Registration
No. 333-158385
ENHANCED
MARKET PARTICIPATION NOTE PRODUCT SUPPLEMENT
(To
the Prospectus dated April 2, 2009 and the
Prospectus
Supplement dated April 9, 2009)
HSBC
USA INC.
Enhanced
Market Participation Notes
HSBC USA
Inc. may offer and sell enhanced market participation notes (the “notes”) linked
to the performance of a reference asset (as defined herein). This
product supplement will describe terms that will generally apply to the
notes. Specific terms of any notes offerings will be included in
supplements to this product supplement (each, a “pricing
supplement”). If the terms described in the applicable pricing
supplement are different or inconsistent with those described herein or in the
prospectus or prospectus supplement, the terms described in the applicable
pricing supplement will supersede.
No
Principal Protection
The
principal amount of your investment is not protected. You may receive less, and
possibly significantly less, than the amount you invested. For notes
with a buffer, you may lose a significant portion of your
investment. For notes with a knockout buffer and notes without a
buffer, your entire principal amount is at risk and you may lose up to 100% of
your investment.
Interest
Payments
Unless
otherwise specified in the applicable pricing supplement, the notes will not
make any periodic interest payments prior to the maturity date. Any
return on the notes will be paid on the maturity date specified in the
applicable pricing supplement.
Reference
Asset
The
principal, interest or any other amounts payable on the notes may be based on
price movements in or other events relating to various financial indices or
formulae or shares of exchange traded funds or non-financial indicators (each, a
“reference asset”) as specified in the applicable pricing
supplement. In addition, we may offer notes linked to the performance
of more than one reference asset.
Maturity
Date
The
applicable pricing supplement will specify the maturity date. The
maturity date may be postponed upon the occurrence of a market disruption
event.
Payment
at Maturity
Notes
without a buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes without a
buffer, the amount you will receive on the maturity date is based on the change
in the price or level of the reference asset over the term of the notes, as
described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If the
reference return is less than zero, you will lose 1% of the principal amount of
your notes for each percentage point that the reference return is below
0.00%. For example, if the reference return is -30%, you will suffer
a 30% loss and receive 70% of the principal amount.
Notes
with a buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes with a buffer,
the amount you will receive on the maturity date is based on the change in the
price or level of the reference asset over the term of the notes and the price
or level of the reference asset in relation to the initial value and the buffer
value, as described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If the
reference return is less than zero but greater than or equal to the buffer
value, you will receive the principal amount of the note.
If the
reference return is less than the buffer value, you will lose 1% of the
principal amount of your notes for each percentage point that the reference
return is below the buffer value. For example, if the buffer protects
the first 10% of loss and the reference return is -30%, you will suffer a 20%
loss and receive 80% of the principal amount.
As used
herein, the “reference return” is equal to the quotient of (i) the final value
of the reference asset minus the initial value of the reference asset divided by
(ii) the initial value of the reference asset. The “upside
participation rate,” if any, and the “maximum cap,” if any, will each have the
meaning specified in the applicable pricing supplement.
We may
also offer notes with a “knockout buffer,” in which the protection afforded by
the buffer is contingent upon the price or level of the reference asset
remaining above a “knockout value” on each day, or a set of predetermined dates,
during the term of the notes as specified in the applicable pricing
supplement.
Please
see “Valuation of Notes – At Maturity” on page PS-7 for a description of notes
with a knockout buffer, notes linked to a basket of reference assets and a more
detailed description of the payment at maturity. The applicable
pricing supplement will specify whether the notes have a buffer, a knockout
buffer, and any additional terms related to the particular
offering.
Ranking
The notes
will be our direct unsecured obligations and will rank on a parity with all of
our other unsecured and unsubordinated debt, except such obligations as may be
preferred by operation of law.
Listing
The notes
will not be listed on any U.S. securities exchange or quotation
system.
Investment
in the notes involves risks. You should refer to “Risk Factors”
beginning on page PS-4.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these notes or determined that this product
supplement is truthful or complete. Any representation to the contrary is a
criminal offense.
The notes
are not deposit liabilities of a bank and are not insured by the Federal Deposit
Insurance Corporation or any other governmental agency of the United States or
any other jurisdiction.
HSBC
SECURITIES (USA) INC.
April 9,
2009
TABLE
OF CONTENTS
PRODUCT
SUPPLEMENT
NOTICE
TO INVESTORS
|
PS-1
|
PRODUCT
SUPPLEMENT SUMMARY
|
PS-1
|
RISK
FACTORS
|
PS-4
|
PRICING
SUPPLEMENT OVERVIEW
|
PS-7
|
VALUATION
OF THE NOTES
|
PS-7
|
HYPOTHETICAL
EXAMPLES
|
PS-10
|
SPECIFIC
TERMS OF THE NOTES
|
PS-19
|
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
|
PS-24
|
EVENTS
OF DEFAULT AND ACCELERATION
|
PS-25
|
INFORMATION
REGARDING THE REFERENCE ASSET AND REFERENCE ISSUERS
|
PS-25
|
CERTAIN
ERISA CONSIDERATIONS
|
PS-25
|
VALIDITY
OF THE NOTES
|
PS-25
|
NOTICE
TO INVESTORS
Offers
and sales of the notes are subject to restrictions in some
jurisdictions. The distribution of this product supplement, the
prospectus supplement, the prospectus and any pricing supplement and the offer
or sale of the notes in some other jurisdictions may be restricted by
law. You should be aware that the regulations of the Financial
Industry Regulatory Authority, Inc. 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 product supplement, the prospectus supplement and any
pricing supplement 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.
PRODUCT
SUPPLEMENT SUMMARY
This
summary sets forth questions and answers highlighting information about the
notes to help you understand the notes. You should carefully read the
entire prospectus, prospectus supplement, this product supplement, any relevant
prospectus addendums and any accompanying pricing supplement to fully understand
the terms of the notes and any reference asset, as well as the principal tax and
other considerations that are important in deciding whether to invest in the
notes. You should also review the “Risk Factors” section on page PS-4
and in the prospectus supplement and the prospectus to determine whether an
investment in the notes is appropriate. The information in this
section is qualified in its entirety by the more detailed explanations set forth
elsewhere in this product supplement, the prospectus, the prospectus supplement,
any relevant prospectus addendums and any applicable pricing
supplement. References to the “prospectus” mean our prospectus, dated
April 2, 2009, and references to the “prospectus supplement” mean our prospectus
supplement, dated April 9, 2009, which supplements the prospectus.
As used
herein, references to “HSBC,” “we,” “us” and “our” are to HSBC USA
Inc.
Are
the notes principal protected?
No. The
notes do not guarantee any return of principal at maturity.
What
will I receive upon maturity of the notes?
Unless
otherwise specified in the applicable pricing supplement, on the maturity date
specified in the applicable pricing supplement, you will receive an amount in
cash equal to the cash settlement value, calculated as follows:
Notes
without a buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes without a
buffer, the amount you will receive on the maturity date is based on the change
in the price or level of the reference asset over the term of the notes, as
described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If the
reference return is less than zero, you will lose 1% of the principal amount of
your notes for each percentage point that the reference return is below
0.00%. For example, if the reference return is -30%, you will suffer
a 30% loss and receive 70% of the principal amount.
Notes
with a buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes with a buffer,
the amount you will receive on the maturity date is based on the change in the
price or level of the reference asset over the term of the notes and the price
or level of the reference asset in relation to the initial value and the buffer
value, as described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If the
reference return is less than zero but greater than or equal to the buffer
value, you will receive the principal amount of the note.
If the
reference return is less than the buffer value, you will lose 1% of the
principal amount of your notes for each percentage point that the reference
return is below the buffer value. For example, if the buffer protects
the first 10% of loss and the reference return is -30%, you will suffer a 20%
loss and receive 80% of the principal amount.
Notes
linked to a basket:
Unless
otherwise specified in the relevant pricing supplement, for notes linked to more
than one reference asset, the payment on the maturity date will be based on a
basket return, calculated as follows:
The
basket return equals the quotient of (i) the final basket level minus the
initial basket level divided by (ii) the initial basket level. The
initial basket level will be set equal to 100 on the pricing date of the
notes. The final basket level will be equal to the sum of the product
of the reference return for each reference asset multiplied by the weighting for
such reference asset within the basket.
Notes
with a knockout buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes with a
knockout buffer, the amount you will receive on the maturity date is based on
the change in the price or level of the reference asset over the term of the
notes and the price or level of the reference asset in relation to the initial
value, the buffer value and the knockout value, as described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If a
knockout event has not occurred and the reference return is less than zero but
greater than or equal to the buffer value, you will receive the principal amount
of the note.
If a
knockout event has not occurred and the reference return is less than the buffer
value, you will lose 1% of the principal amount of your notes for each
percentage point that the reference return is below the buffer
value. For example, if the buffer protects the first 10% of loss and
the reference return is -30%, you will suffer a 20% loss and receive 80% of the
principal amount.
If a
knockout event has occurred and the reference return is less than zero, you will
lose 1% of the principal amount of your notes for each percentage point that the
reference return is below zero. For example, if the reference return
is -30%, you will suffer a 30% loss and receive 70% of the principal
amount.
Unless
otherwise specified in the relevant pricing supplement, a “knockout event”
occurs if (i) for notes with intraday valuation, at any time during the
observation period or on any observation date, as applicable, the reference
value has declined below the knockout value, or (ii) for notes with daily
valuation, on any scheduled trading day during the observation period or on any
observation date, as applicable, the reference value, determined at the
scheduled closing time (as defined herein) for the reference asset, is less than
the knockout value.
The
relevant pricing supplement will specify whether intraday valuation or daily
valuation is applicable to the notes or, alternatively, may specify another
method for monitoring the reference asset, such as monthly or quarterly
valuation on “observation dates.”
Please
see “Valuation of Notes – At Maturity” on page PS-7 for additional terms related
to the notes and a more detailed description of the payment at
maturity. The applicable pricing supplement will specify whether the
notes have a buffer, a knockout buffer, and any additional terms related to the
particular offering.
Do
the notes pay interest?
The notes
will not make any periodic interest payments prior to the maturity
date. Any return on the notes will be paid on the maturity date
specified in the applicable pricing supplement.
What
are some of the risks of the notes?
An
investment in the notes involves risks. We urge you to read the “Risk
Factors” section on page PS-4 below and in the prospectus supplement and the
prospectus.
Who
should consider purchasing the notes?
The notes
are designed for investors who seek a potential return greater than that for
ordinary debt securities, who are willing to accept the risk of investing in the
reference asset, who are prepared to hold the notes until maturity and who
believe that (a) between the initial valuation date and the final valuation
date, inclusive, the price or level of the reference asset will increase; and
(b) the final value of the reference asset will not be greater than the maximum
cap, if any. Because notes do not guarantee the return of your
investment at maturity, the notes are designed for investors who are willing to
forego principal protection on their notes.
The notes
are designed for investors who do not seek principal protection, who are willing
to accept the risks of investing in equities in general and the reference asset
in particular, who do not seek an investment for which there will be an active
secondary market and who are willing to hold the notes until
maturity. Because the notes include the risk of investing in
equities, the notes are not designed for investors who prefer lower risk and
therefore accept the potentially lower returns of fixed income investments with
comparable maturities and credit ratings that bear interest at a prevailing
market rate.
What
is the reference asset?
The
specific reference asset will be described in the applicable pricing
supplement.
Please
note that an investment in the notes does not entitle you to any ownership or
other interest in the reference asset or the reference sponsor or reference
issuer, and you will not receive any payments in respect of dividends or other
distributions that may be payable to actual holders of the reference
asset. The reference sponsor or reference issuer is not an affiliate
of the issuer and is not involved in this offering in any way. The
obligations represented by the notes are debt obligations of us and are not
obligations of the reference sponsor or reference issuer.
How
does an investment in the notes differ from an investment in the reference
asset?
By
investing in the notes you will assume the risk that the reference return will
be less than zero or less than the buffer value, as applicable, causing the
payment at maturity to fall below the principal amount of the
notes. Much like an investment in the reference asset, you will be
exposed to the risk of the decline in the price or level of the reference asset
during the term of the notes. For notes with a buffer, unlike an
investment in the reference asset, you will be entitled to some level of
principal protection to the extent that the reference return is not less than
the buffer value and to the extent that no knockout event has occurred, if
applicable. However, for notes with a maximum cap, unlike an
investment in the reference asset, you will not be entitled to benefit from any
increase in the price or level of the reference asset over the maximum
cap. In addition, you will not be a beneficial owner of the reference
asset and therefore will not be entitled to receive any dividends or similar
amounts paid on the reference asset nor will you be entitled to purchase the
reference asset by virtue of your ownership of the notes. Moreover,
you will not be entitled to any voting rights or other control rights that
holders of the reference asset may have with respect to the reference
issuer. Instead you will be receiving a higher interest payment than
would generally be paid on notes of HSBC USA, Inc. or an issuer with a
comparable credit rating.
What
about taxes?
For a
complete discussion of the U.S. federal income tax consequences of your
investment in a note, please see the discussion under “Certain U.S. Federal
Income Tax Considerations.”
RISK
FACTORS
The notes
are riskier than ordinary unsecured debt securities. Prospective
purchasers of the notes should understand the risks of investing in the notes
and should reach an investment decision only after careful consideration with
their advisors of the suitability of the notes in light of their particular
financial circumstances, the following risk factors and the other information
included or incorporated by reference in the applicable pricing supplement, this
product supplement, the prospectus supplement and the prospectus. We
have no control over a number of matters, including economic, financial,
regulatory, geographic, judicial and political events, that are important in
determining the existence, magnitude, and longevity of these risks and their
influence on the value of, or the payments made on, the notes. You
should not purchase the notes unless you understand and can bear these
investment risks.
We urge
you to read the section “Risk Factors” on page S-3 in the accompanying
prospectus supplement. As you review “Risk Factors” in the
accompanying prospectus supplement, you should pay particular attention to the
following sections:
•
|
“—
Risks Relating to All Note
Issuances”;
|
•
|
“—
Additional Risks Relating to Notes with an Equity Security or Equity Index
as the Reference Asset”; and
|
•
|
“—
Additional Risks Relating to Certain Notes with More than One Instrument
Comprising the Reference Asset,” as
applicable.
|
You will
be subject to significant risks not associated with conventional fixed-rate or
floating-rate debt securities.
1)
|
The
notes are not principal protected and you may lose some or all of your
principal.
|
The notes
are not principal protected. The notes differ from ordinary debt securities in
that we will not pay you 100% of your principal amount if the reference return
is negative, in the case of notes without a buffer, or less than the buffer, in
the case of notes with a buffer. In that event, you will lose 1% of the original
principal amount for each percentage point that the reference return is below
0.00% or the buffer, as applicable. Accordingly, you may lose some or
all of your investment in the notes.
We cannot
predict the final price or level of any reference asset on the final valuation
date.
2)
|
Your
gain on the notes at maturity, if any, may not reflect the full
performance of the reference asset.
|
For notes
with a maximum cap, your payment at maturity per note will not be greater than
the amount equal to the principal amount plus the product of (i) the principal
amount and (ii) the maximum cap. This means that the maximum possible return for
each note is the maximum cap. Therefore, you may not have the benefit of full
exposure to the positive performance of the reference asset if the product of
the reference return multiplied by the upside participation rate is greater than
the maximum cap.
3)
|
The
notes will not be listed on any securities exchange or quotation
system.
|
The notes
will not be listed on any securities exchange or quotation system, and as a
result, there may be little or no secondary market for the
notes. Subject to regulatory constraints, HSBC Securities (USA) Inc.
or an affiliate has agreed to use reasonable efforts to make a market in the
notes for so long as the notes are outstanding. Even if there is a
secondary market, it may not provide enough liquidity to allow you to sell the
notes easily, and you may only be able to sell your notes at a dollar price less
than the amount that you paid for your notes. HSBC Securities (USA)
Inc. or any affiliate may cease acting as a market maker at any time and if it
does, it is likely that there would be no secondary market for the
notes.
4)
|
The
notes will not make periodic interest
payments.
|
As a
holder of the notes, you will not receive periodic interest
payments. Any return on the notes will be paid on the maturity date
specified in the applicable pricing supplement.
5)
|
Changes
that affect the reference asset will affect the market value of the notes
and the amount you will receive at
maturity.
|
The
policies of the publisher, sponsor or compiling authority for a reference asset
(the “reference sponsor”) or the underlying index of a reference asset, as
applicable, concerning additions, deletions and substitutions of the
constituents included in a reference asset or the underlying index (as defined
herein) of a reference asset, as applicable, and the manner in which a reference
sponsor takes account of certain changes affecting those constituents included
in the relevant reference asset or the underlying index of the relevant
reference asset, as applicable, may affect the price or level of that reference
asset. The policies of the reference sponsor with respect to the
calculation of the relevant reference asset or the underlying index of the
relevant reference asset, as applicable, could also affect the price or level of
that reference asset. The reference sponsor may discontinue or
suspend calculation or dissemination of the relevant reference asset or the
underlying index of the relevant reference asset, as applicable. Any
such actions could affect the value of the notes.
6)
|
No
interest or dividend payments or voting
rights.
|
The
return on your notes may not reflect the return you would realize if you
actually owned the stocks included in the reference asset or the underlying
index of the reference asset, as applicable. As a holder of the
notes, you will not receive interest payments, and you will not have voting
rights or rights to receive dividends or other distributions or other rights
that holders of the stocks underlying the reference asset or the underlying
index of the reference asset, as applicable, would have.
7)
|
Impact
of commissions and hedging costs.
|
The
original issue price of the notes includes the underwriting commissions and fees
and HSBC’s cost of hedging its obligations under the notes through one or more
of its affiliates. Such cost includes such affiliates’ expected cost of
providing the hedge, as well as the profit these affiliates expect to realize in
consideration for assuming the risks inherent in providing such hedge. As a
result, assuming no change in market conditions or any other relevant factors,
the price, if any, at which you will be able to sell the notes in secondary
market transactions, if at all, will likely be lower than the original issue
price.
8)
|
Potential
conflict of interest.
|
HSBC and
its affiliates may engage in business with the issuers or the stocks comprising
the reference asset or the underlying index of the reference asset, as
applicable, which may present a conflict between the obligations of HSBC and
you, as a holder or the notes. The calculation agent, who is the
issuer of the notes, will determine the payment at maturity based on the
observed price or level of the reference asset. The calculation agent
can postpone the determination of the final valuation date or the maturity date
if a market disruption event (as defined herein) occurs and is continuing on the
final valuation date.
9)
|
Potentially
inconsistent research, opinions or recommendations by
HSBC.
|
HSBC and
its affiliates may publish research, express opinions or provide recommendations
that are inconsistent with investing in or holding any offering of the
notes. Any such research, opinions or recommendations could affect
the price or level of the reference asset or the price of the stocks included in
the reference asset or the underlying index of the reference asset, as
applicable, and therefore, the market value of the notes.
The notes
are senior unsecured debt obligations of the issuer, HSBC USA Inc. and are not,
either directly or indirectly, an obligation of any third party. Any
payment to be made on the notes, depends on the ability of HSBC USA Inc. to
satisfy its obligations as they come due. As a result, the actual and
perceived creditworthiness of HSBC USA Inc. may affect the market value of the
notes and, in the event HSBC USA Inc. were to default on its obligations, you
may not receive the amounts owed to you under the terms of the
notes.
11)
|
Because
the tax treatment of the notes is uncertain, the material U.S. federal
income tax consequences of an investment in the notes are
uncertain.
|
There is
no direct legal authority as to the proper tax treatment of the notes, and
therefore significant aspects of the tax treatment of the notes are uncertain,
as to both the timing and character of any inclusion in income in respect of the
notes. Under one approach, the notes should be treated as pre-paid
forward or other executory contracts with respect to the reference
asset. We intend to treat the notes consistent with this
approach. Pursuant to the terms of the notes, you agree to treat the
notes under this approach for all U.S. federal income tax purposes, and in the
opinion of Cadwalader, Wickersham & Taft LLP, special U.S. tax counsel to
us, it is reasonable to treat the notes in accordance with this
approach. See “Certain U.S. Federal Income Tax Considerations —
Certain Equity-Linked Notes — Certain Notes Treated as Forward Contracts or
Executory Contracts” in the prospectus supplement for certain U.S. federal
income tax considerations applicable to notes that are treated as pre-paid
cash-settled forward or other executory contracts.
Certain
of the entities included in the reference asset could be treated as “real estate
investment trusts” (“REITs”), partnerships, trusts, or “passive foreign
investment companies” (“PFICs”) for U.S. federal income tax purposes, or
otherwise as “pass-thru entities” for purposes of section 1260 of the Internal
Revenue Code of 1986, as amended (the “Code”), in which case it is possible that
the note will be subject to the “constructive ownership” rules of section 1260
of the Code. If so, the portion of any gain that relates to a
pass-thru entity that would otherwise be treated as long-term capital gain
recognized on the sale, exchange, maturity, or other taxable disposition of the
notes could be treated as ordinary income and subject to an interest
charge.
Because
of the uncertainty regarding the tax treatment of the notes, we urge you to
consult your tax advisor as to the tax consequences of your investment in a
note. For a more complete discussion of the U.S. federal income tax
consequences of your investment in a note, please see the discussion under
“Certain U.S. Federal Income Tax Considerations.”
12)
|
Risks
relating to the reference asset.
|
The notes
are subject to the risks of any investment in common stocks, including the risk
that the prices of the stocks may decline. Any of the following
factors may have a negative effect on the value of any reference asset and thus
adversely affect the trading value of the notes or the amount that you may
receive at maturity. The following is a list of some of the
significant risks associated with a reference asset:
|
•
|
Historical
performance of any reference asset does not indicate future performance of
such reference asset. It is impossible to predict whether the
price or level of any reference asset will rise or fall during the term of
the notes; and
|
|
•
|
The
price or level of any reference asset will be influenced by political,
economic, financial, market and other factors. It is impossible
to predict what effect these factors will have on the price or level of
any reference asset.
|
Additional
Risks Related to Notes Linked to the Performance of Exchange Traded
Funds
13)
|
The
value of shares of a reference asset that is an exchange traded fund
(“ETF”) may not completely track the level of the index that underlies the
reference asset (the “underlying
index”).
|
Although
the trading characteristics and valuations of shares of a reference asset that
is an ETF will usually mirror the characteristics and valuations of the
underlying index, the value of the shares of such reference asset may not
completely track the level of the underlying index. The value of a
reference asset that is an ETF may reflect transaction costs and fees incurred
or imposed by the issuer of the ETF (the “reference issuer”) that are not
included in the calculation of the underlying index. Additionally,
because such reference asset may not actually hold all of the stocks that
comprise the underlying index but invests in a representative sample of
securities which have a similar investment profile as the stocks that comprise
the underlying index, the reference asset may not fully replicate the
performance of the underlying index.
14)
|
Investments
in notes linked to reference assets that are ETFs may involve industry
concentration risks.
|
The
stocks included in an underlying index may be stocks of companies representing a
particular market sector. As a result, an investment in the notes
will be concentrated in this single sector. Although an investment in
the notes will not give noteholders any ownership or other direct interests in
the stocks comprising the relevant underlying index, the return on an investment
in the notes will be subject to certain risks similar to those associated with
direct equity investments in the market sector represented by the relevant
underlying index.
Additional
Risks Related to Notes with a Knockout Buffer
15)
|
The
protection provided by the knockout buffer may terminate during the term
of the notes.
|
If the
reference value declines below the knockout value on any relevant scheduled
trading day during the observation period, you will be fully exposed to any
depreciation in the value of any reference asset at maturity. Under
these circumstances, if the final value is less than the buffer value, you will
lose 1% of the principal amount of your notes for each percentage point that the
reference return is below 0.00%. As a result, if you invest in notes
with a knockout buffer, you may lose up to 100% of your investment.
Additional
Risks Related to Notes Linked to a Basket of Reference Assets (each such
reference asset, a “basket component”)
16)
|
Changes
in the prices or levels of the basket components may offset each
other.
|
If the
notes are linked to a basket composed of basket components, then at a time when
the price or level of one or more of the basket components increases,
the price or level of one or more of the other basket components may not
increase by the same amount or may even decline. Therefore, in
calculating the basket return, increases in the prices or levels of one or more
of the basket components may be moderated, or wholly offset, by lesser increases
or declines in the prices or levels of one or more of the other basket
components.
PRICING
SUPPLEMENT OVERVIEW
The
pricing supplement for each offering of notes will contain the detailed
information and terms with respect to that particular offering. The
pricing supplement also may supplement, update or change information contained
in this product supplement, the prospectus supplement and the
prospectus. If the terms described in the applicable pricing
supplement are inconsistent with those described herein or in the prospectus or
prospectus supplement, the terms described in the applicable pricing supplement
will supersede. Any pricing supplement should be read along with this
product supplement, the prospectus supplement and the prospectus. It
is important that you consider all of the information in the pricing supplement,
this product supplement, the prospectus supplement and the prospectus when
making your investment decision.
Terms Specified in a Pricing
Supplement
. The following is a partial listing of the
information and terms of a note offering which may be included in a pricing
supplement:
|
·
|
initial
public offering price,
|
|
·
|
agents’
commission or discount, if any,
|
|
·
|
reference
asset and reference sponsor or reference
issuer,
|
|
·
|
ticker
symbol of reference asset,
|
|
·
|
initial
valuation date,
|
|
·
|
maturity
date and any terms related to any extension of the maturity date not
otherwise set forth in this product
supplement,
|
|
·
|
initial
value of reference asset,
|
|
·
|
upside
participation rate,
|
|
·
|
knockout
buffer, if any,
|
|
·
|
observation
period or observation dates, as applicable, and whether then notes will
have intraday valuation,
|
|
·
|
any
other applicable terms.
|
VALUATION
OF THE NOTES
At
Maturity
Unless
otherwise specified in the applicable pricing supplement, on the maturity date
specified in the applicable pricing supplement, you will receive an amount in
cash equal to the cash settlement value, calculated as follows:
Notes
without a buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes without a
buffer, the amount you will receive on the maturity date is based on the change
in the price or level of the reference asset over the term of the notes, as
described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If the
reference return is less than zero, you will lose 1% of the principal amount of
your notes for each percentage point that the reference return is below
0.00%. For example, if the reference return is -30%, you will suffer
a 30% loss and receive 70% of the principal amount.
Notes
with a buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes with a buffer,
the amount you will receive on the maturity date is based on the change in the
price or level of the reference asset over the term of the notes and the price
or level of the reference asset in relation to the initial value and the buffer
value, as described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If the
reference return is less than zero but greater than or equal to the buffer
value, you will receive the principal amount of the note.
If the
reference return is less than the buffer value, you will lose 1% of the
principal amount of your notes for each percentage point that the reference
return is below the buffer value. For example, if the buffer value is
equal to 90% of the initial value and the reference return is -30%, you will
suffer a 20% loss and receive 80% of the principal amount.
As used
herein, the “reference return” is equal to the quotient of (i) the final value
of the reference asset minus the initial value of the reference asset divided by
(ii) the initial value of the reference asset. The “upside
participation rate,” if any, and the “maximum cap,” if any, will each have the
meaning specified in the applicable pricing supplement.
Notes
linked to a basket:
Unless
otherwise specified in the relevant pricing supplement, for notes linked to more
than one reference asset, the payment on the maturity date will be based on a
basket return in place of the reference return, where the basket return is
calculated as follows:
The
basket return equals the quotient of (i) the final basket level minus the
initial basket level divided by (ii) the initial basket level. The
initial basket level will be set equal to 100 on the pricing date of the
notes. The final basket level will be equal to the sum of the product
of the reference return for each reference asset multiplied by the weighting for
such reference asset within the basket.
As used
herein, the weighting of each reference asset within the basket will be
specified in the applicable pricing supplement.
Notes
with a knockout buffer:
Unless
otherwise specified in the relevant pricing supplement, for notes with a
knockout buffer, the amount you will receive on the maturity date is based on
the change in the price or level of the reference asset over the term of the
notes and the price or level of the reference asset in relation to the initial
value, the buffer value and the knockout value, as described below:
If the
reference return is greater than or equal to zero, you will receive an amount on
the maturity date, per note, equal to (1) the principal amount of the note plus
(2) the lesser of:
(i) the
product of (a) the principal amount of the note multiplied by (b) the reference
return multiplied by the upside participation rate, if any; and
(ii) the
product of (a) the principal amount of the note multiplied by (b) the maximum
cap, if any.
If a
knockout event has not occurred and the reference return is less than zero but
greater than or equal to the buffer value, you will receive the principal amount
of the note.
If a
knockout event has not occurred and the reference return is less than the buffer
value, you will lose 1% of the principal amount of your notes for each
percentage point that the reference return is below the buffer
value. For example, if the buffer value is equal to 90% of the
initial value and the reference return is -30%, you will suffer a 20% loss and
receive 80% of the principal amount.
If a
knockout event has occurred and the reference return is less than zero, you will
lose 1% of the principal amount of your notes for each percentage point that the
reference return is below zero. For example, if the reference return
is -30%, you will suffer a 30% loss and receive 70% of the principal
amount.
For
notes with a knockout buffer, the protection provided by the knockout buffer
will terminate and you will lose some or all of your investment at maturity if
the final value is less than the initial value and a knockout event has
occurred.
Knockout
Event:
Unless
otherwise specified in the relevant pricing supplement, a “knockout event”
occurs if (i) for notes with intraday valuation, at any time during the
observation period or on any observation date, as applicable, the reference
value has declined below the knockout value, or (ii) for notes with daily
valuation, on any scheduled trading day during the observation period or on any
observation date, as applicable, the reference value, determined at the
scheduled closing time (as defined herein) for the reference asset, is less than
the knockout value.
The
relevant pricing supplement will specify whether intraday valuation or daily
valuation is applicable to the notes or, alternatively, may specify another
method for monitoring the reference asset, such as monthly or quarterly
valuation on “observation dates.”
You
may lose some or all of your investment if you invest in the notes.
Key
Terms:
Reference
Return:
|
The
quotient of (i) the final value of the reference asset minus the initial
value of the reference asset divided by (ii) the initial value of the
reference asset.
|
Initial
Value:
|
The
reference value on the trade date, as determined by the calculation agent
and specified in the applicable pricing supplement.
|
Final
Value:
|
The
reference value on the final valuation date, as determined by the
calculation agent in a manner specified in the applicable pricing
supplement.
|
Reference
Value:
|
The
price or level, as applicable, of the reference asset, as determined by
the calculation agent in a manner described in the applicable pricing
supplement.
|
Buffer
Value:
|
As
specified in the applicable pricing supplement.
|
Knockout
Value:
|
As
specified in the applicable pricing supplement.
|
Basket
Return:
|
The
quotient of (i) the final basket level minus the initial basket level
divided by (ii) the initial basket level.
|
Initial
Basket Level:
|
Set
equal to 100 on the trade date, unless otherwise specified in the
applicable pricing supplement.
|
Final
Basket Level:
|
The
level of the basket on the final valuation date, equal to the sum of the
product of the reference return for each reference asset multiplied by the
weighting for such reference asset within the basket.
|
Upside
Participation Rate:
|
As
specified in the applicable pricing supplement.
|
Maximum
Cap:
|
As
specified in the applicable pricing supplement.
|
Observation
Period:
|
The
period beginning on, and including, the trade date and ending on, and
including, the final valuation date.
|
Pricing
Date:
|
As
specified in the applicable pricing supplement.
|
Trade
Date:
|
As
specified in the applicable pricing supplement.
|
Final
Valuation Date:
|
As
specified in the applicable pricing supplement.
|
Maturity
Date:
|
As
specified in the applicable pricing
supplement.
|
Prior
to Maturity
The
market value of the notes will be affected by a number of interrelated factors
including, but not limited to, the price or level of the reference asset in
relation to the initial value and the buffer, supply and demand, the volatility
of the reference asset, the level of interest rates and other economic
conditions, as well as the perceived creditworthiness of HSBC USA Inc. You
should understand that the market value of the notes is driven by a range of
interrelated factors and that while the price or level of the reference asset is
an important variable, it cannot be used as the sole measure to approximate the
value of this investment. You should not use any single variable to
approximate the value of this investment.
HYPOTHETICAL
EXAMPLES
The
following examples are provided for illustrative purposes only and are
hypothetical. They do not purport to be representative of every possible
scenario concerning increases or decreases in the price or level of the
reference asset and the payment at maturity of the notes. We cannot
predict the final price or level of the reference asset on the final valuation
date. The assumptions we have made in connection with the
illustrations set forth below may not reflect actual events, and the
hypothetical initial value of the reference asset used in the illustrations
below is not the actual initial value of the reference asset of any
note. In addition, the examples assume that the reference asset has
no dividend yield. You should not take these examples as an
indication or assurance of the expected performance of the reference
asset.
Notes
without a Buffer:
The
following examples indicate how the cash settlement value would be calculated
with respect to a hypothetical $1,000 investment in enhanced market
participation notes without a buffer. These examples assume the notes
are held to maturity, a initial value of 100.00, a maximum cap of 25.00% and an
upside participation rate of 300%.
Assumptions:
Principal
amount of note:
|
$1,000.00
|
Initial
value of the reference asset:
|
100.00
|
Maximum
Cap:
|
25.00%
|
Upside
Participation Rate:
|
300%
|
Example
1: The reference return is positive over the term of the notes, and
the product of the reference return multiplied by the upside participation rate
is greater than the maximum cap.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
110.00
|
Reference
Return
|
10.00%
|
Reference
Return x Upside Participation Rate:
|
30.00%
|
Maximum
Cap:
|
25.00%
|
Cash
Settlement Value:
|
$1,250.00
|
Here, the
reference return is 10.00%.
Because
the reference return is positive, the cash settlement value equals the principal
amount of the note plus the lesser of (1) the product of (a) the principal
amount multiplied by (b) the reference return multiplied by the upside
participation rate and (2) the product of (a) the principal amount multiplied by
(b) the maximum cap. Accordingly, at maturity, the cash settlement
value in this example would equal $1,000.00 plus (a) $1,000.00 multiplied by (b)
25.00%. Therefore, the notes would pay $1,250.00 at
maturity.
Example 1
shows that you are assured the return of your principal investment when the
final value is greater than the initial value for the reference
asset. Example 1 also illustrates that if the product of the
reference return multiplied by the upside participation rate exceeds the stated
maximum cap, your return on the notes will be limited to the stated maximum
cap.
Example
2: The reference return is positive over the term of the notes and is
greater than the maximum cap.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
110.00
|
Reference
Return
|
32.00%
|
Reference
Return x Upside Participation Rate:
|
96.00%
|
Maximum
Cap:
|
25.00%
|
Cash
Settlement Value:
|
$1,250.00
|
Here, the
reference return is 32.00%.
Because
the reference return is positive, the cash settlement value equals the principal
amount of the note plus the lesser of (1) the product of (a) the principal
amount multiplied by (b) the reference return multiplied by the upside
participation rate and (2) the product of (a) the principal amount multiplied by
(b) the maximum cap. Accordingly, at maturity, the cash settlement
value in this example would equal $1,000.00 plus (a) $1,000.00 multiplied by (b)
25.00%. Therefore, the notes would pay $1,250.00 at
maturity.
Example 2
shows that you are assured the return of your principal investment when the
final value is greater than the initial value for the reference
asset. Example 2 also illustrates that if the reference return is
greater than the stated maximum cap, your return on the notes will be limited to
the stated maximum cap.
Example
3: The reference return is positive over the term of the notes, and
the product of the reference return multiplied by the upside participation rate
is less than the maximum cap.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
104.00
|
Reference
Return
|
4.00%
|
Reference
Return x Upside Participation Rate:
|
12.00%
|
Maximum
Cap:
|
25.00%
|
Cash
Settlement Value:
|
$1,120.00
|
Here, the
reference return is 4.00%.
Because
the reference return is positive, the cash settlement value equals the principal
amount of the note plus the lesser of (1) the product of (a) the principal
amount multiplied by (b) the reference return multiplied by the upside
participation rate and (2) the product of (a) the principal amount multiplied by
(b) the maximum cap. Accordingly, at maturity, the cash settlement
value in this example would equal $1,000 plus (a) $1,000 multiplied by (b) 4.00%
multiplied by 300.00%. Therefore, the notes would pay $1,120.00 at
maturity.
Example 3
illustrates how a positive reference return is magnified by the leverage
provided by the upside participation rate until the maximum cap is
reached.
Example
4: The reference return is negative over the term of the
notes.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
95.00
|
Reference
Return:
|
-5.00%
|
Cash
Settlement Value:
|
$950.00
|
Here, the
reference return is -5.00%.
Because
the reference return is negative, the cash settlement value results in 1.00% of
principal loss for each percentage point that the reference return falls below
0.00%. Accordingly, at maturity, the cash settlement value in this
example would equal $1,000 multiplied by 95.00%. Therefore, the cash
settlement value would be $950.00.
Example 4
shows that a significant negative reference return may result in loss of up to
100% of your investment in the notes.
Sensitivity
Analysis – Hypothetical payment at maturity for each $10,000 principal amount of
notes.
The table
below illustrates the payment at maturity (including, where relevant, the
payment in respect of the reference return) on a $10,000 investment in enhanced
market participation notes without a buffer for a hypothetical range of
performance for the reference return from -100% to +100%. The following results
are based solely on the assumptions outlined below. You should
consider carefully whether the notes are suitable to your investment goals. The
numbers appearing in the table below have been rounded for ease of analysis. You
should not take the below illustration as an indication or assurance of the
expected performance of the reference asset or return of the notes.
Assumptions:
|
·
|
Principal
Amount:
|
$10,000
|
|
·
|
Upside
Participation Rate:
|
300.00%
|
|
·
|
Maximum
Cap:
|
25.00%
|
|
|
Upside
Participation Rate
|
|
|
|
|
100.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
90.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
80.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
70.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
60.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
50.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
40.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
30.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
20.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
10.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
5.00%
|
|
300.00%
|
|
15.00%
|
|
$11,500
|
0.00%
|
|
N/A
|
|
0.00%
|
|
$10,000
|
-5.00%
|
|
N/A
|
|
-5.00%
|
|
$9,500
|
-10.00%
|
|
N/A
|
|
-10.00%
|
|
$9,000
|
-20.00%
|
|
N/A
|
|
-20.00%
|
|
$8,000
|
-30.00%
|
|
N/A
|
|
-30.00%
|
|
$7,000
|
-40.00%
|
|
N/A
|
|
-40.00%
|
|
$6,000
|
-50.00%
|
|
N/A
|
|
-50.00%
|
|
$5,000
|
-60.00%
|
|
N/A
|
|
-60.00%
|
|
$4,000
|
-70.00%
|
|
N/A
|
|
-70.00%
|
|
$3,000
|
-80.00%
|
|
N/A
|
|
-80.00%
|
|
$2,000
|
-90.00%
|
|
N/A
|
|
-90.00%
|
|
$1,000
|
-100.00%
|
|
N/A
|
|
-100.00%
|
|
$0
|
Notes
with a Buffer:
The
following examples indicate how the cash settlement value would be calculated
with respect to a hypothetical $1,000 investment in enhanced market
participation notes with a buffer. These examples assume the notes
are held to maturity, an initial value of 100.00, a maximum cap of 25.00%, an
upside participation rate of 300% and that if the reference return is below
-20.00%, investors will lose 1.00% of the principal amount of their notes for
each percentage point that the reference return is below
-20.00%.
Assumptions:
Principal
amount of note:
|
$1,000.00
|
Initial
value of the reference asset:
|
100.00
|
Maximum
Cap:
|
25.00%
|
Upside
Participation Rate:
|
300%
|
Buffer:
|
20%
|
Buffer
Value:
|
800.00,
representing 80.00% of the initial
value
|
Example
1: The reference return is positive over the term of the notes, and
the product of the reference return multiplied by the upside participation rate
is greater than the maximum cap.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
110.00
|
Reference
Return
|
10.00%
|
Reference
Return x Upside Participation Rate:
|
30.00%
|
Maximum
Cap:
|
25.00%
|
Cash
Settlement Value:
|
$1,250.00
|
Here, the
reference return is 10.00%.
Because
the reference return is greater than 0.00%, the cash settlement value equals the
principal amount of the note plus the lesser of (1) the product of (a) the
principal amount multiplied by (b) the reference return multiplied by the upside
participation rate and (2) the product of (a) the principal amount multiplied by
(b) the maximum cap. Accordingly, at maturity, the cash settlement
value in this example would equal $1,000.00 plus (a) $1,000.00 multiplied by (b)
25.00%. Therefore, the notes would pay $1,250.00 at
maturity.
Example 1
shows that you are assured the return of your principal investment when the
final value is greater than the initial value for the reference
asset. Example 1 also illustrates that if the product of the
reference return multiplied by the upside participation rate exceeds the stated
maximum cap, your return on the notes will be limited to the stated maximum
cap.
Example
2: The reference return is positive over the term of the notes, and
the product of the reference return multiplied by the upside participation rate
is less than the maximum cap.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
104.00
|
Reference
Return
|
4.00%
|
Reference
Return x Upside Participation Rate:
|
12.00%
|
Maximum
Cap:
|
25.00%
|
Cash
Settlement Value:
|
$1,120.00
|
Here, the
reference return is 4.00%.
Because
the reference return is greater than 0.00%, the cash settlement value equals the
principal amount of the note plus the lesser of (1) the product of (a) the
principal amount multiplied by (b) the reference return multiplied by the upside
participation rate and (2) the product of (a) the principal amount multiplied by
(b) the maximum cap. Accordingly, at maturity, the cash settlement
value in this example would equal $1,000 plus (a) $1,000 multiplied by (b) 4.00%
multiplied by 300.00%. Therefore, the notes would pay $1,120.00 at
maturity.
Example 2
illustrates how a positive reference return is magnified by the leverage
provided by the upside participation rate until the maximum cap is
reached.
Example
3: The reference return is moderately negative over the term of the
notes.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
90.00
|
Reference
Return:
|
-10.00%
|
Cash
Settlement Value:
|
$1,000.00
|
Here, the
reference return is -10.00%.
Because
the reference return is between 0.00% and -20.00%, inclusive, you will receive a
cash settlement value equal to the principal amount of the
notes. Accordingly, the cash settlement value in this example would
equal $1,000.
Example 3
shows that you are assured the return of your principal investment where the
price or level of the reference asset declines by no more than 20.00% over the
term of the notes. Nonetheless, the receipt of only the principal
amount at maturity may be less than the rate that you would have received from a
conventional debt security.
Example
4: The reference return is significantly negative over the term of
the notes.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
50.00
|
Reference
Return:
|
-50.00%
|
Cash
Settlement Value:
|
$700.00
|
Here, the
reference return is -50.00%.
Because
the reference return is less than -20.00%, you would lose 1.00% of the principal
amount of your notes for each percentage point that the reference return is
below -20.00%. Accordingly, at maturity, the cash settlement value
would be equal to $700.00, and you would suffer a loss of 30.00% of your
principal amount.
Example 4
shows that you may lose up to 80.00% of the principal amount of your notes if
the reference return is less than
-20.00%.
Notes
with a Knockout Buffer:
The
following examples indicate how the cash settlement value would be calculated
with respect to a hypothetical $1,000 investment in enhanced market
participation notes with a buffer and a knockout buffer. These
examples assume the notes are held to maturity, an initial value of 100.00, a
maximum cap of 25.00%, an upside participation rate of 300%, a buffer of 20.00%,
a knockout buffer of 25.00% and that if the reference return is below -20.00%,
investors will lose 1.00% of the principal amount of their notes for each
percentage point that the reference return is below -20.00%.
Assumptions:
Principal
amount of note:
|
$1,000.00
|
Initial
value of the reference asset:
|
100.00
|
Maximum
Cap:
|
25.00%
|
Upside
Participation Rate:
|
300%
|
Buffer:
|
20.00%
|
Knockout
Buffer:
|
25.00%
|
Knockout
Value:
|
75.00
(equal to 75.00% of the Initial
Value)
|
Example
1: The reference return is moderately negative over the term of the
notes and a knockout event has not occurred.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
90.00
|
Reference
Return:
|
-10.00%
|
Cash
Settlement Value:
|
$1,000.00
|
Here, the
reference return is -10.00%.
Because a
knockout event has not occurred and the reference return is between 0.00% and
-20.00%, inclusive, you will receive a cash settlement value equal to the
principal amount of the notes. Accordingly, the cash settlement value
in this example would equal $1,000.
Example 1
shows that you are assured the return of your principal investment where the
level of the reference asset declines by no more than 20.00% over the term of
the notes and no knockout event has occurred. Nonetheless, the
receipt of only the principal amount at maturity may be less than the rate that
you would have received from a conventional debt security. Example 1
also shows that you are assured the protection of the buffer is the reference
value never declines below the knockout value during the term of the
notes.
Example
2: The reference return is moderately negative over the term of the
notes and a knockout event has occurred.
|
Reference
Asset
|
Initial
value
|
100.00
|
Final
value
|
90.00
|
Reference
Return:
|
-10.00%
|
Cash
Settlement Value:
|
$900.00
|
Here, the
reference return is -10.00%.
In this
example, the reference return is between 0.00% and -20.00%. However,
a knockout event has occurred, meaning that on at least one scheduled trading
day during the observation period, the reference value declined below the
knockout value of 75.00. Because a knockout event occurred and the
reference return is less than zero, you would lose 1.00% of the principal amount
of your notes for each percentage point that the reference return is less than
zero. Accordingly, at maturity, the cash settlement value would be
equal to $900.00, and you would suffer a loss of 10.00% of your principal
amount.
Example 2
shows that you may lose up to 100.00% of the principal amount of your notes if a
knockout event occurs.
Sensitivity
Analysis – Hypothetical payment at maturity for each $10,000 principal amount of
notes.
The table
below illustrates the payment at maturity (including, where relevant, the
payment in respect of the reference return) on a $10,000 investment in enhanced
market participation notes with a buffer and a knockout buffer for a
hypothetical range of performance for the reference return from -100% to
+100%. The following results are based solely on the assumptions
outlined below. You should consider carefully whether the notes are
suitable to your investment goals. The numbers appearing in the table
below have been rounded for ease of analysis. You should not take the
below illustration as an indication or assurance of the expected performance of
the reference asset or return of the notes.
Assumptions:
|
·
|
Principal
Amount:
|
$10,000
|
|
·
|
Upside
Participation Rate:
|
300.00%
|
|
·
|
Maximum
Cap:
|
25.00%
|
|
·
|
Buffer:
|
20.00%
|
|
|
|
|
No
Knockout Event Occurs
|
|
A
Knockout Event Occurs
|
Reference
return
|
|
Upside
Participation Rate
|
|
Return
on the Notes (%)
|
|
Payment
at Maturity
|
|
Return
on the Notes (%)
|
|
Payment
at Maturity
|
100.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
90.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
80.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
70.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
60.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
50.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
40.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
30.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
20.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
10.00%
|
|
300.00%
|
|
25.00%
|
|
$12,500
|
|
25.00%
|
|
$12,500
|
5.00%
|
|
300.00%
|
|
15.00%
|
|
$11,500
|
|
15.00%
|
|
$11,500
|
0.00%
|
|
N/A
|
|
0.00%
|
|
$10,000
|
|
0.00%
|
|
$10,000
|
-5.00%
|
|
N/A
|
|
0.00%
|
|
$10,000
|
|
-5.00%
|
|
$9,500
|
-10.00%
|
|
N/A
|
|
0.00%
|
|
$10,000
|
|
-10.00%
|
|
$9,000
|
-20.00%
|
|
N/A
|
|
0.00%
|
|
$10,000
|
|
-20.00%
|
|
$8,000
|
-30.00%
|
|
N/A
|
|
-10.00%
|
|
$9,000
|
|
-30.00%
|
|
$7,000
|
-40.00%
|
|
N/A
|
|
-20.00%
|
|
$8,000
|
|
-40.00%
|
|
$6,000
|
-50.00%
|
|
N/A
|
|
-30.00%
|
|
$7,000
|
|
-50.00%
|
|
$5,000
|
-60.00%
|
|
N/A
|
|
-40.00%
|
|
$6,000
|
|
-60.00%
|
|
$4,000
|
-70.00%
|
|
N/A
|
|
-50.00%
|
|
$5,000
|
|
-70.00%
|
|
$3,000
|
-80.00%
|
|
N/A
|
|
-60.00%
|
|
$4,000
|
|
-80.00%
|
|
$2,000
|
-90.00%
|
|
N/A
|
|
-70.00%
|
|
$3,000
|
|
-90.00%
|
|
$1,000
|
-100.00%
|
|
N/A
|
|
-80.00%
|
|
$2,000
|
|
-100.00%
|
|
$0
|
The notes
are intended to be long term investments and, as such, should be held to
maturity. They are not intended to be short-term trading instruments. The price
at which you will be able to sell your notes prior to maturity may be at a
substantial discount from the principal amount of the notes, even in cases where
the price or level of the reference asset has appreciated since the pricing date
of the notes. The potential returns described here assume that your notes are
held to maturity.
SPECIFIC
TERMS OF THE NOTES
The notes
are part of a series of debt securities entitled “Notes, Series 1” (the
“medium-term notes”) that we may issue under the senior debt indenture, dated
March 31, 2006, between HSBC USA Inc. and Deutsche Bank Trust Company Americas
(as trustee) from time to time. This product supplement summarizes specific
financial and other terms that apply to the notes. Terms that apply generally to
all medium-term notes are described in “Description of Medium-Term Notes” in the
prospectus supplement. The terms described here (
i.e.
, in this product
supplement) supplement those described in the prospectus supplement and
prospectus and, if the terms described here are inconsistent with those
described in those documents, the terms described herein are
controlling.
Please
note that the information about the price to public and net proceeds to us in
the applicable pricing supplement relates only to the initial sale of the notes.
If you have purchased the notes in a purchase/resale transaction after the
initial sale, information about the price and date of sale to you will be
provided in a separate confirmation of sale.
Payment
at Maturity
Your
payment at maturity for each note you hold is discussed above under “Valuation
of the Notes – At Maturity.”
In the
event that the maturity date is postponed or extended as described under
“Specific Terms of the Notes – Maturity Date and Final Valuation Date” below,
the related payment of principal will be made on the postponed or extended
maturity date.
Denominations
Unless
otherwise stated in the applicable pricing supplement, the notes will be issued
in minimum denominations of $1,000, increased in multiples of
$1,000.
Maturity
Date and Final Valuation Date
If the
maturity date stated in the applicable pricing supplement is not a business day,
the amounts payable at maturity will be paid on the next following business
day. Unless otherwise specified in the applicable pricing supplement,
the maturity date shall be three business days after the final valuation
date. If the stated final valuation date as specified in the
applicable pricing supplement occurs on a day that is not a scheduled trading
day (as defined below), the final valuation date shall be the first succeeding
scheduled trading day. The calculation agent may postpone the final
valuation date – and therefore the maturity date – if a market disruption event
occurs or is continuing on a day that would otherwise be the final valuation
date. We describe market disruption events under “Market Disruption
Events.”
Business
Day
A
“business day” shall be any day other than a Saturday or Sunday, on which
banking institutions in the city of New York are not authorized or obligated by
law or executive order to be closed.
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 “Maturity
Date and Final Valuation Date” above.
Calculation
Agent
Unless
otherwise specified in the applicable pricing supplement, HSBC Bank USA,
National Association, will act as calculation agent. See also
“Description of the Notes – Open Market Purchases – Calculation Agent and
Calculations” in the prospectus supplement.
We may
change the calculation agent after the issue date without notice.
Market
Disruption Events
The
following applies to reference assets that are indices:
If the
final valuation date is not a scheduled trading day with respect to an index,
then the final valuation date with respect to that index will be the next day
that is a scheduled trading day with respect to that index. If a
market disruption event (as defined below) exists for an index on the final
valuation date, then such final valuation date for that index will be the next
scheduled trading day for which there is no market disruption event with respect
to that index. If a market disruption event exists with respect to
the final valuation date for an index on five consecutive scheduled trading
days, then that fifth scheduled trading day will be the final valuation date for
that index, and the final value of that index will be determined by means of the
formula for and method of calculating that index which applied just prior to the
market disruption event, using the relevant exchange traded or quoted price of
each stock in that index (or a good faith estimate of the value of a security in
that index which is itself the subject of a market disruption
event). For the avoidance of doubt, if no market disruption event
exists with respect to an index on the final valuation date for that index, the
determination of that index’s final value will be made on the originally
scheduled final valuation date, irrespective of the existence of a market
disruption event with respect to one or more other reference
assets. If the final valuation date for any index is postponed, then
the maturity date will also be postponed by an equal number of scheduled trading
days and no interest will be paid in respect of such
postponement.
“Market
disruption event” means, with respect to an index, any scheduled trading day on
which any relevant exchange or related exchange fails to open for trading during
its regular trading session or on which any of the following events has occurred
and is continuing which the calculation agent determines is
material:
(i) Any
suspension of or limitation imposed on trading by any relevant exchanges or
related exchanges or otherwise, (A) relating to any component security included
in the reference asset or (B) in futures or options contracts relating to the
reference asset on any related exchange; or
(ii) Any
event (other than any event described in (iii) below) that disrupts or impairs
the ability of market participants in general (A) to effect transactions in, or
obtain market values for any component security included in the reference asset
or (B) to effect transactions in, or obtain market values for, futures or
options contracts relating to the reference asset on any relevant related
exchange; or
(iii) The
closure on any scheduled trading day of any relevant exchange or related
exchange prior to its scheduled closing time (unless the earlier closing time is
announced by the relevant exchange or related exchange at least one hour prior
to the earlier of (i) the actual closing time for the regular trading session on
the exchange and (ii) the submission deadline for orders to be entered into the
relevant exchange or related exchange for execution at the close of trading on
that day).
“Related
exchange” means, with respect to an index, each exchange or quotation system or
any successor or temporary substitute for such exchange or quotation system
(provided the calculation agent has determined, for a substitute exchange or
quotation system, that liquidity on such substitute is comparable to liquidity
on the original related exchange) where trading has a material effect (as
determined by the calculation agent) on the overall market for futures or
options contracts relating to the reference asset.
“Relevant
exchange” means, with respect to an index, the primary exchange or quotation
system for any security then included in the reference asset.
“Scheduled
closing time” means the scheduled weekday closing time of the relevant exchange
or related exchange, without regard to after hours or any other trading outside
of the regular trading session hours.
“Scheduled
trading day” means any day on which all of the relevant exchanges and related
exchanges are scheduled to be open for trading for their respective regular
trading sessions.
The
following applies to reference assets that are ETFs:
If the
final valuation date is not a scheduled trading day with respect to an ETF, then
the final valuation date with respect to that ETF will be the next day that is a
scheduled trading day with respect to that ETF. If a market
disruption event (as defined below) exists for an ETF on the final valuation
date, then such final valuation date for that ETF will be the next scheduled
trading day for which there is no market disruption event with respect to that
ETF. If a market disruption event exists with respect to the final
valuation date for an ETF on five consecutive scheduled trading days, then that
fifth scheduled trading day will be the final valuation date, and the
calculation agent will determine the final value of the ETF on that date in good
faith and in its sole discretion using its estimate of the exchange traded price
for the ETF that would have prevailed but for that market disruption
event. For the avoidance of doubt, if no market disruption event
exists with respect to an ETF on the final valuation date for that ETF, the
determination of that ETF’s final value will be made on the originally scheduled
final valuation date, irrespective of the existence of a market disruption event
with respect to one or more other reference assets. If the final
valuation date for any ETF is postponed, then the maturity date will also be
postponed by an equal number of scheduled trading days and no interest will be
paid in respect of such postponement.
“Market
disruption event” means, with respect to an ETF, any scheduled trading day on
which any relevant exchange or related exchange for such ETF fails to open for
trading during its regular trading session or on which any of the following
events has occurred and is continuing which the calculation agent determines is
material:
(i) Any
suspension of or limitation imposed on trading by any relevant exchanges or
related exchanges for such ETF or otherwise, whether by reason of movements in
price exceeding limits permitted by the relevant exchanges or related exchanges
or otherwise, (A) relating to shares of the reference asset, (B) relating to any
security included in the underlying index of the reference asset or (C) in
futures or options contracts relating to the reference asset or the underlying
index of the reference asset, on any related exchange; or
(ii) Any
event (other than any event described in (iii) below) that disrupts or impairs
(as determined by the calculation agent) the ability of market participants in
general (A) to effect transactions in, or obtain market values for shares of the
reference asset, (B) to effect transactions in, or obtain market values for any
security included in the underlying index of the reference asset, or (C) to
effect transactions in, or obtain market values for, futures or options
contracts relating to the reference asset or the underlying index of the
reference asset on any relevant related exchange; or
(iii) The
closure on any scheduled trading day of any relevant exchange relating to shares
of the ETF or relating to any security included in the underlying index of the
ETF or any related exchange prior to its scheduled closing time unless the
earlier closing time is announced by the relevant exchange or related exchange
at least one hour prior to the earlier of (A) the actual closing time for the
regular trading session on the exchange and (B) the submission deadline for
orders to be entered into the relevant exchange or related exchange for
execution at the close of trading on that day.
“Related
exchange” means, with respect to an ETF, each exchange or quotation system or
any successor to such exchange or quotation system or any substitute exchange or
quotation system to which trading in the futures or options contracts relating
to the reference asset or the underlying index of the reference asset has
temporarily relocated (provided that the calculation agent has determined that
there is comparable liquidity relative to the futures or options contracts
relating to the reference asset or the underlying index of the reference asset
on such temporary substitute exchange or quotation system as on the original
related exchange) on which futures or options contracts relating to the
reference asset or the underlying index of the reference asset are traded where
trading has a material effect (as determined by the calculation agent) on the
overall market for futures or options contracts relating to the reference asset
or the underlying index.
“Relevant
exchange” means, with respect to an ETF, any exchange on which shares of the ETF
or securities then included in the underlying index of the ETF trade, where such
trading has a material effect (as determined by the calculation agent) on the
overall market for trading of such securities.
“Scheduled
closing time” means the scheduled weekday closing time of the relevant exchange
or related exchange, without regard to after hours or any other trading outside
of the regular trading session hours.
“Scheduled
trading day” means any day on which all of the relevant exchanges and related
exchanges are scheduled to be open for trading for their respective regular
trading sessions.
Discontinuance
or Modification of a Reference Asset that is an Index
If a
reference sponsor (as defined in the applicable pricing supplement) discontinues
publication of or otherwise fails to publish a reference asset that is an index
on any day on which the reference asset is scheduled to be published and the
reference sponsor or another entity publishes a successor or substitute index
that the calculation agent determines to be comparable to the discontinued index
(the comparable index, the “successor index”), then that successor index will be
deemed to be the reference asset for all purposes relating to the notes,
including for purposes of determining whether a market disruption event
exists. Upon any selection by the calculation agent of a successor
index, the calculation agent will furnish written notice to us and the holders
of the notes.
If the
reference asset is discontinued or if the reference sponsor fails to publish the
reference asset and the calculation agent determines that no successor index is
available at that time, then the calculation agent will determine the reference
value using the same general methodology previously used by the reference
sponsor. The calculation agent will continue to make that
determination until the earlier of (i) the final valuation date or (ii) a
determination by the calculation agent that the reference asset or a successor
index is available. In that case, the calculation agent will furnish
written notice to us and the holders of the notes.
If at any
time the method of calculating the reference asset or a successor index, or the
level thereof, is changed in a material respect, or if the reference asset or a
successor index is in any other way modified so that, in the determination of
the calculation agent, the level of the reference asset or successor index does
not fairly represent the level of the reference asset or successor index that
would have prevailed had those changes or modifications not been made, then the
calculation agent will make the calculations and adjustments as may be necessary
in order to determine a level comparable to the level that would have prevailed
had those changes or modifications not been made. If, for example,
the method of calculating the reference asset or a successor index is modified
so that the level of the reference asset or successor index is a fraction of
what it would have been if it had not been modified, then the calculation agent
will adjust the reference asset or successor index in order to arrive at a level
of the reference asset or successor index as if it had not been
modified. In that case, the calculation agent will furnish written
notice to us and the holders of the notes.
Notwithstanding
these alternative arrangements, discontinuance of the publication of the
reference asset may adversely affect the value of, and trading in, the
notes.
Share
Delisting or Suspension of Trading in the Shares of an ETF; Termination of an
ETF; and Discontinuation of the Underlying Index of an ETF
A
delisting shall be deemed to have occurred if, at any time during the period
from and including the issue date to and including the final valuation date, the
relevant exchange announces that pursuant to the rules of such exchange, the
reference asset ceases (or will cease) to be listed, traded or publicly quoted
on the relevant exchange for any reason (other than a merger event or tender
offer) and are not immediately re-listed, re-traded or re-quoted on a U.S.
exchange or quotation system. The effective date of such delisting
shall be the date of the announcement of delisting by the relevant
exchange.
If the
shares of the reference asset are delisted from, or trading of shares of the
reference asset is suspended on, the relevant exchange and a major U.S. exchange
or market lists or approves for trading successor or substitute securities that
the calculation agent determines, in its sole discretion, to be comparable to
the shares of the reference asset (any such trading successor or substitute
securities, the “successor shares”), such successor shares will be deemed to be
the reference asset for all purposes relating to the notes, including for
purposes of determining whether a market disruption event
exists. Upon any selection by the calculation agent of successor
shares, the calculation agent will cause notice thereof to be furnished to us
and the trustee and we will provide notice thereof to the registered holders of
the notes.
If the
shares of the reference asset are delisted from, or trading of the shares of the
reference asset is suspended on, the relevant exchange and successor shares that
the calculation agent determines to be comparable to the shares of the reference
asset are not listed or approved for trading on a major U.S. exchange or market,
a successor or substitute security will be selected by the calculation agent,
and such successor or substitute security will be deemed to be such reference
asset for all purposes relating to the notes, including for purposes of
determining whether a market disruption event exists. Upon any
selection by the calculation agent of successor or substitute securities, the
calculation agent will cause notice thereof to be furnished to us and the
trustee and we will provide notice thereof to the registered holders of the
notes.
If the
reference asset is liquidated or otherwise terminated (a “termination event”),
the final value of the shares of the reference asset on the final valuation date
will be determined by the calculation agent in accordance with the general
procedures last used to calculate the underlying index of the reference asset
prior to any such termination event. The calculation agent will cause notice of
the termination event and calculation of the final value as described above to
be furnished to us and the trustee and we will provide notice thereof to
registered holders of the notes.
If a
termination event has occurred with respect to the reference asset and the
underlying index sponsor discontinues publication of the underlying index and if
the underlying index sponsor or another entity publishes a successor or
substitute index that the calculation agent determines to be comparable to the
underlying index, then the level of the underlying index will be determined by
reference to the level of that comparable index, which we refer to as a
“successor underlying index.” Upon any selection by the calculation
agent of a successor underlying index, the calculation agent will cause notice
to be furnished to us and the trustee and we will provide notice thereof of the
selection of the successor underlying index to the registered holders of the
notes.
If a
termination event has occurred and the underlying index sponsor discontinues
publication of the underlying index and a successor underlying index is not
selected by the calculation agent or is no longer published from the date of the
termination event up to and including the final valuation date, the level to be
substituted for the underlying index on the final valuation date will be a level
computed by the calculation agent for that date in accordance with the
procedures last used to calculate the underlying index prior to any such
discontinuance.
If a
successor underlying index is selected or the calculation agent calculates a
level as a substitute for the underlying index as described above, the successor
underlying index or level, as the case may be, will be substituted for the
underlying index for all purposes, including for purposes of determining whether
a market disruption event occurs.
All
determinations made by the calculation agent will be at the discretion of the
calculation agent and will be conclusive for all purposes and binding on the
holder of notes, absent manifest error.
Merger
Event and Tender Offer With Respect to an ETF
A “merger
event” shall mean, in respect of a reference asset that is an ETF, any (i)
reclassification or change of the shares of the reference asset that results in
a transfer of or an irrevocable commitment to transfer all shares of the
reference asset outstanding, or (ii) consolidation, amalgamation or merger of
the reference issuer with or into another entity (other than a consolidation,
amalgamation or merger of the reference issuer with or into another entity and
which does not result in any such reclassification or change of all shares of
the reference asset) or (iii) takeover offer, tender offer, exchange offer,
solicitation, proposal or other event by any entity or person to purchase or
otherwise obtain 100% of the outstanding shares of the reference asset that
results in a transfer of or an irrevocable commitment to transfer all shares of
the reference asset (other than those shares of the reference asset owned or
controlled by the offeror), or (iv) consolidation, amalgamation, merger or
binding share exchange of the reference issuer or its subsidiaries with or into
another entity in which the reference issuer is the continuing entity and which
does not result in a reclassification or change of the shares of the reference
asset but results in the outstanding shares of the reference asset immediately
prior to that event collectively representing less than 50% of the outstanding
shares of the reference asset immediately following that event, in each case if
the approval date (as defined below) is on or before a final valuation
date.
A “tender
offer” shall mean, in respect of the voting shares of a reference issuer, any
takeover offer, tender offer, exchange offer, solicitation, proposal or other
event by any entity or person that results in that entity or person purchasing,
or otherwise obtaining or having the right to obtain, by conversion or other
means, not less than 10% of the outstanding voting shares of the reference
issuer as determined by the calculation agent, based upon the making of filings
with governmental or self-regulatory agencies or such other information as the
calculation agent deems relevant.
If a
merger event or tender offer occurs in respect of a reference asset and the
shares of the reference asset are exchanged for new shares (with no other
distributions of property in respect of the shares of the reference asset), and
those new shares are publicly quoted, traded or listed on a U.S. exchange or
quotation system, then the reference asset shall be adjusted to comprise the
number of new shares to which a holder of one share of the reference asset
immediately prior to the occurrence of the merger event or tender offer, as the
case may be, would be entitled upon consummation of the merger event or tender
offer. The calculation agent shall also adjust such terms and
conditions of the notes as the calculation agent determines appropriate to
account for that event and such new shares shall be deemed reference
asset.
If a
merger event or tender offer occurs and any distributions of property (other
than the publicly quoted new shares referred to above) are made on the shares of
the reference asset, in whole or in part, then the calculation agent shall
accelerate the maturity date to the day which is five business days after the
approval date (as defined below). On the maturity date, we shall pay
to each holder of a note the payment at maturity, provided that for purposes of
that calculation, the final value of the reference asset will be deemed to be
the value of all consideration received (or that would be received) in respect
of that event, and the final valuation date will be deemed to be the approval
date. In addition, the calculation agent shall adjust the payment at
maturity for the value of the imbedded options that would preserve for a holder
of notes the economic equivalent of any remaining payment obligations with
respect to the notes hereunder. The “approval date” is the closing
date of a merger event, or, in the case of a tender offer, the date on which the
person or entity making the tender offer acquires or acquires the right to
obtain the relevant percentage of the applicable class of shares of the
reference issuer, or if that date is not a scheduled trading day, the
immediately preceding scheduled trading day.
Notwithstanding
these alternative arrangements, a merger event or tender offer may affect the
reference asset in a manner that adversely affects the value of, and trading in,
the notes. Similarly, an adjustment or acceleration resulting from a
merger event or a tender offer may adversely affect the value of, or the trading
in, the notes.
Adjustments
to an ETF
Following
the declaration by a reference issuer of the terms of any potential adjustment
event (as defined below), the calculation agent will determine whether that
potential adjustment event has a diluting or concentrative effect on the
theoretical value of the reference asset and, if so, will make such calculations
and adjustments to the terms of the note as may be necessary in order to account
for the economic effect of such event.
For
purposes hereof, “potential adjustment event” means the occurrence of any of the
following after the issue date of the notes:
(i) a
subdivision, consolidation or reclassification of the shares of the reference
asset (unless a merger event), or a free distribution or dividend of any shares
of the reference asset to existing holders by way of bonus, capitalization or
similar issue;
(ii) a
distribution or dividend to existing holders of shares of (A) the reference
asset, or (B) other share capital or securities granting the right to payment of
dividends and/or the proceeds of liquidation of the reference issuer equally or
proportionately with such payments to holders of those shares or (C) other types
of securities, rights or warrants or other assets, in any case for payment (cash
or other) at less than the prevailing market price as determined by the
calculation agent;
(iii) an
extraordinary dividend;
(iv) a
call by the relevant reference issuer in respect of shares of the reference
asset that are not fully paid;
(v) a
repurchase by the reference issuer of shares of the reference asset whether out
of profits or capital and whether the consideration for such repurchase is cash,
securities or otherwise;
(vi) any
other similar event that may have a diluting or concentrative effect on the
theoretical value of the shares of the reference asset.
Settlement
Unless
otherwise specified in the applicable pricing supplement, we expect that the
delivery of the notes will be made against payment therefor on or about the
initial settlement date specified on the cover page of the applicable pricing
supplement, which will be the third business day following the pricing date of
the notes (the settlement cycle being referred to as “T+3”).
In some
circumstances, the applicable pricing supplement may state that the delivery of
the notes will be made against payment therefor on or about the fourth or fifth
business day following the pricing date of the notes (such settlement cycles
being referred to as “T+4” and “T+5” respectively). Under Rule 15c6-1
of the Securities Exchange Act of 1934, as amended, trades generally are
required to settle in three business days, unless the parties to any such trade
expressly agree otherwise.
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
You
should carefully consider, among other things, the matters set forth in “Certain
U.S. Federal Income Tax Considerations” in the prospectus supplement. The
following discussion summarizes certain of the material U.S. federal income tax
consequences of the purchase, beneficial ownership, and disposition of each of
the notes. This summary supplements the section “Certain U.S. Federal
Income Tax Considerations” in the prospectus supplement and supersedes it to the
extent inconsistent therewith. The Pricing Supplement may contain a
further discussion of special federal income tax consequences applicable to
certain notes. The summary of the federal income tax considerations
contained in the Pricing Supplement supersedes the following summary to the
extent it is inconsistent therewith.
There are
no statutory provisions, regulations, published rulings or judicial decisions
addressing the characterization for U.S. federal income tax purposes of
securities with terms that are substantially the same as those of the
notes. Under one approach, the notes should be treated as pre-paid
forward or other executory contracts with respect to the reference
asset. We intend to treat the notes consistent with this
approach. Pursuant to the terms of the notes, you agree to treat the
notes under this approach for all U.S. federal income tax purposes, and in the
opinion of Cadwalader, Wickersham & Taft LLP, special U.S. tax counsel to
us, it is reasonable to treat the notes in accordance with this
approach. Pursuant to this approach, we do not intend to report any
income or gain with respect to the notes prior to their maturity or an earlier
sale or exchange and we intend to treat any gain or loss upon maturity or an
earlier sale or exchange as long-term capital gain or loss, provided that the
U.S. holder has held the note for more than one year at such time for federal
income tax purposes. See “Certain U.S. Federal Income Tax
Considerations — Certain Equity-Linked Notes — Certain Notes Treated as Forward
Contracts or Executory Contracts” in the prospectus supplement for certain U.S.
federal income tax considerations applicable to notes that are treated as
pre-paid cash-settled forward or other executory contracts.
If one or
more of the entities included in the reference asset are treated as a
REIT, partnership or trust, or PFIC for U.S. federal income tax
purposes, or otherwise as a “pass-thru entity” for purposes of section 1260 of
the Code, it is possible that the note will be subject to the “constructive
ownership” rules of section 1260 of the Code. If so, the portion of
any gain that relates to a pass-thru entity that would otherwise be treated as
long-term capital gain recognized on the sale, exchange, maturity, or other
taxable disposition of the notes could be treated as ordinary income and subject
to an interest charge.
Because
there are no statutory provisions, regulations, published rulings or judicial
decisions addressing the characterization for U.S. federal income tax purposes
of securities with terms that are substantially the same as those of the notes,
other characterizations and treatments are possible and the timing and character
of income in respect of the notes might differ from the treatment described
above. For example, the notes could be treated as debt instruments
that are “contingent payment debt instruments” for federal income tax
purposes. See “Certain U.S. Federal Income Tax Considerations —
Contingent Payment Debt Instruments” in the prospectus supplement.
In Notice
2008-2, the Internal Revenue Service (“IRS”) and the Treasury Department
requested comments as to whether the purchaser of certain securities (which may
include the notes) should be required to accrue income during its term under a
mark-to-market, accrual or other methodology, whether income and gain on such a
note or contract should be ordinary or capital , and whether foreign holders
should be subject to withholding tax on any deemed income
accrual. Accordingly, it is possible that regulations or other
guidance could provide that a U.S. holder of a note is required to accrue income
in respect of the note prior to the receipt of payments under the note or its
earlier sale. Moreover, it is possible that any such regulations or
other guidance could treat all income and gain of a U.S. holder in respect of a
note as ordinary income (including gain on a sale). Finally, it is
possible that a non-U.S. holder of the note could be subject to U.S. withholding
tax in respect of a note. It is unclear whether any regulations or other
guidance would apply to the notes (possibly on a retroactive
basis). Prospective investors are urged to consult with their tax
advisors regarding Notice 2008-2 and the possible effect to them of the issuance
of regulations or other guidance that affects the federal income tax treatment
of the notes.
PROSPECTIVE
PURCHASERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL, STATE,
LOCAL, AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF NOTES.
EVENTS
OF DEFAULT AND ACCELERATION
If the
calculation agent determines that the notes have become immediately due and
payable following an event of default (as defined in the prospectus) with
respect to the notes, the calculation agent will determine the accelerated cash
settlement value due and payable in the same general manner as described in
“Valuation of the Notes – At Maturity” herein. In that case, the
scheduled trading day preceding the date of acceleration will be used as the
final valuation date for purposes of determining the accelerated reference
return. If a market disruption event exists with respect to the
reference asset on that scheduled trading day, then the final valuation date for
the reference asset will be postponed for up to five scheduled trading days (in
the same general manner used for postponing the originally scheduled final
valuation date). The accelerated maturity date will also be postponed
by an equal number of business days.
INFORMATION
REGARDING THE REFERENCE ASSET AND REFERENCE ISSUERS
The notes
have not been passed on by the reference issuers of the reference assets as to
their legality or suitability. The notes are not issued by and are
not financial or legal obligations of the reference issuers of the reference
assets. The reference issuers of the reference assets make no
warranties and bear no liabilities with respect to the notes. This
product supplement relates only to the notes offered by the applicable pricing
supplement and does not relate to any security of an underlying
issuer.
Note that
companies with securities registered under the Exchange Act are required to file
periodically certain financial and other information specified by the
SEC. Information provided to or filed with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1580, 100 F Street, N.E., Washington, D.C. 20549, and copies of such material
can be obtained from the Public Reference Section of the SEC, 100 F Street,
N.E., Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the public reference room by calling the SEC at
l-800-SEC-0330. In addition, information provided to or filed with
the SEC electronically can be accessed through a website maintained by the
SEC. The address of the SEC’s website is
http://www.sec.gov. Information provided to or filed with the SEC
pursuant to the Exchange Act by a company issuing a reference asset can be
located by reference to the SEC file number provided in the applicable pricing
supplement. In addition, information regarding such a company may be
obtained from other sources including, but not limited to, press releases,
newspaper articles and other publicly disseminated documents. We make
no representation or warranty as to the accuracy or completeness of such
information.
We do not
make any representation or warranty as to the accuracy or completeness of any
materials referred to above, including any filings made by any reference issuer
of any reference asset with the SEC. In connection with any issuance
of notes under the applicable pricing supplement, neither we nor the agent has
participated in the preparation of the above-described documents or made any due
diligence inquiry with respect to the sponsors or issuers of the reference
asset. Neither we nor any affiliate makes any representation that
such publicly available documents or any other publicly available information
regarding the sponsor or issuer of the reference asset is accurate or
complete. Furthermore, we cannot give any assurance that all events
occurring prior to the date hereof (including events that would affect the
accuracy or completeness of the publicly available documents described herein)
that would affect the level or price of the reference asset (and therefore the
price or level of such reference asset at the time we price the notes) have been
publicly disclosed. Subsequent disclosure of any such events or the
disclosure of or failure to disclose material future events concerning the
sponsor or issuer of the reference asset could affect the payment due at
maturity of the notes and therefore the price of the notes.
CERTAIN
ERISA CONSIDERATIONS
We urge
you to read and consult “Certain ERISA Considerations” in the prospectus
supplement.
VALIDITY
OF THE NOTES
If stated
in the pricing supplement applicable to a specific issuance of notes, the
validity of the notes under New York law for that issuance of notes may be
passed upon for us by Cadwalader, Wickersham & Taft LLP.