,
your payment on the Call Settlement Date may be less than the Indicative Note Value at the time we gave the notice of our election to
call the notes.
As discussed above, we have the right to call the notes on or
prior to the Maturity Date. The Call Settlement Amount will be payable on the Call Settlement Date and we will provide at least 14 calendar
days’ notice prior to the Call Settlement Date of our election to exercise our call of the notes. The Call Settlement Amount per
note will be based principally on the closing Indicative Note Value on each Index Business Day during the Call Measurement Period. The
Call Measurement Period will be a specified number of consecutive Index Business Days from, and including, the Call Calculation Date.
The Call Calculation Date will be a date specified in our call notice, subject to postponement if such date is not an Index Business Day
or in the event of a Market Disruption Event. It is possible that the market prices of the applicable Index constituents, and,
as a result, the Index Closing Level and the Indicative Note Value, may vary significantly between when we provide the notice of our intent
to call the notes and the Call Calculation Date, including potentially as a result of our trading activities during this period, as described
further under “We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result
of our hedging and other trading activities.” As a result, you may receive a Call Settlement Amount that is significantly less than
the Indicative Value at the time of the notice of our election to call the notes and may be less than your initial investment in the notes.
The notes do not pay any interest, and you will not have any ownership rights
in the Index constituents.
The notes do not pay any interest, and you should not invest
in the notes if you are seeking an interest-bearing investment. You will not have any ownership rights in the applicable Index constituents,
nor will you have any right to receive dividends or other distributions paid to holders of the Index constituents, except as reflected
in the level of the applicable Index. The Cash Settlement Amount, the Call Settlement Amount, or Redemption Amount, if any, will be paid
in U.S. dollars, and you will have no right to receive delivery of any shares of the Index constituents.
The Index Closing Level used to calculate the payment at maturity, call or upon
a redemption may be greater than the Index Closing Level on the Maturity Date, Call Settlement Date or at other times during the term
of the notes.
The Index Closing Level on the Maturity Date, Call Settlement
Date or at other times during the term of the notes, including dates near the Final Measurement Period or the Call Measurement Period,
as applicable, could be less than any of the Index Closing Levels during the Final Measurement Period or Call Measurement Period, as applicable.
This difference could be particularly large if there is a significant decrease in the applicable Index Closing Level after the Final Measurement
Period or the Call Measurement Period, as applicable, or if there is a significant increase in the Index Closing Level around the Final
Measurement Period or the Call Measurement Period, as applicable, or if there is significant volatility in the Index Closing Levels during
the term of the notes.
There are restrictions on the minimum number of notes you may request that we
redeem and the dates on which you may exercise your right to have us redeem your notes.
If you elect to require us to redeem your notes, you must request
that we redeem at least the number of notes specified in the applicable pricing supplement on any Business Day commencing on the first
applicable Redemption Date through and including the Final Redemption Date. If you own fewer than the applicable minimum required number
of notes, you will not be able to elect to require us to redeem your notes. Your request that we redeem your notes is only valid if we
receive your Redemption Notice by email no later than 2:00 p.m., New York City time, on the applicable Redemption Notice Date and a completed
and signed Redemption Confirmation by 5:00 p.m., New York City time, that same day. If we do not receive such notice and confirmation,
your redemption request will not be effective and we will not redeem your notes on the corresponding Redemption Date.
The daily redemption feature is intended to induce arbitrageurs
to counteract any trading of the notes at a premium or discount to their indicative value. There can be no assurance that arbitrageurs
will employ the redemption feature in this manner.
Because of the timing requirements of the Redemption Notice and
the Redemption Confirmation, settlement of the redemption will be prolonged when compared to a sale and settlement in the secondary market.
Because your request that we redeem your notes is irrevocable, this will subject you to loss if the level of the applicable Index increases
after we receive your request. Furthermore, our obligation to redeem the notes prior to maturity may be postponed upon the occurrence
of a Market Disruption Event.
If you want to sell your notes but are unable to meet the minimum
redemption requirements, you may sell your notes into the secondary market at any time, subject to the risks described below. A trading
market for the notes may not develop. Also, the price you may receive for the notes in the secondary market may differ from, and may be
significantly less than, the Redemption Amount.
You will not know the Redemption Amount at the time you elect to request that
we redeem your notes.
You will not know the Redemption Amount you will receive at the
time you elect to request that we redeem your notes. Your notice to us to redeem your notes is irrevocable and must be received by us
no later than 2:00 p.m., New York City time, on the applicable Redemption Notice Date and a completed and signed confirmation of such
redemption must be received by us no later than 5:00 p.m., New York City time, on the same day. The Redemption Measurement Date is the
Index Business Day following the applicable Redemption Notice Date. You will not know the Redemption Amount until after the Redemption
Measurement Date, and we will pay you the Redemption Amount, if any, on the Redemption Date. As a result, you will be exposed to market
risk in the event the level of the Index fluctuates after we confirm the validity of your notice of election to exercise your right to
have us redeem your notes, and prior to the relevant Redemption Date.
Market disruptions may adversely affect your return.
The Calculation Agent may, in its sole discretion, determine
that the markets have been affected in a manner that prevents the Calculation Agent from determining the closing Indicative Note Values
during the Final Measurement Period or the Call Measurement Period, or on a Redemption Measurement Date, and prevents the Calculation
Agent from calculating the amount that we are required to pay you, if any. These events may include disruptions or suspensions of trading
in the markets as a whole. If the Calculation Agent, in its sole discretion, determines that any of these events prevents us or any of
our affiliates from properly hedging our obligations under the notes, it is possible that the determination of the Index Closing Level
will be postponed and your return will be adversely affected. Moreover, if the final Averaging Date (as defined under “Additional
Terms of the Notes — Market Disruption Events”) is postponed to the last possible day and the Index Closing Level is not available
on that day if such day is not an Index Business Day, the Calculation Agent or one of its affiliates will determine the Index Closing
Level on such last possible day. See “Additional Terms of the Notes — Market Disruption Events” for more information.
Because the Calculation Agent is our affiliate, its interests in making a determination of this kind may be adverse to the interests of
holders of the notes.
Significant aspects of the tax treatment of the notes are uncertain.
The tax treatment of the notes is uncertain. We do not plan to
request a ruling from the Internal Revenue Service or from any Canadian authorities regarding the tax treatment of the notes, and the
Internal Revenue Service or a court may not agree with the tax treatment described in this product supplement.
The Internal Revenue Service has issued a notice indicating that
it and the Treasury Department are actively considering whether, among other issues, a holder should be required to accrue interest over
the term of an instrument such as the notes even though that holder will not receive any payments with respect to the notes until maturity
and whether all or part of the gain a holder may recognize upon sale or maturity of an instrument such as the notes could be treated as
ordinary income. The outcome of this process is uncertain and could apply on a retroactive basis.
Please read carefully the section entitled “Supplemental
Tax Considerations” in this product supplement. You should consult your tax advisor about your own tax situation.
Risks Relating to Liquidity and the Secondary Market
The Intraday Indicative Value and the Indicative Note Value are not the same as
the closing price or any other trading price of the notes in the secondary market.
The Intraday Indicative Value at any point in time of an Index
Business Day will equal (a) the Deposit Amount minus (b) the Intraday Short Index Amount; provided that if such calculation results in
a value equal to or less than $0, the Intraday Indicative Value will be $0. Because the Intraday Indicative Value uses an intraday Index
level for its calculation, a variation in the intraday level of the applicable Index from the previous Index Business Day’s Index
Closing Level may cause a significant variation between the closing Indicative Note Value and the Intraday Indicative Value on any date
of determination. The Intraday Indicative Value also does not reflect intraday changes in the leverage; it is based on the applicable
constant Daily Leverage Factor. As a result, the Intraday Indicative Value may vary significantly from the previous or next Index Business
Day’s closing Indicative Note Value or the price of the notes purchased intraday.
The trading price of the notes at any time is the price at which
you may be able to sell your notes in the secondary market at such time, if one exists. The trading price of the notes at any time may
vary significantly from the Intraday Indicative Value of the notes at such time due to, among other things, imbalances of supply and demand,
lack of liquidity, transaction costs, credit considerations and bid-offer spreads, and any corresponding premium in the trading price
may be reduced or eliminated at any time. Paying a premium purchase price over the Intraday Indicative Value of the notes could lead to
significant losses in the event the investor sells such notes at a time when such premium is no longer present in the market place or
the notes are called, in which case investors will receive a cash payment based on the closing Indicative Note Value of the notes during
the Call Measurement Period. See “— There is no assurance that your notes will continue to be listed on a securities exchange,
and they may not have an active trading market” below. We may, without providing you notice or obtaining your consent, create and
issue notes in addition to those offered by the applicable pricing supplement having the same terms and conditions as your notes. However,
we are under no obligation to sell additional notes at any time, and we may suspend issuance of new notes at any time and for any reason
without providing you notice or obtaining your consent. If we limit, restrict or stop sales of additional notes, or if we subsequently
resume sales of such additional notes, the price and liquidity of your notes could be materially and adversely affected, including an
increase or decline in the premium purchase price of the applicable notes over the Intraday Indicative Value of the notes. Before trading
in the secondary market, you should compare the Intraday Indicative Value with the then-prevailing trading price of the notes.
Publication of the Intraday Indicative Value may be delayed,
particularly if the publication of the applicable intraday Index value is delayed. See “Intraday Value of the Index and the Notes—Intraday
Indicative Note Values.”
There is no assurance that your notes will continue to be listed on a securities
exchange, and they may not have an active trading market.
The notes are expected to be listed on the securities exchange
specified in the applicable pricing supplement. No assurance can be given as to the continued listing of the notes for their term or of
the liquidity or trading market for the notes. There can be no assurance that a secondary market for the notes will be maintained. We
are not required to maintain any listing of the notes on any securities exchange.
If the notes are delisted, they will no longer trade on a national
securities exchange. Trading in delisted notes, if any, would be on an over-the-counter basis. If the notes are removed from their primary
source of liquidity, it is possible that holders may not be able to trade their notes at all. We cannot predict with certainty what effect,
if any, a delisting would have on the trading price of the applicable notes; however, the notes may trade at a significant discount to
their indicative value. If a holder had paid a premium over the Intraday Indicative Value of the notes and wanted to sell the notes at
a time when that premium has declined or is no longer present, the investor may suffer significant losses and may be unable to sell the
notes in the secondary market.
The notes could be delisted by the applicable securities exchange
if they cease to meet the listing requirements of that exchange, for example, in the event that there is a material change in the applicable
Index that causes the Index to no longer meet the exchange’s listing requirements. See “Additional Terms of the Notes—Discontinuation
of or Adjustments to the Index; Alteration of Method of Calculation.”
Although the title of the notes includes the words “exchange-traded
notes,” we are not obligated to maintain the listing of any of the notes on any securities exchange. We may elect to discontinue
the listing of your notes at any time and for any reason, including in connection with a decision to discontinue further issuances and
sales of those notes. If your notes ceased to be listed on an exchange, the words “exchange-traded notes” will continue to
be included in their title in any event.
The applicable securities exchange may halt trading in the notes or may limit
the extent to which trading prices may change within specified time periods, which in either case would adversely impact your ability
to sell the notes.
Trading in your notes may be halted due to market conditions
or, in light of the exchange’s rules and procedures, for reasons that, in the view of that exchange, make trading in the notes inadvisable.
General exchange trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker”
rules based on a specified decline in a market index (e.g., the S&P 500® Index). In addition, the notes may be subject
to “limit up” and “limit down” rules or trading pause requirements that are triggered by a significant change
in the trading price of the notes within a specified period of time. These “limit up” and “limit down” and trading
pause rules, if triggered, could prevent investors from transacting at the then prevailing Intraday Indicative Value or at all. If the
value of the notes declines precipitously during the trading day, triggering a “limit down” mechanism or trading pause, you
may be unable to sell your notes for some period of time, either because no trading at all is permitted or because the price that any
purchaser would be willing to pay for them at the time may be significantly below the lowest price that a purchaser would be permitted
to pay for them on the applicable exchange. In that circumstance, by the time you are finally able to sell your notes, you may have incurred
significantly greater losses than you would have incurred had you been able to sell them when you initially wanted to. Additionally, the
ability to short sell notes may be restricted when there is a 10% or greater change from the previous day’s official closing price.
The applicable exchange’s rules relating to these matters are subject to change from time to time.
The liquidity of the market for the notes may vary materially over time, and may
be limited if you do not hold the minimum number of notes required for an optional redemption.
Certain affiliates of BMOCM may engage in limited purchase and
resale transactions in the notes, and we or BMOCM may purchase notes from holders in amounts and at prices that may be agreed from time
to time, although they are not required to do so. Also, the number of notes outstanding or held by persons other than our affiliates could
be reduced at any time due to early redemptions of the notes or due to our or our affiliates’ purchases of notes in the secondary
market. Accordingly, the liquidity of the market for your notes could vary materially over the term of the notes. There may not be sufficient
liquidity to enable you to sell your notes readily and you may suffer substantial losses and/or sell your notes at prices substantially
less than their Intraday Indicative Value or Indicative Note Value, including being unable to sell them at all or only for a minimal price
in the secondary market. You may elect to require us to redeem your notes, but such redemption is subject to the restrictive conditions
and procedures described in this product supplement, including the condition that you must request that we redeem the minimum number of
notes specified in the applicable pricing supplement on any Redemption Date.
The value of the notes in the secondary market may be influenced by many unpredictable
factors.
The market value of your notes may fluctuate between the date
you purchase them and the relevant date of determination. You may also sustain a significant loss if you sell your notes in the secondary
market. Several factors, many of which are beyond our control, will influence the market value of the notes. We expect that, generally,
the level of the applicable Index on any day will affect the value of the notes more than any other single factor. The value of the notes
may be affected by a number of other factors that may either offset or magnify each other, including:
| · | the expected volatility in the applicable Index and the prices of the applicable Index constituents; |
| · | the time to maturity of the notes; |
| · | the market price and expected dividends or distributions on the applicable Index constituents; |
| · | interest and yield rates in the market generally; |
| · | supply and demand for the applicable notes, including, but not limited to, inventory positions with BMOCM or any market maker or other
person or entity who is trading the notes (supply and demand for the notes will be affected by the total issuance of notes, and we are
under no obligation to issue additional notes to increase the supply); |
| · | the amount of the Daily Investor Fee on the relevant date of determination; |
| · | whether the Daily Interest has been negative or positive; |
| · | the applicable Index constituents and changes to those Index constituents over time; |
| · | whether the applicable notes have been delisted from the applicable securities exchange; |
| · | economic, financial, political, regulatory, judicial, military and other events that affect the applicable Index constituents or that
affect markets generally and which may affect the Index Closing Level; and |
| · | our actual or perceived creditworthiness. |
Some or all of these factors will influence the price you will
receive if you choose to sell your notes prior to maturity. The impact of any of the factors set forth above may enhance or offset some
or all of any change resulting from another factor or factors. If you sell the notes, you may receive significantly less than the amount
that you paid for them.
The notes are subject to intraday purchase risk.
The notes may be purchased in the secondary market at prices
other than the closing Indicative Note Value, which will have an effect on the effective leverage amount of the notes. Because the exposure
is fixed each night and does not change intraday as the level of the applicable Index moves in favor of the notes (i.e., the level
of the Index decreases), the actual exposure in the notes decreases. The reverse is also true.
Risks Relating to Conflicts of Interest and Hedging
Our offering of the notes does not constitute an expression of our view about,
or a recommendation of, the applicable Index or any of the applicable Index constituents.
You should not take our offering of the notes as an expression
of our views about how the applicable Index or any of the Index constituents will perform in the future or as a recommendation to invest
(directly or indirectly, by taking a long or short position) in the applicable Index or any of the Index constituents, including through
an investment in the notes. As a global financial institution, we and our affiliates may, and often do, have positions (long, short or
both) in the applicable Index or one or more of the Index constituents that conflict with an investment in the notes. See “—
We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result of our hedging and
other trading activities” below and “Use of Proceeds and Hedging” in this product supplement for some examples of potential
conflicting positions we may have. You should undertake an independent determination of whether an investment in the notes is suitable
for you in light of your specific investment objectives, risk tolerance and financial resources.
Except to the extent specified in the applicable pricing supplement,
we will not be affiliated with any constituent issuer or the Index Sponsor. However, we or our affiliates may currently or from time to
time in the future engage in business with a constituent issuer or the Index Sponsor. Nevertheless, neither we nor any of our affiliates
independently verified the accuracy or the completeness of any information about the applicable Index Sponsor or any of the constituent
issuers disclosed by the Index Sponsor or the constituent issuers.
We or our affiliates may have economic interests that are adverse to those of
the holders of the notes as a result of our hedging and other trading activities.
In anticipation of the sale of each of the notes, we expect to
hedge our obligations under the notes through certain affiliates or unaffiliated counterparties by taking positions in instruments the
value of which is derived from the applicable Index or one or more Index constituents. We may also adjust our hedge by, among other things,
purchasing or selling instruments the value of which is derived from the applicable Index or one or more Index constituents at any time
and from time to time, and close out or unwind our hedge by selling any of the foregoing at any time and from time to time. We cannot
give you any assurances that our hedging will not positively affect the level of the applicable Index or the performance of the applicable
notes. See “Use of Proceeds and Hedging” below for additional information about our hedging activities.
These hedging activities may present a conflict of interest between
your interest as a holder of the notes and the interests our affiliates have in executing, maintaining and adjusting hedge transactions.
These hedging activities could also affect the price at which BMOCM is willing to purchase your notes in the secondary market.
Our hedging counterparties expect to make a profit. Because hedging
our obligations entails risk and may be influenced by market forces beyond our control, this hedging may result in a profit that is more
or less than expected, or it may result in a loss.
It is possible that these hedging or trading activities could
result in substantial returns for us or our affiliates while the value of the applicable notes declines.
Bank of Montreal or its affiliates may also engage in trading
in the applicable Index constituents and other investments relating to those constituents, the constituent issuers or the applicable Index
on a regular basis as part of our general broker-dealer and other businesses, for proprietary accounts, for other accounts under management
or to facilitate transactions for customers, including block transactions. Any of these activities could positively affect the market
price of the applicable Index constituents and the applicable Index level and, therefore negatively affect the market value of the applicable
notes. Bank of Montreal or its affiliates may also issue or underwrite other securities or financial or derivative instruments with returns
linked or related to changes in the performance of any constituent issuers, the Index constituents or the applicable Index. By introducing
competing products into the market place in this manner, Bank of Montreal or its affiliates could adversely affect the market value of
the applicable notes.
We or our affiliates may have economic interests that are adverse to those of
the holders of the notes as a result of our business activities.
We or our affiliates may currently or from time to time engage
in business with the applicable constituent issuers, including extending loans to, or making equity investments in, or providing advisory
services to them, including merger and acquisition advisory services. In the course of this business, we or our affiliates may acquire
non-public information about those constituent issuers, and we will not disclose any such information to you. Any prospective purchaser
of notes should undertake an independent investigation of each constituent issuer as in its judgment is appropriate to make an informed
decision with respect to an investment in the notes.
Additionally, we or one of our affiliates may serve as issuer,
agent or underwriter for additional issuances of other securities or financial instruments with returns linked or related to changes in
the applicable Index level or the applicable Index constituents. To the extent that we or one of our affiliates serves as issuer, agent
or underwriter for such securities or financial instruments, our or their interests with respect to such products may be adverse to those
of the holders of the applicable notes. By introducing competing products into the market place in this manner, we or one or more of our
affiliates could adversely affect the value of the applicable notes.
BMOCM and its affiliates may have published research, expressed opinions or provided
recommendations that are inconsistent with investing in or holding the applicable notes, and may do so in the future. Any such research,
opinions or recommendations could affect the level of the applicable Index and of each of the Index constituents, and therefore the market
value of the notes.
BMOCM and its affiliates publish research from time to time on
financial markets and other matters that may influence the value of the applicable notes, or express opinions or provide recommendations
that are inconsistent with purchasing or holding those notes. BMOCM and its affiliates may have published or may publish research or other
opinions that call into question the investment view implicit in an investment in the applicable notes. Any research, opinions or recommendations
expressed by BMOCM 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 applicable notes, the applicable Index, the constituent
issuers and the Index constituents.
We or our affiliates may have economic interests that are adverse to those of
the holders of the notes due to BMOCM’s role as Calculation Agent.
BMOCM, one of our affiliates, will act as the Calculation Agent.
The Calculation Agent will make all determinations relating to each of the notes, including the Index Closing Level, the Index Performance
Factor, the Indicative Note Value, the Daily Investor Fee, the Deposit Amount, the Short Index Amount, the Daily Interest, the Redemption
Fee Amount, the Cash Settlement Amount, if any, that we will pay you at maturity, and the Redemption Amount, if any, that we will pay
you upon early redemption, if applicable. The Calculation Agent will also be responsible for determining whether a Market Disruption Event
has occurred, whether the applicable Index has been discontinued and whether there has been a material change in that Index. In performing
these duties, BMOCM may have interests adverse to the interests of the holders of the notes, which may affect your return on the notes,
particularly where BMOCM, as the Calculation Agent, is entitled to exercise discretion.
HYPOTHETICAL EXAMPLES
The applicable pricing supplement will set forth examples and
tables that illustrate the amounts payable on the notes at maturity in hypothetical circumstances. They are intended to highlight how
the return on the notes is affected by the daily performance of the Index, fees and path dependency.
Many factors will affect the value of the notes, and the figures
in the applicable pricing supplement will be provided for illustration only. These hypothetical examples and tables should not be taken
as an indication or a prediction of future Index performance or investment results and are intended to illustrate a few of the possible
returns on the notes. Because the Indicative Note Value will take into account the net effect of the Daily Investor Fee and the performance
of the applicable Index, the Indicative Note Value is dependent on the path taken by the Index level to arrive at its ending level.
ADDITIONAL TERMS OF THE NOTES
In this section, references to “holders” mean those
who own the applicable notes registered in their own names, on the books that we or the trustee maintains for this purpose, and not those
who own beneficial interests in the notes registered in street name or in the notes issued in book-entry form through DTC or another depositary.
Owners of beneficial interests in the notes should read the section entitled “Description of Debt Securities We May Offer —
Legal Ownership and Book-Entry Issuance” in the accompanying prospectus.
Each of the notes will be part of a series of debt securities
entitled “Senior Medium-Term Notes, Series G” that we may issue from time to time under the indenture more particularly described
in the accompanying prospectus supplement. This product supplement summarizes specific financial and other terms that apply to the notes.
Terms that apply generally to all Senior Medium-Term Notes, Series G are described in “Description of the Notes We May Offer”
in the accompanying prospectus supplement and “Description of Debt Securities We May Offer” in the accompanying prospectus.
The terms described in this product supplement those described in the accompanying prospectus supplement and prospectus and, if the terms
described here are inconsistent with those described there, the terms described here are controlling. The applicable pricing supplement
for your notes may also contain additional or different terms of the applicable notes.
We or our affiliates may, at any time and from time to time,
purchase outstanding notes in the open market, by private agreement or in other transactions.
Cash Settlement Amount at Maturity
The “Maturity Date” will be specified in the applicable
pricing supplement. Unless otherwise set forth in the applicable pricing supplement, the Maturity Date will be the third scheduled Business
Day following the last Index Business Day in the Final Measurement Period, unless that day is not a Business Day, in which case the Maturity
Date will be the following Business Day, subject to adjustment as described below under “— Market Disruption Events.”
The Maturity Date of any of the notes may be extended at our option for up to two additional five-year periods. We may only extend a scheduled
Maturity Date for five years at a time. If we exercise our option to extend the maturity, we will notify DTC and the trustee at least
45 but not more than 60 calendar days prior to the then scheduled Maturity Date, including the new Calculation Date determined by
the Calculation Agent. We will provide that notice to DTC and the trustee in respect of each five-year extension of the scheduled Maturity
Date.
For each note, unless earlier called or redeemed, you will receive
at maturity a cash payment equal to the arithmetic mean of the closing Indicative Note Values on each Index Business Day in the Final
Measurement Period. We refer to this cash payment as the “Cash Settlement Amount.” This amount will not be less than $0.
On the Initial Trade Date, the Indicative Note Value of the applicable
notes will equal the principal amount. The principal amount will be $50, unless specified otherwise in the applicable pricing supplement.
On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the closing Indicative Note Value will equal
(a) the Deposit Amount on such Exchange Business Day minus (b) the Short Index Amount on such Exchange Business Day; provided that
if such calculation results in a value equal to or less than $0, the closing Indicative Note Value will be $0. If the closing Indicative
Note Value is $0 on any Exchange Business Day or the Intraday Indicative Value at any time during an Exchange Business Day is equal to
or less than $0, then the Indicative Note Value on all future Exchange Business Days for those notes will be $0 and the Cash Settlement
Amount will be $0.
On the Initial Trade Date, the Deposit Amount of the applicable
notes will equal the principal amount plus the Short Index Amount on the Initial Trade Date, which sum will equal $150 for notes with
2 times leverage, and $200 for notes with 3 times leverage. On any subsequent Exchange Business Day until maturity, call or redemption
of the notes, the Deposit Amount will equal (a) the closing Indicative Note Value on the immediately preceding Exchange Business Day times
the Daily Deposit Factor plus (b) the Daily Interest on such Exchange Business Day minus (c) the Daily Investor Fee on such Exchange Business
Day.
On the Initial Trade Date, the Short Index Amount will equal
the Daily Leverage Factor times the principal amount, which will equal $100 for notes with 2 times leverage, and $150 for notes with 3
times leverage. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Short Index Amount will equal
the product of (a) the closing Indicative Note Value on the immediately preceding Exchange Business Day times (b) the Daily Leverage
Factor times (c) the Index Performance Factor on that Exchange Business Day.
The Daily Leverage Factor is 2 or 3, as applicable. The Daily
Deposit Factor is 3 in the case of -2x leveraged notes, and 4 in the case of -3x leveraged notes.
On the Initial Trade Date, the Index Performance Factor of the
applicable notes will be 1. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Index Performance
Factor will equal (a) the Index Closing Level on such Exchange Business Day (or, if such day is not an Index Business Day, the Index Closing
Level on the immediately preceding Index Business Day) divided by (b) the Index Closing Level on the immediately preceding
Index Business Day, as determined by the Calculation Agent. If a Market Disruption Event occurs or is continuing on any Index Business
Day, the Calculation Agent will determine the Index Performance Factor for the notes on each such Index Business Day using an appropriate
closing level of the applicable Index for each such Index Business Day, taking into account the nature and duration of such Market Disruption
Event. Furthermore, if a Market Disruption Event occurs and is continuing with respect to the notes on any Index Business Day or occurred
or was continuing on the immediately preceding Index Business Day, the calculation of the Index Performance Factor will be modified so
that the applicable leveraged exposure does not reset until the first Index Business Day on which no Market Disruption Event with respect
to the notes is continuing.
Accordingly, if a Market Disruption Event with
respect to the notes occurs or is continuing on any Index Business Day (for purposes of this paragraph, the “date of determination”)
or if a Market Disruption Event with respect to the notes occurred or was continuing on the Index Business Day immediately preceding the
date of determination, then the Index Performance Factor for the notes on the date of determination will equal one plus the quotient of
(a) the difference of (i) the closing level of the applicable Index on the date of determination, minus (ii) the closing level of the
Index on the Index Business Day immediately preceding the date of determination, divided by (b) the difference of (i) the product of the
Daily Deposit Factor and the closing level of the Index on the Index Business Day on which no Market Disruption Event occurred or was
continuing that most closely precedes the date of determination, minus (ii) the product of the Daily Leverage Factor and the closing level
of the applicable Index on the Index Business Day immediately preceding the date of determination.
Unless otherwise specified in the applicable pricing supplement,
on the Initial Trade Date, the Daily Interest will be $0. On any subsequent Exchange Business Day until maturity, call or redemption of
the applicable notes, the Daily Interest will equal the product of (a) the closing Indicative Note Value on the immediately preceding
Exchange Business Day times (b) the Daily Deposit Factor times (c) the Daily Interest Rate divided by (d) 365 times (e) the number of
calendar days since the last Exchange Business Day. Because the Daily Interest is calculated and added to the Deposit Amount on a daily
basis, the net effect of the Daily Interest accrues over time. The Daily Interest Rate will vary in time and can become negative on certain
days. On such days, the Daily Interest will also be negative.
Unless otherwise specified in the applicable pricing supplement,
Daily Interest Rate will equal (a) the most recent US Federal Funds Effective Rate minus (b) 1.00%. The US Federal Funds Effective
Rate is an interest rate that represents the rate at which U.S. banks may lend reserve balances to other depository institutions overnight,
on an uncollateralized basis. The rate is released by the NY Federal Reserve each day at approximately 9:00 a.m. EST for the prior business
day and published on Bloomberg page “FEDL01 Index”. If the Calculation Agent determines that this rate is no longer published
or available, the Calculation Agent may substitute a successor rate, with any applicable adjustments, as it reasonably determines to be
appropriate under the circumstances. On the days when the US Federal Funds Effective Rate is lower than 1.00%, the Daily Interest Rate
will be negative.
On the Initial Trade Date, the Daily Investor Fee of the applicable
notes will be $0. On any subsequent Exchange Business Day until maturity, call or redemption of the notes, the Daily Investor Fee will
equal the product of (a) the Indicative Note Value at the close of the immediately preceding Exchange Business Day times (b) the
Fee Rate divided by (c) 365 times (d) the number of calendar days since the last Exchange Business Day. Because the Daily
Investor Fee is subtracted from the Deposit Amount, and the Deposit Amount is calculated as part of the closing Indicative Note Value
on a daily basis, the net effect of the Daily Investor Fee accumulates over time and is subtracted at a rate per year equal to the Fee
Rate. Because the net effect of the Daily Investor Fee is a fixed percentage of the value of the notes, the aggregate effect of the Daily
Investor Fee will increase or decrease in a manner directly proportional to the value of the notes and the amount of notes that are held.
The “Intraday Indicative Value” of the notes at any
time during an Exchange Business Day will equal (a) the Deposit Amount minus (b) the Intraday Short Index Amount; provided that if such
calculation results in a value equal to or less than $0, the Intraday Indicative Value will be $0. If the Intraday Indicative Value is
equal to or less than $0 at any time on any Exchange Business Day, then both the Intraday Indicative Value and the closing Indicative
Note Value on that Exchange Business Day, and on all future Exchange Business Days, will be $0.
The “Intraday Short Index Amount” will equal the
product of (a) the closing Indicative Note Value on the immediately preceding Exchange Business Day times (b) the Daily Leverage Factor
times (c) the Intraday Index Performance Factor.
The “Intraday Index Performance Factor” will equal
(a) the most recently published level of the applicable Index divided by (b) the Index Closing Level on the immediately preceding Index
Business Day.
The applicable Fee Rate will be specified in the applicable pricing
supplement.
You may lose some or all of your investment at maturity or call,
or upon early redemption. Because the Daily Investor Fee and any negative Daily Interest reduce your final payment, the level of the applicable
Index will need to have decreased sufficiently over the term of the notes in an amount, after giving effect to the daily leverage and
the compounding effect thereof, sufficient to offset the decrease in principal amount represented by the Daily Investor Fee and any negative
Daily Interest in order for you to receive an aggregate amount over the term of the notes equal to at least the principal amount. Due
to leverage, the notes are very sensitive to changes in the level of the applicable Index and the path of such changes. If the decrease
in the level of the applicable Index, measured as a component of the closing Indicative Note Value during the Final Measurement Period,
is insufficient to offset the cumulative negative effect of the Daily Investor Fee and any negative Daily Interest, you will lose some
or all of your investment at maturity or call, or upon early redemption. This loss may occur even if the Index Closing Level at any
time during the Final Measurement Period is less than the Index Closing Level on the Initial Trade Date. It is possible that you will
suffer significant losses in the notes even if the long-term performance of the applicable Index is flat or negative (before taking into
account the negative effect of the Daily Investor Fee, the Daily Interest, and the Redemption Fee Amount, if applicable). In
addition, if the closing Indicative Note Value or the Intraday Indicative Value of the notes is equal to or less than $0, then the notes
will be permanently worth $0 and the Cash Settlement Amount will be $0 (a total loss of value).
The “Initial Index Level” will be specified in the
applicable pricing supplement, and will be the Index Closing Level for the applicable Index on the applicable Initial Trade Date.
Unless otherwise set forth in the applicable pricing supplement,
the “Final Measurement Period” means the five Index Business Days from and including the Calculation Date, subject to adjustment
as described under “— Market Disruption Events.”
The “Index Calculation Agent” means the entity that
calculates and publishes the level of the applicable Index, as specified in the applicable pricing supplement.
The “Calculation Date” will be specified in the applicable
pricing supplement. If that day is not an Index Business Day, the Calculation Date will be the next Index Business Day, subject to adjustments.
“Index Business Day” means any day on which the applicable
Index Sponsor publishes the Index Closing Level.
Unless otherwise set forth in the applicable pricing supplement,
“Primary Exchange” means, with respect to each Index constituent or each component underlying a successor index, the primary
exchange or market of trading such Index constituent or such component underlying a successor index.
Unless otherwise set forth in the applicable pricing supplement,
“Related Exchange” means, with respect to each Index constituent or each component underlying a successor index, each exchange
or quotation system where trading has a material effect (as determined by the Calculation Agent) on the overall market for futures or
options contracts relating to such Index constituent or such component underlying a successor index.
“Exchange Business Day” means any day on which the
primary exchange or market for trading of the applicable notes is scheduled to be open for trading.
“Business Day” means a Monday, Tuesday, Wednesday,
Thursday or Friday that is neither a legal holiday nor a day on which banking institutions are authorized or obligated by law or executive
order to close in New York City.
Early Redemption at the Option of the Holders
Subject to your compliance with the procedures described below,
you may submit a request on any Business Day to elect to require us to redeem your notes (subject to a minimum redemption amount set forth
in the applicable pricing supplement) between and including the applicable Redemption Dates. If you so elect and have done so in compliance
with the redemption procedures described below, and subject to the postponements and adjustments described under “— Market
Disruption Events,” you will receive payment for the redeemed notes on the applicable Redemption Date. The “Redemption Amount”
will equal (a) the Indicative Note Value as of the Redemption Measurement Date minus (b) the Redemption Fee Amount (as defined below).
You must comply with the redemption procedures described below
in order to redeem your notes. For any applicable redemption request, the “Redemption Notice Date” will be the date that the
applicable Redemption Notice and Redemption Confirmation (each as defined below) are delivered. If such Redemption Notice or Redemption
Confirmation is delivered on a day that is not an Index Business Day, then the Redemption Notice Date will be the next Index Business
Day. To satisfy the minimum redemption amount, your broker or other financial intermediary may bundle your notes for redemption with those
of other investors to reach the minimum required amount of notes; however, there can be no assurance that they can or will do so. We may
from time to time in our sole discretion reduce the applicable minimum redemption amount. Any such reduction will be applied on a consistent
basis for all holders of the applicable notes at the time the reduction becomes effective.
The notes will be redeemed and the holders will receive payment
for their notes on the third Business Day following the applicable Redemption Measurement Date (the “Redemption Date”). The
first Redemption Date will be set forth in the applicable pricing supplement, and the final Redemption Date will be the last scheduled
Index Business Day prior to the Calculation Date or Call Calculation Date, as applicable. If a Market Disruption Event is continuing or
occurs on the applicable scheduled Redemption Measurement Date with respect to any of the applicable Index constituents, such Redemption
Measurement Date may be postponed as described under “— Market Disruption Events.”
The applicable “Redemption Measurement Date” means
the Index Business Day following the applicable Redemption Notice Date, subject to adjustments as described under “— Market
Disruption Events.”
If you exercise your right to have us redeem your notes, subject
to your compliance with the procedures described under “— Redemption Procedures,” you will receive for each note a cash
payment on the relevant Redemption Date equal to the Indicative Note Value as of the Redemption Measurement Date, minus the Redemption
Fee Amount.
The “Redemption Fee Amount” will be a percentage
of the Indicative Note Value set forth in the applicable pricing supplement. We reserve the right from time to time to reduce or waive
the Redemption Fee Amount in our sole discretion on a case-by-case basis. In exercising your right to have us redeem your notes, you should
not assume you will be entitled to the benefit of any such waiver.
We refer to this cash payment as the “Redemption Amount.”
This amount will not be less than $0.
For purposes of determining the Redemption Amount, the Index
Performance Factor used in calculating the closing Indicative Note Value as of the Redemption Measurement Date will be (a) the Index Closing
Level on the Redemption Measurement Date divided by (b) the Index Closing Level on the immediately preceding Index Business Day,
as determined by the Calculation Agent.
We will inform you of such Redemption Amount on the first Business
Day following the applicable Redemption Measurement Date.
You may lose some or all of your investment upon early redemption.
Because the cumulative negative effect of the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount reduce your
final payment, the level of the applicable Index will need to have decreased over the term of the applicable notes by an amount, after
giving effect to the daily leverage and the compounding effect thereof, sufficient to offset the decrease in principal amount represented
by the Daily Investor Fee, any negative Daily Interest and the Redemption Fee Amount in order for you to receive an aggregate amount upon
redemption equal to at least the principal amount of your notes. Due to the applicable leverage, the notes are very sensitive to changes
in the level of the applicable Index and the path of such changes. If the decrease in the level of the applicable Index, as measured on
the Redemption Measurement Date, is insufficient to offset such a cumulative negative effect, you will lose some or all of your investment
upon early redemption. It is possible that you will suffer significant losses in the notes upon redemption even if the long-term performance
of the applicable Index is flat or negative (before taking into account the negative effect of the Daily Investor Fee, the Daily Interest
and the Redemption Fee Amount).
The Redemption Amount is meant to induce arbitrageurs to counteract
any trading of the notes at a premium or discount to their indicative value. However, there can be no assurance that arbitrageurs will
employ the repurchase feature in this manner as to any of the notes.
Redemption Procedures
To redeem your notes, you must instruct your broker or other
person through whom you hold your notes to take the following steps through normal clearing system channels:
| Ø | deliver a notice of redemption, which we refer to as a “Redemption Notice,” which will be attached to the applicable pricing
supplement, to Bank of Montreal or its agent via email no later than 2:00 p.m. (New York City time) on the Index Business Day preceding
the applicable Redemption Measurement Date. If we receive your Redemption Notice by the time specified in the preceding sentence, we (or
our agent) will respond by sending you a form of confirmation of redemption, in a form that will be set forth in the applicable pricing
supplement, for your execution; |
| Ø | deliver the signed confirmation of redemption, which we refer to as the “Redemption Confirmation,” to us via e-mail in
the specified form by 5:00 p.m. (New York City time) on the same day. We or our affiliate must acknowledge receipt in order for your Redemption
Confirmation to be effective; |
| Ø | instruct your DTC custodian to book a delivery vs. payment trade with respect to your notes on the applicable Redemption Measurement
Date at a price equal to the Redemption Amount; and |
| Ø | cause your DTC custodian to deliver the trade as booked for settlement via DTC at or prior to 10:00 a.m. (New York City time) on the
applicable Redemption Date. |
Different brokerage firms may have different deadlines for accepting
instructions from their customers. Accordingly, as a beneficial owner of the notes, you should consult the brokerage firm through which
you own your interest for the relevant deadline. If your broker delivers your notice of redemption after 2:00 p.m. (New York City time),
or your confirmation of redemption after 5:00 p.m. (New York City time), on the Index Business Day prior to the applicable Redemption
Measurement Date, your notice will not be effective, you will not be able to redeem your notes until the following Redemption Date and
your broker will need to complete all the required steps if you wish to redeem your notes on any subsequent Redemption Date. In addition,
Bank of Montreal may request a medallion signature guarantee or such assurances of delivery as it may deem necessary in its sole discretion.
All instructions given to participants from beneficial owners of notes relating to the right to redeem their notes will be irrevocable.
If the applicable notes undergo a split or reverse split, the minimum number of notes needed to exercise your right to redeem will remain
the same.
Call Right
We have the right to redeem all, but not less than all, of any
issuance of the notes upon not less than 14 calendar days’ prior notice to the holders of the applicable notes. Such redemption
will occur on the applicable Call Settlement Date (as defined above). Upon early redemption in the event we exercise this right, you will
receive a cash payment equal to the arithmetic mean of the closing Indicative Note Values on each Index Business Day in the Call Measurement
Period.
We refer to this cash payment as the “Call Settlement Amount.”
This amount will not be less than $0.
We will inform you of such Call Settlement Amount on the first
Business Day following the last Index Business Day in the Call Measurement Period.
The holders will receive payment for their notes on the fifth
Business Day following the last Index Business Day in the Call Measurement Period (the “Call Settlement Date”). If a Market
Disruption Event is continuing or occurs on the scheduled Call Calculation Date with respect to any of the applicable Index constituents,
such Call Calculation Date may be postponed as described under “— Market Disruption Events.”
Unless otherwise set forth in the applicable pricing supplement,
the “Call Measurement Period” means the five Index Business Days from and including the Call Calculation Date, subject to
adjustments as described under “— Market Disruption Events.”
If we issue a call notice on any calendar day, the “Call
Calculation Date” will be the next Index Business Day after the call notice is issued.
You may lose some or all of your investment upon a call. Because
the Daily Investor Fee and any negative Daily Interest reduce your final payment, the level of the applicable Index will need to have
decreased over the term of the notes by an amount, after giving effect to the daily leverage and the compounding effect thereof, sufficient
to offset the decrease in the principal amount represented by the Daily Investor Fee and any negative Daily Interest in order for you
to receive an aggregate amount upon a call equal to at least the principal amount of your notes. Due to leverage, the notes are very sensitive
to changes in the level of the Index and the path of such changes. If the decrease in the level of the Index, measured as a component
of the closing Indicative Note Value during the Call Measurement Period, is insufficient to offset such a cumulative negative effect,
you will lose some or all of your investment upon a call. This loss may occur even if the Index Closing Level at any time during the Call
Measurement Period is less than the Initial Index Level. It is possible that you will suffer significant losses in the notes upon a
call even if the long-term performance of the applicable Index is flat or negative (before taking into account the negative effect of
the Daily Investor Fee and the Daily Interest).
Calculation Agent
BMOCM will act as the Calculation Agent for each of the notes.
The Calculation Agent will make all determinations relating to the notes, including the Index Performance Factor, the Index Closing Level
on any Index Business Day on which such Index Closing Level is to be determined during the term of the applicable notes, the Indicative
Note Value, the Deposit Amount, the Short Index Amount, the Daily Interest, the Daily Investor Fee, the Redemption Fee Amount, the Cash
Settlement Amount, if any, that we will pay you at maturity, the Redemption Amount, if any, that we will pay you upon redemption, if applicable,
and the Call Settlement Amount, if any, that we will pay you in the event that we call the applicable notes. The Calculation Agent will
also be responsible for determining whether a Market Disruption Event has occurred, whether the applicable Index has been discontinued
and whether there has been a material change in that Index. All determinations made by the Calculation Agent will be at the sole discretion
of the Calculation Agent and will, in the absence of manifest error, be conclusive for all purposes and binding on you and on us. The
holder of the notes will not be entitled to any compensation from us for any loss suffered as a result of any determinations or calculations
made by the Calculation Agent. We may appoint a different Calculation Agent from time to time after the date of this product supplement
or the applicable pricing supplement without your consent and without notifying you.
The Calculation Agent will provide written notice to the trustee
at its New York office, on which notice the trustee may conclusively rely, of the amount to be paid at maturity or call, or upon early
redemption, on or prior to 12:00 p.m., New York City time, on the Business Day immediately preceding the Maturity Date, any Redemption
Date any Call Settlement Date, as applicable.
All dollar amounts related to determination of the applicable
Indicative Note Value, the Deposit Amount, the Short Index Amount, the Daily Interest, the Daily Investor Fee, the Redemption Amount and
Redemption Fee Amount, if any, per note, the Call Settlement Amount, if any, per note, and the Cash Settlement Amount, if any, per note,
may be rounded as the Calculation Agent deems appropriate; and all dollar amounts paid on the aggregate principal amount of the applicable
notes per holder will be rounded to the nearest cent, with one-half cent rounded upward.
Market Disruption Events
If a Market Disruption Event occurs or is continuing on any day
that would otherwise constitute an Index Business Day, as determined by the Calculation Agent, that day will not be considered an Index
Business Day for purposes of determinations with respect to the applicable notes. As a result, the calculation of the Index Performance
Factor will be modified so that the applicable leverage does not reset until the first Index Business Day on which no Market Disruption
Event has occurred or is continuing.
To the extent a Market Disruption Event has occurred or is continuing
on an Averaging Date (as defined below) or on a Redemption Measurement Date, the closing Indicative Note Value for such Averaging Date
or for such Redemption Measurement Date will be determined by the Calculation Agent or one of its affiliates on the first succeeding Index
Business Day on which a Market Disruption Event does not occur or is not continuing (the “Deferred Averaging Date”) irrespective
of whether, pursuant to such determination, the Deferred Averaging Date would fall on a date originally scheduled to be an Averaging Date.
If the postponement described in the preceding sentence results in the closing Indicative Note Value being calculated on a day originally
scheduled to be an Averaging Date, for purposes of determining the closing Indicative Note Values on the Index Business Days during the
Final Measurement Period or Call Measurement Period, or on a Redemption Measurement Date, the Calculation Agent or one of its affiliates,
as the case may be, will apply the closing Indicative Note Value for such Deferred Averaging Date (i) on the date(s) of the original Market
Disruption Event and (ii) such Averaging Date. For example, if the Final Measurement Period or Call Measurement Period, as applicable,
for purposes of calculating the Cash Settlement Amount or Call Settlement Amount, respectively, is based on the arithmetic mean of the
closing Indicative Note Values on June 23, 2025, June 24, 2025, June 25, 2025, June 26, 2025 and June 27, 2025 and there is a Market Disruption
Event on June 23, 2025, but no other Market Disruption Event during the Final Measurement Period or Call Measurement Period, as applicable,
then the closing Indicative Note Value on June 24, 2025 will be used twice to calculate the Cash Settlement Amount or Call Settlement
Amount, respectively, and such Cash Settlement Amount or Call Settlement Amount, as applicable, will be determined based on the arithmetic
mean of the closing Indicative Note Values on June 24, 2025, June 24, 2025, June 25, 2025, June 26, 2025 and June 27, 2025.
In no event, however, will any postponement under the two immediately
preceding paragraphs result in the final Averaging Date or the Redemption Measurement Date, as applicable, occurring more than three Index
Business Days following the day originally scheduled to be such final Averaging Date or Redemption Measurement Date. If the third Index
Business Day following the date originally scheduled to be the final Averaging Date, or the Redemption Measurement Date, as applicable,
is not an Index Business Day or a Market Disruption Event has occurred or is continuing on such third Index Business Day, the Calculation
Agent or one of its affiliates will determine the Index Closing Level to be used in the calculation of the closing Indicative Note Value
based on its good faith estimate of the Index Closing Level that would have prevailed on such third Index Business Day but for such Market
Disruption Event.
An “Averaging Date” means each of the Index Business
Days during the Final Measurement Period or Call Measurement Period, as applicable, subject to adjustment as described in this document.
Any of the following will be a Market Disruption Event with respect
to the applicable Index, in each case as determined by the Calculation Agent in its sole discretion:
| (a) | the suspension, absence or material limitation of trading in a material number of the applicable Index constituents for more than
two hours or during the one-half hour before the close of trading in the applicable Primary Exchange or Primary Exchanges; |
| (b) | the suspension, absence or material limitation of trading in option or futures contracts relating to the applicable Index or to a
material number of Index constituents on a Related Exchange for more than two hours of trading or during the one-half hour before the
close of trading in that market; |
| (c) | the applicable Index is not published, or the Calculation Agent reasonably determines that the published level of the Index is or
may be inaccurate; or |
| (d) | any other event, if the Calculation Agent determines in its sole discretion that the event materially interferes with our ability
or the ability of any of our affiliates to unwind all or a material portion of a hedge with respect to the applicable notes that we or
our affiliates have effected or may effect as described in the section entitled “Use of Proceeds and Hedging.” |
The following events will not be Market Disruption Events with
respect to the applicable Index:
| (a) | a limitation on the hours or numbers of days of trading, but only if the limitation results from an announced change in the regular
business hours of the Primary Exchange or Related Exchange; or |
| (b) | a decision to permanently discontinue trading in the option or futures contracts relating to the applicable Index or any Index constituents. |
For this purpose, an “absence of trading” in the
primary securities market on which option or futures contracts related to the applicable Index or any Index constituents are traded will
not include any time when that market is itself closed for trading under ordinary circumstances.
Notwithstanding the occurrence of one or more of the events described
above, which may, in the Calculation Agent’s discretion, constitute a Market Disruption Event, the Calculation Agent in its discretion
may waive its right to postpone the determination of the Index Closing Level if it determines that one or more of the above events has
not and is not likely to materially impair its ability to determine the Index Closing Level on any date.
Discontinuance or Modification of an Index
If the applicable Index Sponsor discontinues publication of the
applicable Index and the Index Sponsor or anyone else publishes a substitute index that the Calculation Agent determines is comparable
to that Index, then the Calculation Agent will permanently replace that Index with that substitute index (the “successor index”)
for all purposes, and all provisions described in this product supplement as applying to the Index will thereafter apply to the successor
index instead. If the Calculation Agent replaces the applicable Index with a successor index, then the Calculation Agent will determine
the Cash Settlement Amount, Redemption Amount or Call Settlement Amount, as applicable, by reference to the successor index.
If the Calculation Agent determines that the publication of the
applicable Index is discontinued and there is no successor index, the Calculation Agent will determine the level of that Index and thus
the Cash Settlement Amount, Redemption Amount or Call Settlement Amount, as applicable, by a computation methodology that the Calculation
Agent determines will as closely as reasonably possible replicate the Index.
If the Calculation Agent determines that the applicable Index,
the Index constituents or the method of calculating that Index is changed at any time in any respect, including whether the change is
made by the Index Sponsor under its existing policies or following a modification of those policies, is due to the publication of a successor
index, is due to events affecting the Index constituents or is due to any other reason and is not otherwise reflected in the level of
the applicable Index by the Index Sponsor pursuant to the applicable methodology, then the Calculation Agent will be permitted (but not
required) to make such adjustments in the Index or the method of its calculation as it believes are appropriate to ensure that the Index
Closing Level used to determine the Cash Settlement Amount, Redemption Amount or Call Settlement Amount, as applicable, is equitable.
A substitution of the applicable Index for a successor index
or a material change in the method of calculating the Index could cause the notes to no longer satisfy the listing requirements and result
in the relevant securities exchange delisting the notes. A delisting of the notes would materially and adversely affect the liquidity
of the trading market for those notes.
Events of Default and Acceleration
Under the heading “Description of Debt Securities We May
Offer — Modification and Waiver of the Debt Securities — Events of Default” in the accompanying prospectus is a description
of events of default relating to debt securities including the notes.
Payment upon an Event of Default
In case an event of default with respect to any of the notes
shall have occurred and be continuing, the amount declared due and payable per note upon any acceleration of the applicable notes will
be determined by the Calculation Agent and will be an amount in cash equal to the Redemption Amount, calculated as if the date of acceleration
were the Redemption Measurement Date. For purposes of this calculation, the Redemption Fee Amount will be $0.
If the maturity of the applicable notes is accelerated because
of an event of default as described above, we will, or will cause the Calculation Agent to, provide written notice to the trustee at its
New York office, on which notice the trustee may conclusively rely, and to DTC of the cash amount due with respect to the applicable notes
as promptly as possible and in no event later than two Business Days after the date of acceleration.
Defeasance
The provisions described in the accompanying prospectus under
the heading “Description of Debt Securities We May Offer — Modification and Waiver of the Debt Securities — Defeasance”
are not applicable to the notes.
Manner of Payment and Delivery
Any payment on or delivery of the applicable notes at maturity
or call, or upon early redemption, will be made to accounts designated by you and approved by us, or at the corporate trust office of
the trustee in New York City, but only when the applicable notes are surrendered to the trustee at that office. We also may make any payment
or delivery in accordance with the applicable procedures of the depositary.
Modified Business Day
As described in “Description of the Notes We May Offer
— Payment Mechanics — Payment When Offices Are Closed” in the attached prospectus supplement, any payment on the notes
that would otherwise be due on a day that is not a Business Day may instead be paid on the next day that is a Business Day, with the same
effect as if paid on the original due date, except as described under “— Cash Settlement Amount at Maturity,” “—
Call Right” and “— Early Redemption at the Option of the Holders” above.
Clearance and Settlement
The DTC participants that hold the notes through DTC on behalf
of investors will follow the settlement practices applicable to equity securities in DTC’s settlement system with respect to the
primary distribution of the notes and secondary market trading between DTC participants.
Split or Reverse Split of the Notes
We or the Calculation Agent may initiate a split or reverse split
of any issuance of the notes on any Index Business Day. If we or the Calculation Agent decides to initiate a split or reverse split, we
will issue a notice to holders of the applicable notes and a press release announcing the split or reverse split, specifying the effective
date of the split or reverse split. The Calculation Agent will determine the ratio of such split or reverse split, as the case may be,
using relevant market indicia, and will adjust the terms of the applicable notes accordingly. Any adjustment of the closing value will
be rounded to 8 decimal places.
In the case of a reverse split, we reserve the right to address
odd numbers of notes (commonly referred to as “partials”) in a manner determined by the Calculation Agent in its sole discretion,
acting in good faith. For example, if the notes undergo a 1-for-4 reverse split, holders who own a number of the applicable notes on the
relevant record date that is not evenly divisible by 4 will receive the same treatment as all other holders for the maximum number of
notes they hold that is evenly divisible by 4, and we will have the right to compensate holders for their remaining or “partial”
notes in a manner determined by the Calculation Agent in its sole discretion. Our current intention is to provide holders with a cash
payment for their partials in an amount equal to the appropriate percentage of the closing Indicative Note Value of the notes on a specified
Index Business Day following the announcement date.
A split or reverse split of the notes will not affect the aggregate
stated principal amount of the applicable notes held by an investor, other than to the extent of any “partial” notes, but
it will affect the number of notes an investor holds, the denominations used for trading purposes on the exchange and the trading price,
and may affect the liquidity, of the applicable notes on the exchange.
THE INDEX
The applicable pricing supplement will set forth information
about the relevant Index, including its Index Sponsor, Index Calculation Agent, and other material information about that Index. We will
derive all information contained in any pricing supplement regarding the applicable Index from publicly available sources, without independent
investigation.
USE OF PROCEEDS AND HEDGING
The net proceeds we receive from the sale of each of the notes
will be used for general corporate purposes and, in part, by us or by one or more of our affiliates in connection with hedging our obligations
under those notes.
We expect to enter into transactions to hedge our obligations
under the applicable notes. Such transactions may involve purchases or sales of the applicable Index constituents or financial instruments
linked to the applicable Index and/or the Index constituents prior to or on the applicable Initial Issue Date. In addition, from time
to time after we issue any notes, we may enter into additional hedging transactions or unwind those hedging transactions previously entered
into. In this regard, we may:
| · | acquire or dispose of or otherwise repurchase long or short positions in some or all of the applicable Index constituents; |
| · | acquire or dispose of long or short positions in listed or over-the-counter options, futures, or other instruments linked to some
or all of the constituent issuers, the Index constituents or the applicable Index; |
| · | acquire or dispose of long or short positions in listed or over-the-counter options, futures, or other instruments linked to the level
of other similar market indices; or |
| · | engage in any combination of the above activities. |
We or our affiliates may acquire a long or short position in
securities similar to any of the notes from time to time and may, in our sole discretion, hold or resell those securities.
We may close out our hedge positions on or before the last Index
Business Day in the applicable Final Measurement Period or Call Measurement Period. That step may involve sales or purchases of the applicable
Index constituents, listed or over-the-counter options or futures on Index constituents or listed or over-the-counter options, futures,
or other instruments linked to the level of the applicable Index, as well as other instruments designed to track the performance of that
Index.
While we cannot predict an outcome, any of these hedging activities
or other trading activities of ours could potentially increase the level of the applicable Index, which could adversely affect your payment
at maturity, call or upon early redemption. It is possible that these hedging or trading activities could result in substantial returns
for us or our affiliates while the value of the notes declines. See “Risk Factors — Risks Relating to the Notes Generally
— We or our affiliates may have economic interests that are adverse to those of the holders of the notes as a result of our hedging
and other trading activities” above.
We have no obligation to engage in any manner of hedging activity
and will do so solely at our discretion and for our own account. We may hedge our exposure on the notes directly or we may aggregate this
exposure with other positions taken by us and our affiliates with respect to our exposure to the applicable Index or one or more constituent
issuers or the Index constituents. No noteholder will have any rights or interest in our hedging activity or any positions that we or
any unaffiliated counterparties may take in connection with our hedging activity.
SUPPLEMENTAL TAX CONSIDERATIONS
The following is a general description of certain tax considerations
relating to the notes. It does not purport to be a complete analysis of all tax considerations relating to the notes. Prospective purchasers
of the notes should consult their tax advisors as to the consequences under the tax laws of the country of which they are resident for
tax purposes and the tax laws of Canada and the U.S. of acquiring, holding and disposing of the notes and receiving payments under the
notes. This summary is based upon the law as in effect on the date of this product supplement and is subject to any change in law that
may take effect after such date. The applicable pricing supplement may set forth additional or different considerations relating to any
particular issuance of the notes.
Supplemental Canadian Tax Considerations
In the opinion of Torys LLP, our Canadian federal income tax
counsel, the following summary describes the principal Canadian federal income tax considerations generally applicable to a purchaser
who acquires from us as the beneficial owner the notes offered by this document, and who, at all relevant times, for purposes of the Income
Tax Act (Canada) and the Income Tax Regulations (collectively, the “Tax Act”), (1) is not, and is not deemed to be, resident
in Canada; (2) deals at arm’s length with us and with any transferee resident (or deemed to be resident) in Canada to whom the purchaser
disposes of notes, (3) is not affiliated with us, (4) does not receive any payment of interest on a note in respect of a debt or other
obligation to pay an amount to a person with whom we do not deal at arm’s length, (5) does not use or hold notes in a business carried
on in Canada and (6) is not a “specified shareholder” of ours as defined in the Tax Act for this purpose or a non-resident
person not dealing at arm’s length with such “specified shareholder” (a “Holder”). Special rules, which
are not discussed in this summary, may apply to a non-Canadian holder that is an insurer that carries on an insurance business in Canada
and elsewhere.
This section supersedes and replaces in its entirety the section
of the prospectus entitled “Canadian Taxation.”
This summary is based on the current provisions of the Tax Act
and on counsel’s understanding of the current administrative policies and assessing practices of the Canada Revenue Agency published
in writing prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act publicly announced by
or on behalf of the Minister of Finance (Canada) prior to the date of this document (the “Proposed Amendments”) and assumes
that all Proposed Amendments will be enacted in the form proposed. However, no assurances can be given that the Proposed Amendments will
be enacted as proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative
policy or assessing practice whether by legislative, administrative or judicial action nor does it take into account tax legislation or
considerations of any province, territory or foreign jurisdiction, which may differ from those discussed herein.
Canadian federal income tax considerations applicable to the
notes may be described more particularly when such notes are offered (and then only to the extent material) in a pricing supplement related
thereto if they are not addressed by the comments following and, in that event, the following will be superseded thereby to the extent
indicated in that pricing supplement. These Canadian federal income tax considerations may also be supplemented, amended and/or replaced
in a pricing supplement.
This summary is of a general nature only and is not, and is
not intended to be, legal or tax advice to any particular holder. This summary is not exhaustive of all Canadian federal income tax considerations.
Accordingly, prospective purchasers of the notes should consult their own tax advisors having regard to their own particular circumstances.
Interest paid or credited or deemed to be paid or credited by
us on a note (including amounts on account or in lieu of payment of, or in satisfaction of interest) to a Holder will not be subject to
Canadian non-resident withholding tax, unless any portion of such interest (other than on a “prescribed obligation,” as defined
in the Tax Act for this purpose) is contingent or dependent on the use of or production from property in Canada or is computed by reference
to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders
of any class or series of shares of the capital stock of a corporation. The administrative policy of the Canada Revenue Agency is that
interest paid on a debt obligation is not subject to withholding tax unless, in general, it is reasonable to consider that there is a
material connection between the index or formula to which any amount payable under the debt obligation is calculated and the profits of
the issuer. With respect to any interest on a note, or any portion of the principal amount of a note in excess of the issue price, such
interest or principal, as the case may be, paid or credited to a Holder should not be subject to Canadian non-resident withholding tax,
unless otherwise specified in the applicable pricing supplement.
In the event that a note, interest on which is not exempt from
Canadian non-resident withholding tax (other than a note which is an “excluded obligation,” as defined in the Tax Act for
this purpose) is redeemed in whole or in part, cancelled, repurchased or purchased by us or any other person resident or deemed to be
resident in Canada from a Holder or is otherwise assigned or transferred by a Holder to a person resident or deemed to be resident in
Canada for an amount which exceeds, generally, the issue price thereof, or in certain cases, the price for which such note was assigned
or transferred to the Holder by a person resident or deemed resident in Canada, the excess may be deemed to be interest and may, together
with any interest that has accrued on the note to that time, be subject to Canadian non-resident withholding tax.
Generally, there are no other taxes on income (including taxable
capital gains) payable by a Holder on interest, discount, or premium in respect of a note or on the proceeds received by a Holder on the
disposition of a note (including redemption, cancellation, purchase or repurchase).
U.S. Federal Income Tax Considerations
The following is a general description of certain material
U.S. federal income tax considerations relating to the notes. It does not purport to be a complete analysis of all U.S. federal income
tax considerations relating to the notes. Prospective purchasers of the notes should consult their tax advisors as to the consequences
under the tax laws of the country of which they are resident for tax purposes and the tax laws of Canada and the U.S. of acquiring, holding
and disposing of the notes and receiving payments under the notes. This summary is based upon the law as in effect on the date of this
product supplement and is subject to any change in law that may take effect after such date.
The following section supersedes the discussion of U.S. federal
income taxation in the accompanying prospectus and prospectus supplement in its entirety. This section is based on the Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations under the Code, published
rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.
This summary applies only to holders who are initial investors
and hold their notes as capital assets for U.S. federal income tax purposes and are not excluded from this discussion. This section does
not apply to classes of holders subject to special rules, such as partnerships, subchapter S corporations, other pass-through entities,
governments (or instrumentalities or agencies thereof), dealers in securities or currencies, traders in securities that elect to use a
mark-to-market method of accounting for their notes, banks, financial institutions, insurance companies, tax-exempt organizations, regulated
investment companies, real estate investment trusts, persons that hold notes as part of a straddle or a hedging or conversion transaction,
persons liable for alternative minimum tax, persons subject to Section 451(b) of the Code, U.S. expatriates or persons whose functional
currency for tax purposes is not the U.S. dollar. In addition, the discussion below assumes that an investor in the notes will be subject
to a significant risk that it will lose a significant amount of its investment in the notes.
If a partnership holds the notes, the U.S. federal income tax
treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership
holding the notes should consult its tax advisor with regard to the U.S. federal income tax treatment of an investment in the notes.
A U.S. holder is a beneficial owner of a note and that, for U.S.
federal income tax purposes, is (i) a citizen or individual resident of the United States, (ii) a domestic corporation, (iii) an estate
whose income is subject to U.S. federal income tax regardless of its source, or (iv) a trust if a U.S. court can exercise primary supervision
over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust. A
non-U.S. holder is a beneficial owner of a note that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign
corporation, or a foreign estate or trust.
Tax Treatment of the Notes
NO STATUTORY, JUDICIAL OR ADMINISTRATIVE AUTHORITY DIRECTLY DISCUSSES
HOW THE NOTES SHOULD BE TREATED FOR U.S. FEDERAL INCOME TAX PURPOSES. AS A RESULT, THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT
IN THE NOTES ARE UNCERTAIN. BECAUSE OF THE UNCERTAINTY, HOLDERS SHOULD CONSULT THEIR TAX ADVISORS IN DETERMINING THE U.S. FEDERAL INCOME
TAX AND OTHER TAX CONSEQUENCES OF THEIR INVESTMENT IN THE NOTES, INCLUDING THE APPLICATION OF STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN U.S. FEDERAL OR OTHER TAX LAWS.
We will not attempt to ascertain whether the issuer of any of
the applicable Index constituents would be treated as a “passive foreign investment company” within the meaning of Section
1297 of the Code or a “United States real property holding corporation” within the meaning of Section 897 of the Code. If
the issuer of one or more of such stocks were so treated, certain adverse U.S. federal income tax consequences could possibly apply. You
should refer to any available information filed with the SEC by the issuers of the applicable Index constituents and consult your tax
advisor regarding the possible consequences to you in this regard.
In the opinion of our counsel, Ashurst LLP, it would be generally
reasonable to treat a note with terms described in this product supplement as a pre-paid cash-settled derivative contract in respect of
the applicable Index for U.S. federal income tax purposes, and the terms of the notes require a holder and us (in the absence of a change
in law or an administrative or judicial ruling to the contrary) to treat the notes for all tax purposes in accordance with such characterization.
If the notes are so treated, and subject to the discussion below regarding the potential application of the constructive ownership rules
under Section 1260 of the Code, a U.S. holder generally should recognize capital gain or loss upon the sale, exchange, redemption or maturity
of the applicable notes in an amount equal to the difference between the amount a U.S. holder receives at such time and the U.S. holder’s
tax basis in those notes. In general, a U.S. holder’s tax basis in the notes will be equal to the price the holder paid for the
notes. Capital gain recognized by an individual U.S. holder generally is taxed at preferential rates where the property is held for more
than one year and generally is taxed at ordinary income rates where the property is held for one year or less. The deductibility of capital
losses is subject to limitations. The holding period for notes of a U.S. holder who acquires the notes upon issuance generally will begin
on the date after the issue date (i.e., the settlement date) of the notes. If the notes are held by the same U.S. holder until maturity,
that holder’s holding period generally will include the applicable Maturity Date.
Potential Application of Section 1260 of
the Code. To the extent that an applicable Index includes the type of financial asset described under Section 1260 of the Code (including,
among others, any equity interest in pass-thru entities such as ETFs, regulated investment companies, real estate investment trusts, partnerships,
and passive foreign investment companies, each a “Section 1260 Financial Asset”), while the matter is not entirely clear,
unless otherwise specified in the applicable terms supplement, there exists a substantial risk that an investment in a note is, in whole
or in part, a “constructive ownership transaction” to which Section 1260 of the Code applies. If Section 1260 of the Code
applies, all or a portion of any long-term capital gain recognized by a U.S. holder in respect of a note will be recharacterized as ordinary
income (the “Excess Gain”). In addition, an interest charge will also apply to any deemed underpayment of tax in respect of
any Excess Gain to the extent such gain would have resulted in a gross income inclusion for the U.S. holder in taxable years prior to
the taxable year of the call, sale, or maturity (assuming such income accrued at a constant rate equal to the applicable federal rate
as of the date of call, sale, or maturity).
If an investment in a note is treated as a
constructive ownership transaction, it is not clear to what extent any long-term capital gain of a U.S. holder in respect of the note
will be recharacterized as ordinary income. It is possible, for example, that the amount of the Excess Gain (if any) that would be recharacterized
as ordinary income in respect of the note will equal the excess of (i) any long-term capital gain recognized by the U.S. holder in respect
of the note and attributable to Section 1260 Financial Assets, over (ii) the “net underlying long-term capital gain” (as defined
in Section 1260 of the Code) such U.S. holder would have had if such U.S. holder had acquired an amount of the corresponding Section 1260
Financial Assets at fair market value on the original issue date for an amount equal to the portion of the issue price of the note attributable
to the corresponding Section 1260 Financial Assets and sold such amount of Section 1260 Financial Assets upon the date of call, sale,
or maturity of the note at fair market value. To the extent any gain is treated as long-term capital gain after application of the recharacterization
rules of Section 1260 of the Code, such gain would be subject to U.S. federal income tax at the rates that would have been applicable
to the net underlying long-term capital gain. However, unless otherwise established by clear and convincing evidence, the net underlying
long-term capital gain is treated as zero. U.S. holders should consult their tax advisors regarding the potential application of Section
1260 of the Code to an investment in a note.
Information With Respect to Foreign Financial Assets.
An individual U.S. holder who, during any taxable year, holds any interest in “specified foreign financial assets” with an
aggregate value in excess of $50,000 (and in some circumstances, a higher threshold) may be required to file an information report with
respect to such assets with his or her tax returns. “Specified foreign financial assets” may include financial accounts maintained
by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial
institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that
have non-U.S. issuers or counterparties, and (iii) interests in foreign entities. Under these rules, the notes may be treated as “specified
foreign financial assets.” Holders are urged to consult their tax advisors regarding the application of this reporting requirement
to their ownership of the notes.
Additional Medicare Tax on Unearned Income. Certain U.S.
holders will be subject to an additional 3.8% Medicare tax on unearned income. For individual U.S. holders, the additional Medicare tax
applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over
$200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally
equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income. Investment income generally
includes passive income such as dividends and capital gains. U.S. holders are urged to consult their own tax advisors regarding the implications
of the additional Medicare tax resulting from an investment in the notes.
Alternative Treatments. Alternative tax treatments of
the notes are also possible and the Internal Revenue Service (“IRS”) might assert that a treatment other than that
described above is more appropriate. For example, it would be possible to treat the notes, and the IRS might assert that the notes should
be treated, as a single debt instrument. Such a debt instrument would generally be subject to the special tax rules governing contingent
payment debt instruments. If the notes are so treated, a U.S. holder would generally be required to accrue interest currently over the
term of the notes even though that holder will not receive any payments from us prior to maturity. In addition, any gain a U.S. holder
might recognize upon the sale, exchange, redemption or maturity of the notes would be ordinary income and any loss recognized by a holder
at such time would be ordinary loss to the extent of interest that same holder included in income in the current or previous taxable years
in respect of the notes, and thereafter, would be capital loss. It is also possible that the IRS could seek to tax the notes by reference
to a holder’s deemed ownership of the applicable Index constituents. In such case, a U.S. holder could be required to recognize
amounts of income, gain or loss as if such holder had actually owned interests in those Index constituents. Under this alternative treatment,
a U.S. holder could also be required to currently recognize gain or loss, at least some of which could be short-term capital gain (and
possibly loss), each time the applicable Index rebalances.
The IRS could also assert that a holder should be required to
treat any amounts attributable to the Daily Investor Fee and any Redemption Fee Amount as separate investment expenses. For taxable years
beginning after December 31, 2017 and beginning on or before December 31, 2025, the deduction of any such deemed expenses generally would
not be permitted to a holder who is an individual, trust or estate. For taxable years beginning after December 31, 2025, the deduction
of any such deemed expenses generally would be subject to a 2% floor on miscellaneous itemized deductions applicable to a holder who is
an individual, trust or estate. Such amount correspondingly would increase the amount of gain and income or decrease the amount of loss
recognized by a holder with respect to an investment in the notes.
In addition to and separate from an alternative tax treatment
of deemed ownership of the applicable Index constituents, it is possible that a deemed taxable exchange could occur on one or more of
the applicable Index rebalancing dates or upon any extension by us of the Maturity Date or that the notes could be treated as a series
of derivative contracts, each of which matures on the next rebalancing date. If the notes were properly characterized in such a manner,
a U.S. holder would be treated as disposing of the notes on each rebalancing date or extension, as the case may be, in return for new
notes that mature on the next rebalancing date or on the extended Maturity Date, as the case may be, and a U.S. holder could accordingly
recognize capital gain or loss on each rebalancing date or extension, as the case may be, equal to the difference between the holder’s
tax basis in the notes (which would be adjusted to take into account any prior recognition of gain or loss) and the fair market value
of the notes on such date.
Because of the absence of authority regarding the appropriate
tax characterization of the notes, it is also possible that the IRS could seek to characterize the notes in a manner that results in other
tax consequences that are different from those described above. For example, the IRS could assert that any gain or loss that a holder
may recognize upon the call, sale, exchange, redemption or maturity of the notes should be treated as ordinary gain or loss.
The IRS has released a notice that may affect the taxation of
holders of the notes. According to the notice, the IRS and the Treasury Department are actively considering whether the holder of an instrument
such as the notes should be required to accrue ordinary income on a current basis, and they sought taxpayer comments on the subject. It
is not possible to determine what guidance will ultimately be issued, if any. It is possible, however, that under such guidance, holders
of the notes will ultimately be required to accrue income currently and this could be applied on a retroactive basis. The IRS and the
Treasury Department are also considering other relevant issues, including whether additional gain or loss from such instruments should
be treated as ordinary or capital and whether the special “constructive ownership rules” of Section 1260 of the Code might
be applied to such instruments. Further, future legislation, including legislation based on bills previously introduced in Congress, may
tax all derivative instruments on a mark-to-market basis, requiring holders of such derivative instruments to take into account annually
gains and losses on such instruments as ordinary income. The adoption of such legislation or similar proposals may significantly impact
the tax consequences from an investment in the notes, including the timing and character of income and gain on the notes. Holders should
consult their tax advisor as to the tax consequences of possible alternative characterizations of the notes for U.S. federal income tax
purposes and proposals to change the taxation of certain derivative instruments. We intend to treat the notes for U.S. federal income
tax purposes in accordance with the treatment described in this product supplement unless and until such time as the Treasury Department
and IRS determine that some other treatment is more appropriate.
Non-U.S. Holders
The following discussion applies to non-U.S. holders of the notes.
A non-U.S. holder is a beneficial owner of a note that, for U.S. federal income tax purposes, is a non-resident alien individual, a foreign
corporation, or a foreign estate or trust.
Except as discussed below, a non-U.S. holder generally will not
be subject to U.S. federal income or withholding tax for amounts paid in respect of the notes, provided that (i) the holder complies with
any applicable certification requirements, (ii) the payment is not effectively connected with the conduct by the holder of a U.S. trade
or business, and (iii) if the holder is a non-resident alien individual, such holder is not present in the U.S. for 183 days or more during
the taxable year of the sale, exchange, redemption or maturity of the notes. In the case of (ii) above, the holder generally would be
subject to U.S. federal income tax with respect to any income or gain in the same manner as if the holder were a U.S. holder and, in the
case of a holder that is a corporation, the holder may also be subject to a branch profits tax equal to 30% (or such lower rate provided
by an applicable U.S. income tax treaty) of a portion of its earnings and profits for the taxable year that are effectively connected
with its conduct of a trade or business in the U.S., subject to certain adjustments.
Under Section 871(m) of the Code, a “dividend
equivalent” payment is treated as a dividend from sources within the United States. Such payments generally would be subject to
a 30% U.S. withholding tax if paid to a non-U.S. holder. Under U.S. Treasury Department regulations, payments (including deemed payments)
with respect to equity linked instruments (“ELIs”) that are “specified ELIs” may be treated as dividend equivalents
if such specified ELIs, directly or indirectly reference an interest in an “underlying security,” which generally is any interest
in an entity taxable as a corporation for U.S. federal income tax purposes if a payment with respect to such interest could give rise
to a U.S. source dividend. However, the IRS has issued guidance that states that the U.S. Treasury Department and the IRS intend to amend
the effective date of the U.S. Treasury Department regulations to provide that withholding on “dividend equivalent” payments
will not apply to specified ELIs that are not delta-one instruments and that are issued before January 1, 2023. We do not expect that
payments with respect to the notes will be subject to withholding under Section 871(m); however, to the extent we determine that withholding
is required, we will treat dividend equivalent payments, if any, as subject to withholding. We will not pay any additional amounts in
respect of any dividend equivalent withholding.
As discussed above, alternative characterizations of the notes
for U.S. federal income tax purposes are possible. Should an alternative characterization, by reason of change or clarification of the
law, by regulation or otherwise, cause payments as to the notes to become subject to withholding tax (including withholding on “dividend
equivalent” payments), we will withhold tax at the applicable statutory rate. The IRS has also indicated that it is considering
whether income in respect of instruments such as the notes should be subject to withholding tax. Prospective investors should consult
their own tax advisors in this regard.
Backup Withholding and Information Reporting
Holders may be subject to information reporting. Holders may
also be subject to backup withholding on payments in respect of their notes unless they provide proof of an applicable exemption or a
correct taxpayer identification number and otherwise comply with applicable requirements of the backup withholding rules. Non-U.S. holders
will not be subject to backup withholding if they provide a properly completed Form W-8 appropriate to their circumstances. Amounts withheld
under the backup withholding rules are not additional taxes and may be refunded or credited against U.S. federal income tax liability,
provided the required information is furnished to the IRS.
The Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (“FATCA”)
imposes a 30% U.S. withholding tax on certain U.S. source payments, including interest (and original issue discount), dividends, and other
fixed or determinable annual or periodical gain, profits, and income (“Withholdable Payments”), if paid to a foreign financial
institution (including amounts paid to a foreign financial institution on behalf of a holder), unless such institution enters into an
agreement with the U.S. Treasury Department to collect and provide to the U.S. Treasury Department certain information regarding U.S.
financial account holders, including certain account holders that are foreign entities with U.S. owners, with such institution, or otherwise
complies with the legislation. In addition, the notes may constitute a “financial account” for these purposes and, thus, be
subject to information reporting requirements pursuant to FATCA. FATCA also generally imposes a withholding tax of 30% on Withholdable
Payments made to a non-financial foreign entity unless such entity provides the withholding agent with a certification that it does not
have any substantial U.S. owners or a certification identifying the direct and indirect substantial U.S. owners of the entity. Under certain
circumstances, a holder may be eligible for refunds or credits of such taxes.
The U.S. Treasury Department has proposed regulations that eliminate
the requirement of FATCA withholding on payments of gross proceeds upon the sale or disposition of financial instruments of a type which
can produce U.S. source interest or dividends. The U.S. Treasury Department has indicated that taxpayers may rely on these proposed regulations
pending their finalization, and the discussion above assumes the proposed regulations will be finalized in their proposed form with retroactive
effect. If we determine withholding is appropriate with respect to the notes, we will withhold tax at the applicable statutory rate, and
we will not pay any additional amounts in respect of such withholding. Therefore, if such withholding applies, any payments on the notes
will be significantly less than what you would have overwise received. Depending on your circumstances, these amounts withheld may be
creditable or refundable to you. 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 are urged to consult
with their own tax advisors regarding the possible implications of FATCA on their investment in the notes.
EMPLOYEE RETIREMENT INCOME SECURITY
ACT
A fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA” and, each such plan, an “ERISA
Plan”) should consider the fiduciary standards of ERISA in the context of the ERISA Plan’s particular circumstances before
authorizing an investment in the applicable notes. Among other factors, the fiduciary should consider whether the investment would satisfy
the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the ERISA
Plan, and whether the investment would involve a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal
Revenue Code (the “Code”).
Section 406 of ERISA and Section 4975 of the Code prohibit
ERISA Plans, individual retirement accounts and Keogh plans subject to Section 4975 of the Code and entities such as collective investment
funds, partnerships or separate accounts whose underlying assets are deemed to include “plan assets” of such ERISA
Plans, accounts or plans (collectively, “Plans”), from engaging in certain transactions involving “plan assets”
with persons who are “parties in interest” under ERISA or “disqualified persons” under the Code
(in either case referred to herein as “parties in interest”) with respect to such Plans. As a result of our business,
we and our current and future affiliates may be parties in interest with respect to many Plans. Where the Bank of Montreal or our affiliate
is or becomes a party in interest with respect to a Plan, the purchase and holding of the notes by or on behalf of the Plan could be a
prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code and result in civil penalties or other liabilities under
ERISA or an excise tax under Section 4975 of the Code unless such acquisition and holding is pursuant to and in accordance with applicable
statutory, regulatory or administrative relief.
In this regard, Section 408(b)(17) of ERISA and Section 4975(d)(20)
of the Code provide an exemption for the purchase and sale of securities and related lending transactions where neither Bank of Montreal
nor any of its affiliates have or exercise any discretionary authority or control or render any investment advice with respect to the
assets of the Plan involved in the transaction and the Plan pays no more and receives no less than “adequate consideration”
in connection with the transaction (the “Service Provider Exemption”). Moreover, the United States Department of Labor
has issued five prohibited transaction class exemptions, or “PTCEs”, that may provide exemptive relief if required
for direct or indirect prohibited transactions that may arise from the purchase or holding of the notes. Those exemptions are:
| · | PTCE 84-14, an exemption for certain transactions determined or effected by independent qualified professional asset managers; |
| · | PTCE 90-1, an exemption for certain transactions involving insurance company pooled separate accounts; |
| · | PTCE 91-38, an exemption for certain transactions involving bank collective investment funds; |
| · | PTCE 95-60, an exemption for transactions involving certain insurance company general accounts; and |
| · | PTCE 96-23, an exemption for plan asset transactions managed by in-house asset managers. |
Accordingly, the notes may not be purchased or held by any Plan
or any person investing “plan assets” of any plan, unless in each case the purchaser or holder is eligible for exemptive
relief under one or more of the PTCEs listed above or under the Service Provider Exemption or there is some other basis on which the purchase
and holding of the notes will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Each purchaser or holder of the notes or any interest therein will therefore be deemed to have represented by such purchase and holding
that it either (1) is not a Plan and is not purchasing the notes on behalf of or with “plan assets” of any Plan
or (2) its purchase and holding of the notes will not result in a non-exempt prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code.
Certain employee benefit plans and arrangements including those
that are governmental plans (as defined in section 3(32) of ERISA), church plans (as defined in Section 3(33) of ERISA) and
non-U.S. plans (as described in Section 4(b)(4) of ERISA) (collectively, “Non-ERISA Arrangements”) are not subject
to the prohibited transaction rules of Section 406 of ERISA or Section 4975 of the Code, but may be subject to similar rules under applicable
laws or regulations (“Similar Laws”). As such, any purchaser or holder of the notes or any interest in the notes which
is, or is investing the assets of, a non-ERISA arrangement will be deemed to have represented by its purchase and holding of the notes
that such purchase and holding will not violate the provisions of any Similar Laws.
Due to the complexity of these rules and the penalties that may
be imposed upon persons involved in non-exempt prohibited transactions, it is important that fiduciaries or other persons considering
purchasing the notes on behalf of or with “plan assets” of any Plan or non-ERISA arrangement consult with their counsel
regarding the availability of exemptive relief under any of the PTCEs listed above, the Service Provider Exemption or any other applicable
exemption, or the potential consequences of any purchase or holding under Similar Laws, as applicable. If you are an insurance company
or the fiduciary of a pension plan or an employee benefit plan, and propose to invest in the notes, you should consult your legal counsel.
None of the Transaction Parties is undertaking to provide impartial
investment advice, or to give advice in a fiduciary capacity, in connection with the acquisition or holding of notes by any Plan or Non-ERISA
Arrangement. Each purchaser and holder of the notes has exclusive responsibility for ensuring that its purchase, holding and subsequent
disposition of the notes do not violate the fiduciary or prohibited transaction rules of ERISA, the Code or any Similar Laws. The sale
of notes to any Plan or Non-ERISA Arrangement is in no respect a representation by Bank of Montreal of any of our affiliates or any other
Transaction Party that such an investment is appropriate for, or meets all applicable legal requirements with respect to investments by,
Plans or Non-ERISA Arrangements generally or any particular Plan or Non-ERISA Arrangement.
SUPPLEMENTAL PLAN OF DISTRIBUTION
(CONFLICTS OF INTEREST)
The terms and conditions set forth in a Distribution Agreement
between Bank of Montreal and the Agents party thereto, including BMOCM, govern the sale and purchase of each of the notes.
We may deliver notes against payment therefor on a date that
is greater than two business days following the date of sale of any notes. Under Rule 15c6-1 of the Securities Exchange Act of 1934,
trades in the secondary market generally are required to settle in two business days, unless parties to any such trade expressly agree
otherwise. Accordingly, purchasers who wish to transact in notes that are to be issued more than two business days after the related trade
date will be required to specify alternative settlement arrangements to prevent a failed settlement.
BMOCM will act as our agent in connection with any redemptions
at the investor’s option, and the applicable Redemption Fee Amount applicable to any such redemptions will be paid to us. Additionally,
it is possible that BMOCM and its affiliates may profit from expected hedging activities related to any of the notes, even if the value
of those notes declines.
Each of BMOCM and any other broker-dealer offering the Notes
have not offered, sold or otherwise made available and may not offer, sell or otherwise make available any of the notes to, any retail
investor in the European Economic Area (“EEA”). For these purposes, the expression “offer” includes the communication
in any form and by any means of sufficient information on the terms of the offer and the notes to be offered so as to enable an investor
to decide to purchase or subscribe the notes, and a “retail investor” means a person who is one (or more) of: (a) a retail
client, as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or (b) a customer, within
the meaning of Directive (EU) 2016/97, as amended, where that customer would not qualify as a professional client as defined in point
(10) of Article 4(1) of MiFID II; or (c) not a qualified investor as defined in Regulation (EU) (2017/1129) (the “Prospectus Regulation”).
Consequently, no key information document required by Regulation (EU) No 1286/2014 (as amended, the “PRIIPs Regulation”) for
offering or selling the notes or otherwise making them available to retail investors in the EEA has been prepared,
and therefore, offering or selling the notes or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPs Regulation.
Each of BMOCM and any other broker-dealer offering the notes
have not offered, sold or otherwise made available and may not offer, sell or otherwise make available any of the notes to, any retail
investor in the United Kingdom. For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client, as
defined in point (8) of Article 2 of Regulation (EU) No 2017/565 as it forms part of domestic law by virtue of the European Union (Withdrawal)
Act 2018; or (ii) a customer within the meaning of the provisions of the Financial Services and Markets Act 2000 (the "FSMA")
and any rules or regulations made under the FSMA to implement Directive (EU) 2016/97, where that customer would not qualify as a professional
client, as defined in point (8) of Article 2(1) of Regulation (EU) No 600/2014 as it forms part of domestic law by virtue of the European
Union (Withdrawal) Act 2018. Consequently no key information document required by Regulation (EU) No 1286/2014 as it forms part of domestic
law by virtue of the European Union (Withdrawal) Act 2018 (the "UK PRIIPs Regulation") for offering or selling the notes or
otherwise making them available to retail investors in the UK has been prepared and therefore offering or selling the notes or otherwise
making them available to any retail investor in the UK may be unlawful under the UK PRIIPs Regulation.
Conflicts of Interest
BMOCM is an affiliate of Bank of Montreal and, as such, has a
“conflict of interest” in the offerings contemplated hereby, within the meaning of FINRA Rule 5121. Consequently, each offering
of the notes will be conducted in compliance with the provisions of Rule 5121. BMOCM is not permitted to sell notes in any offering to
an account over which it exercises discretionary authority without the prior specific written approval of the account holder.
PS-39
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