Filed pursuant to General Instruction II.K
of Form F-9, File No. 333-179383
Pricing Supplement dated July 3, 2012 to the
Prospectus dated February 13, 2012,
Prospectus Supplement dated February 29, 2012 and Product Prospectus Supplement (Equity Linked Index Notes, Series A) dated April 4, 2012
The Bank of Nova Scotia
$1,545,000
Capped Optimal Entry Enhanced Participation Notes, Series A
Linked to the EURO STOXX 50® Index
Due January 10, 2014
The notes do not bear interest. The amount that you will be paid on your notes at maturity is based on the performance of the EURO STOXX 50 Index® (which we refer to as the reference asset) as measured from the date of determination of the initial level, which will be the lowest closing level of the reference asset during the observation period (each scheduled trading day from and including the trade date to and including September 3, 2012, subject to adjustment) to and including the valuation date. If the percentage change (defined below) of the reference asset is negative (the final level is less than the initial level), you will lose a portion of your investment in the notes and may lose all or a substantial portion of your investment depending on the performance of the reference asset. Additionally, the amount you may receive for each $1,000 principal amount of your notes at maturity is subject to a maximum redemption amount of $1,198.75. Any payment on your notes is subject to the creditworthiness of The Bank of Nova Scotia.
To determine your payment at maturity, we will first calculate the percentage increase or decrease in the final level (determined on the valuation date, subject to adjustment) from the initial level (which will be the lowest closing level of the reference asset during the observation period (each scheduled trading day from and including the trade date to and including September 3, 2012, subject to adjustment)), which we refer to as the percentage change. The percentage change may reflect a positive return (based on any increase in the level of the reference asset over the life of the notes) or a negative return (based on any decrease in the level of the reference asset over the life of the notes). At maturity, for each $1,000 principal amount of your notes:
| • | if the final level is greater than or equal to the initial level (the percentage change is zero or positive), you will receive an amount in cash equal to the sum of (i) $1,000 plus (ii) the product of $1,000 times the percentage change times the participation rate of 150%, subject to the maximum redemption amount; or |
| • | if the final level is less than the initial level (the percentage change is negative), you will receive an amount in cash equal to the sum of: (1) $1,000 plus (2) the product of (i) $1,000 times (ii) the percentage change. You will receive less than $1,000. |
Following the determination of the initial level, the amount you will be paid on your notes at maturity will not be affected by the closing level of the reference asset on any day other than the valuation date. You could lose all or a substantial portion of your investment in the notes. Any percentage decrease between the initial level and the final level will reduce the payment you will receive at maturity below the principal amount of your notes. Further, the maximum payment that you could receive at maturity with respect to each $1,000 principal amount of your notes (the minimum denomination) is limited to the maximum redemption amount of $1,198.75. In addition, the notes do not bear interest, and no other payments on your notes will be made prior to maturity.
Assuming no changes in market conditions or our creditworthiness and other relevant factors, the value of your notes on the trade date (“estimated value”) (as determined by reference to pricing models used by Goldman, Sachs & Co. and taking into account credit spreads of The Bank of Nova Scotia) is, and the price you receive for your notes may be, significantly less than the original issue price. The value or quoted price of your notes at any time will reflect many factors and cannot be predicted. However, the price at which Goldman, Sachs & Co., as a potential dealer, would initially buy or sell notes (if Goldman, Sachs & Co. makes a market) and the value that Goldman, Sachs & Co. will initially use for account statements and otherwise will significantly exceed the value of your notes using such pricing models. The amount of the excess will decline on a straight line basis over the period from the date hereof through December 3, 2012.
The Capped Optimal Entry Enhanced Participation Notes, Series A Linked to the EURO STOXX 50® Index Due January 10, 2014 (the “Notes”) offered hereunder are unsecured obligations of The Bank of Nova Scotia (the “Bank”) and are subject to investment risks including possible loss of the principal amount invested due to the negative performance of the reference asset and the credit risk of The Bank of Nova Scotia. As used in this pricing supplement, the “Bank,” “we,” “us” or “our” refers to The Bank of Nova Scotia.
The Notes will not be listed on any U.S. securities exchange or automated quotation system.
The return on your Notes, if any, relates to the price return of the reference asset and will not include a total return or dividend component. The Notes are derivative products based on the performance of the reference asset. The Notes do not constitute a direct investment in any of the shares, units or other securities represented by the reference asset. By acquiring Notes, you will not have a direct economic or other interest in, claim or entitlement to, or any legal or beneficial ownership of any such share, unit or security and will not have any rights as a shareholder, unitholder or other security holder of any of the issuers including, without limitation, any voting rights or rights to receive dividends or other distributions.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (“SEC”), THE ONTARIO SECURITIES COMMISSION (“OSC”) NOR ANY PROVINCIAL OR STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES OR PASSED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT, THE ACCOMPANYING PROSPECTUS, PROSPECTUS SUPPLEMENT OR PRODUCT PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE NOTES ARE NOT INSURED BY THE CANADA DEPOSIT INSURANCE CORPORATION PURSUANT TO THE CANADA DEPOSIT INSURANCE CORPORATION ACT OR THE U.S. FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OF CANADA, THE UNITED STATES OR ANY OTHER JURISDICTION.
Scotia Capital (USA) Inc., our affiliate, will purchase the Notes from us for distribution to other registered broker dealers or will offer the Notes directly to investors. Scotia Capital (USA) Inc. or any of its affiliates or agents may use this pricing supplement in market-making transactions in Notes after their initial sale. Unless we, Scotia Capital (USA) Inc. or another of its affiliates or agents selling such Notes to you informs you otherwise in the confirmation of sale, this pricing supplement is being used in a market-making transaction. See “Supplemental Plan of Distribution (Conflicts of Interest)” in this pricing supplement and “Supplemental Plan of Distribution” on page PS-28 of the accompanying product prospectus supplement.
| Per Note | Total | |||||||
| Price to public |
100.00% | $ | 1,545,000.00 | |||||
| Underwriting commissions1 |
0.25% | $ | 3,862.50 | |||||
| Proceeds to The Bank of Nova Scotia2 |
99.75% | $ | 1,541,137.50 | |||||
Investment in the Notes involves certain risks. You should refer to “Additional Risks” in this pricing supplement and “Additional Risk Factors Specific to the Notes” beginning on page PS-5 of the accompanying product prospectus supplement and “Risk Factors” beginning on page S-2 of the accompanying prospectus supplement.
We will deliver the Notes in book-entry form through the facilities of The Depository Trust Company (“DTC”) on July 11, 2012 against payment in immediately available funds.
The difference between the estimated value of your Notes and the original issue price reflects costs that the Bank or its affiliates expect to incur and profits that the Bank or its affiliates expect to realize in connection with hedging activities related to the Notes. These costs and profits will likely reduce the secondary market price, if any secondary market develops, for the Notes. As a result, you may experience an immediate and substantial decline in the market value of your Notes on the trade date and you may lose all or a substantial portion of your initial investment. The Bank’s profit in relation to the Notes will vary based on the difference between (i) the amounts received by the Bank in connection with the issuance and the reinvestment return received by the Bank in connection with those funds and (ii) the costs incurred by the Bank in connection with the issuance of the Notes and the hedging transactions it enters into with its affiliates or Goldman, Sachs & Co. The Bank’s affiliates and Goldman, Sachs & Co. will also realize a profit that will be based on the (i) cost of creating and maintaining the hedging transactions minus (ii) the payments received on the hedging transactions.
| Scotia Capital (USA) Inc. | Goldman, Sachs & Co. |
| 1 | Scotia Capital (USA) Inc. or one of our affiliates will purchase the Notes at the Principal Amount and as part of the distribution of the Notes may pay varying discounts and underwriting commissions of up to $2.50 per $1,000 Principal Amount of Notes in connection with the distribution of the Notes. Scotia Capital (USA) Inc. may also receive a structuring and development fee of up to $0.50 per $1,000 principal amount of Notes. See “Supplemental Plan of Distribution (Conflicts of Interest)” in this pricing supplement. |
| 2 | Excludes profits from hedging. For additional considerations relating to hedging activities see “Additional Risks—The Inclusion of Dealer Spread and Projected Profit from Hedging in the Original Issue Price is Likely to Adversely Affect Secondary Market Prices” in this pricing supplement. |
Summary
The information in this “Summary” section is qualified by the more detailed information set forth in this pricing supplement, the prospectus, the prospectus supplement, and the product prospectus supplement, each filed with the SEC. See “Additional Terms of Your Notes” in this pricing supplement.
| Issuer: | The Bank of Nova Scotia (“the Bank”) | |
| Reference Asset: | The EURO STOXX 50® Index (Bloomberg Ticker: SX5E) | |
| Minimum Investment and Denominations: |
$1,000 and integral multiples of $1,000 in excess thereof | |
| Principal Amount: | $1,000 | |
| Original Issue Price: | 100% of the Principal Amount of each Note | |
| Currency: | U.S. Dollars | |
| Pricing Date: | July 3, 2012 | |
| Trade Date: | July 3, 2012 | |
| Original Issue Date: | July 11, 2012. | |
| Maturity Date: | January 10, 2014, subject to adjustment as described in more detail in the accompanying the product prospectus supplement dated April 4, 2012. | |
| Principal at Risk: | You may lose all or a substantial portion of your initial investment at maturity if there is a percentage decrease from the Initial Level to the Final Level. | |
| Fees and Expenses: | Scotia Capital (USA) Inc. or one of our affiliates may pay varying discounts and underwriting commissions of up to $2.50 per $1,000 Principal Amount of Notes in connection with the distribution of the Notes. Scotia Capital (USA) Inc. may also receive a structuring and development fee of up to $0.50 per $1,000 Principal Amount of Notes.
The price at which you purchase the Notes includes costs that the Bank or its affiliates expect to incur and profits that the Bank or its affiliates expect to realize in connection with hedging activities related to the Notes, as set forth above. These costs and profits will likely reduce the secondary market price, if any secondary market develops, for the Notes. As a result, you may experience an immediate and substantial decline in the market value of your Notes on the Trade Date. See “Additional Risks—The Inclusion of Dealer Spread and Projected Profit from Hedging in the Original Issue Price is Likely to Adversely Affect Secondary Market Prices” in this pricing supplement. | |
| Payment at Maturity: | The Payment at Maturity will be based on the performance of the Reference Asset and will be calculated as follows: | |
| If the Final Level is greater than or equal to the Initial Level, then the Payment at Maturity will equal:
the lesser of (a) the Principal Amount + (Principal Amount x Percentage Change x Participation Rate) or (b) the Maximum Redemption Amount | ||
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| If the Final Level is less than the Initial Level, then the Payment at Maturity will equal:
Principal Amount + (Principal Amount × Percentage Change)
In this case you will suffer a loss on your initial investment in an amount equal to the negative Percentage Change. Accordingly, you could lose up to 100% of your initial investment. | ||
| Initial Level: | The lowest closing level of the Reference Asset during the Observation Period.
The Initial Level will be published on Goldman, Sachs
& Co.’s website at:
We do not incorporate the information on the website into this pricing supplement and you should not consider any information on, or that can be accessed through, the website as part of this pricing supplement. | |
| Observation Period: | Each scheduled Trading Day from and including the Trade Date to and including September 3, 2012. If the Calculation Agent determines that a Market Disruption Event occurs on any scheduled Trading Day during the Observation Period or such day is not a Trading Day, the closing level on such day will not be included in the determination of the Initial Level; provided, however, if a Market Disruption Event or non-Trading Day occurs or is continuing on each scheduled Trading Day during the Observation Period, the Calculation Agent may postpone the last Trading Day of such Observation Period. If such a postponement occurs, the Calculation Agent will use the closing level of the Reference Asset on the first subsequent Trading Day on which no Market Disruption Event occurs or is continuing. However, in such circumstances, the last day of the Observation Period will not be postponed by more than seven scheduled Trading Days. If a Market Disruption Event occurs or is continuing on the day that is the last possible day of the Observation Period or such last possible day is not a Trading Day, in such circumstances, that day will nevertheless be the last day of the Observation Period and the Calculation Agent will determine the Initial Level based on its assessment and in its sole discretion of the level of the Reference Asset on that day.
For purposes of solely this section, a “Market Disruption Event” shall be any of the events described under “Market Disruption Events” beginning on page PS-17 of the accompanying Product Prospectus Supplement for Equity Linked Index Notes, Series A dated April 4, 2012, but shall exclude the event described as “any other event, if the calculation agent determines that the event interferes with our ability or the ability of any of our affiliates to unwind all or a portion of a hedge with respect to the notes that we or our affiliates have effected or may effect as described below under “Use of Proceeds and Hedging” in this product prospectus supplement.” | |
| Final Level: | The final level of the Reference Asset will be determined based upon the closing level published on the Bloomberg page “SX5E<Index>” or any successor page on Bloomberg or any successor service, as applicable, on the Valuation Date. In certain special circumstances, the final level will be determined by the Calculation Agent, in its discretion, and such determinations will, under certain circumstances, be confirmed by an independent calculation expert. See “General Terms of the Notes – Unavailability of the Level of the Reference Asset on a Valuation Date” and “General Terms of the Notes – Market Disruption Events” beginning on page PS-17 and “Appointment of Independent Calculation Experts” on page PS-20, in the accompanying product prospectus supplement. | |
| Percentage Change: | The Percentage Change, expressed as a percentage, with respect to the Payment at Maturity, is calculated as follows:
Final Level – Initial Level Initial Level
For the avoidance of doubt, the Percentage Change may be a negative value. | |
| Participation Rate: | 150% | |||
| Maximum Redemption Amount: | $1,198.75, which equals Principal Amount x 119.875%. The Maximum Redemption Amount sets a cap on appreciation of the Reference Asset of 13.25%. | |||
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| Valuation Date: | January 3, 2014.
The Valuation Date could be delayed by the occurrence of a market disruption event. See “General Terms of the Notes—Market Disruption Events” beginning on page PS-17 in the accompanying product prospectus supplement. | |
| CUSIP/ISIN: | CUSIP 064159874 / ISIN US0641598745 | |
| Form of Notes: | Book-entry | |
| Type of Notes: | Capped Optimal Entry Enhanced Participation Notes, Series A | |
| Calculation Agent: | Scotia Capital Inc., an affiliate of the Bank | |
| Status: | The Notes will constitute direct, unsubordinated and unsecured obligations of the Bank ranking pari passu with all other direct, unsecured and unsubordinated indebtedness of the Bank from time to time outstanding (except as otherwise prescribed by law). Holders will not have the benefit of any insurance under the provisions of the Canada Deposit Insurance Corporation Act, the U.S. Federal Deposit Insurance Act or under any other deposit insurance regime. | |
| Tax Redemption: | The Bank (or its successor) may redeem the Notes, in whole but not in part, at a redemption price determined by the Calculation Agent in a manner reasonably calculated to preserve your and our relative economic position, if it is determined that changes in tax laws or their interpretation will result in the Bank (or its successor) becoming obligated to pay additional amounts with respect to the Notes. See “Tax Redemption” below. | |
| Listing: | The Notes will not be listed on any securities exchange or quotation system. | |
| Use of Proceeds: | General corporate purposes | |
| Clearance and Settlement: | Depository Trust Company | |
| Business Day: | New York and Toronto | |
| Terms Incorporated: | All of the terms appearing above the item under the caption “General Terms of the Notes” beginning on page PS-12 in the accompanying product prospectus supplement, as modified by this pricing supplement. | |
INVESTING IN THE NOTES INVOLVES SIGNIFICANT RISKS. YOU MAY LOSE YOUR ENTIRE PRINCIPAL AMOUNT. ANY PAYMENT ON THE NOTES, INCLUDING ANY REPAYMENT OF PRINCIPAL, IS SUBJECT TO THE CREDITWORTHINESS OF THE BANK. IF THE BANK WERE TO DEFAULT ON ITS PAYMENT OBLIGATIONS YOU MAY NOT RECEIVE ANY AMOUNTS OWED TO YOU UNDER THE NOTES AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
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ADDITIONAL TERMS OF YOUR NOTES
You should read this pricing supplement together with the prospectus dated February 13, 2012, as supplemented by the prospectus supplement dated February 29, 2012 and the product prospectus supplement (Equity Linked Index Notes, Series A) dated April 4, 2012, relating to our Senior Note Program, Series A, of which these Notes are a part. Capitalized terms used but not defined in this pricing supplement will have the meanings given to them in the product prospectus supplement. In the event of any conflict, this pricing supplement will control. The Notes may vary from the terms described in the accompanying product prospectus supplement in several important ways. You should read this pricing supplement carefully.
This pricing supplement, together with the documents listed below, contains the terms of the Notes and supersedes all prior or contemporaneous oral statements as well as any other written materials including pricing terms, correspondence, trade ideas, structures for implementation, sample structures, brochures or other educational materials of ours. You should carefully consider, among other things, the matters set forth in “Additional Risk Factors Specific to the Notes” in the accompanying product prospectus supplement, as the Notes involve risks not associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisors before you invest in the Notes. You may access these documents on the SEC website at www.sec.gov as follows (or if that address has changed, by reviewing our filings for the relevant date on the SEC website at http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000009631):
Prospectus dated February 13, 2012:
http://sec.gov/Archives/edgar/data/9631/000119312512057287/d296062df9a.htm
Prospectus Supplement dated February 29, 2012:
http://sec.gov/Archives/edgar/data/9631/000119312512090175/d300613dsuppl.htm
Product Prospectus Supplement for Equity Linked Index Notes, Series A dated April 4, 2012:
http://sec.gov/Archives/edgar/data/9631/000119312512149817/d310079dsuppl.htm
The Bank of Nova Scotia has filed a registration statement (including a prospectus, a prospectus supplement, and a product prospectus supplement) with the SEC for the offering to which this pricing supplement relates. Before you invest, you should read those documents and the other documents relating to this offering that we have filed with the SEC for more complete information about us and this offering. You may obtain these documents without cost by visiting EDGAR on the SEC Website at www.sec.gov. Alternatively, The Bank of Nova Scotia, any agent or any dealer participating in this offering will arrange to send you the prospectus, the prospectus supplement and the product prospectus supplement if you so request by calling 1-416-866-3672.
INVESTOR SUITABILITY
The Notes may be suitable for you if:
| • | You fully understand the risks inherent in an investment in the Notes, including the risk of losing your entire initial investment. |
| • | You can tolerate a loss of up to 100% of your initial investment and are willing to make an investment that has downside risk equal to the downside market risk of an investment in the Reference Asset or in the Reference Asset constituent stocks. |
| • | You believe that the Reference Asset will appreciate over the term of the Notes and that the appreciation is unlikely to exceed the cap on appreciation within the Maximum Redemption Amount of $1,198.75. |
| • | You understand and accept that your potential return is limited to the Maximum Redemption Amount and you are willing to invest in the Notes based on the Maximum Redemption Amount indicated above. |
| • | You can tolerate fluctuations in the price of the Notes prior to maturity that may be similar to or exceed the downside fluctuations in the level of the Reference Asset. |
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| • | You do not seek current income from your investment. |
| • | You are willing to hold the Notes to maturity, a term of 18 months, and accept that there may be little or no secondary market for the Notes. |
| • | You seek an investment with exposure to companies in the Eurozone. |
| • | You are willing to assume the credit risk of the Bank for all payments under the Notes, and understand that if the Bank defaults on its obligations you may not receive any amounts due to you including any repayment of principal. |
The Notes may not be suitable for you if:
| • | You do not fully understand the risks inherent in an investment in the Notes, including the risk of losing your entire initial investment. |
| • | You require an investment designed to guarantee a full return of principal at maturity. |
| • | You cannot tolerate a loss of all or a substantial portion of your initial investment and are not willing to make an investment that has downside risk equal to the downside market risk as an investment in the Reference Asset or in the Reference Asset constituent stocks. |
| • | You believe that the level of the Reference Asset will decline during the term of the Notes, or you believe the Reference Asset will appreciate over the term of the Notes and that the appreciation is likely to equal or exceed the cap on appreciation within the Maximum Redemption Amount. |
| • | You seek an investment that has unlimited return potential without a cap on appreciation and you are unwilling to invest in the Notes based on the Maximum Redemption Amount of $1,198.75. |
| • | You cannot tolerate fluctuations in the price of the Notes prior to maturity that may be similar to or exceed the downside fluctuations in the level of the Reference Asset. |
| • | You seek current income from your investment or prefer to receive dividends paid on the stocks included in the Reference Asset. |
| • | You are unwilling to hold the Notes to maturity, a term of 18 months, or you seek an investment for which there will be a secondary market. |
| • | You do not seek an investment with exposure to companies in the Eurozone. |
| • | You are not willing to assume the credit risk of the Bank for all payments under the Notes. |
The investor suitability considerations identified above are not exhaustive. Whether or not the Notes are a suitable investment for you will depend on your individual circumstances and you should reach an investment decision only after you and your investment, legal, tax, accounting and other advisors have carefully considered the suitability of an investment in the Notes in light of your particular circumstances. You should also review “Additional Risks” in this pricing supplement and the “Additional Risk Factors Specific to the Notes” beginning on page PS-5 of the Product Prospectus Supplement for Equity Linked Index Notes, Series A for risks related to an investment in the Notes.
EVENTS OF DEFAULT AND ACCELERATION
If the Notes have become immediately due and payable following an event of default (as defined in the accompanying prospectus) with respect to the Notes, the Calculation Agent will determine the default amount as described below.
Default Amount
The default amount for your Notes on any day (except as provided in the last sentence under “Default Quotation Period” below) will be an amount, in the specified currency for the principal of your Notes, equal to the cost of having a qualified financial institution, of the kind and selected as described below, expressly assume all our payment and other obligations with respect to your Notes as of that day and as if no default or acceleration had occurred, or to undertake other obligations providing substantially equivalent economic value to you with respect to your Notes. That cost will equal:
| • | the lowest amount that a qualified financial institution would charge to effect this assumption or undertaking, plus |
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| • | the reasonable expenses, including reasonable attorneys’ fees, incurred by the trustees of your Notes in preparing any documentation necessary for this assumption or undertaking. |
During the default quotation period for your Notes, described below, the trustees and/or the Bank may request a qualified financial institution to provide a quotation of the amount it would charge to effect this assumption or undertaking. If either party obtains a quotation, it must notify the other party in writing of the quotation. The amount referred to in the first bullet point above will equal the lowest—or, if there is only one, the only—quotation obtained, and as to which notice is so given, during the default quotation period. With respect to any quotation, however, the party not obtaining the quotation may object, on reasonable and significant grounds, to the assumption or undertaking by the qualified financial institution providing the quotation and notify the other party in writing of those grounds within two business days after the last day of the default quotation period, in which case that quotation will be disregarded in determining the default amount.
Default Quotation Period
The default quotation period is the period beginning on the day the default amount first becomes due (the “due day”) and ending on the third business day after that day, unless:
| • | no quotation of the kind referred to above is obtained, or |
| • | every quotation of that kind obtained is objected to within five business days after the due day as described above. |
If either of these two events occurs, the default quotation period will continue until the third business day after the first business day on which prompt notice of an objection is given as described above. If that quotation is objected to as described above within five business days after that first business day, however, the default quotation period will continue as described in the prior sentence and this sentence.
Qualified Financial Institutions
For the purpose of determining the default amount at any time, a qualified financial institution must be a financial institution organized under the laws of any jurisdiction in the United States of America, Europe or Japan, which at that time has outstanding debt obligations with a stated maturity of one year or less from the date of issue and that is, or whose securities are, rated either:
| • | A-1 or higher by Standard & Poor’s Ratings Services, or any successor, or any other comparable rating then used by that rating agency, or |
| • | P-1 or higher by Moody’s Investors Service or any successor, or any other comparable rating then used by that rating agency. |
If the Notes have become immediately due and payable following an event of default, you will not be entitled to any additional payments with respect to the Notes. For more information, see “Description of the Debt Securities—Events of Default” beginning on page I-13 of the accompanying prospectus.
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TAX REDEMPTION
The Bank (or its successor) may redeem the Notes, in whole but not in part, at a redemption price determined by the Calculation Agent in a manner reasonably calculated to preserve your and our relative economic position, upon the giving of a notice as described below, if:
| • | as a result of any change (including any announced prospective change) in or amendment to the laws (or any regulations or rulings promulgated thereunder) of Canada (or the jurisdiction of organization of the successor to the Bank) or of any political subdivision or taxing authority thereof or therein affecting taxation, or any change in official position regarding the application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction), which change or amendment is announced or becomes effective on or after the Pricing Date (or, in the case of a successor to the Bank, after the date of succession), and which in the written opinion to the Bank (or its successor) of legal counsel of recognized standing has resulted or will result (assuming, in the case of any announced prospective change, that such announced change will become effective as of the date specified in such announcement and in the form announced) in the Bank (or its successor) becoming obligated to pay, on the next succeeding date on which a payment is due, additional amounts with respect to the Notes; or |
| • | on or after the Pricing Date (or, in the case of a successor to the Bank, after the date of succession), any action has been taken by any taxing authority of, or any decision has been rendered by a court of competent jurisdiction in, Canada (or the jurisdiction of organization of the successor to the Bank) or any political subdivision or taxing authority thereof or therein, including any of those actions specified in the paragraph immediately above, whether or not such action was taken or decision was rendered with respect to the Bank (or its successor), or any change, amendment, application or interpretation shall be officially proposed, which, in any such case, in the written opinion to the Bank (or its successor) of legal counsel of recognized standing, will result (assuming, that such change, amendment or action is applied to the Notes by the taxing authority and that, in the case of any announced prospective change, that such announced change will become effective as of the date specified in such announcement and in the form announced) in the Bank (or its successor) becoming obligated to pay, on the next succeeding date on which a payment is due, additional amounts with respect to the Notes; |
and, in any such case, the Bank (or its successor), in its business judgment, determines that such obligation cannot be avoided by the use of reasonable measures available to it (or its successor).
The redemption price will be determined by the Calculation Agent, in its discretion, and such determination will, under certain circumstances, be confirmed by an independent calculation expert. See “General Terms of the Notes –“Appointment of Independent Calculation Experts” on page PS-20, in the accompanying product prospectus supplement.
In the event the Bank elects to redeem the Notes pursuant to the provisions set forth in the preceding paragraph, it shall deliver to the trustees a certificate, signed by an authorized officer, stating that the Bank is entitled to redeem such Notes pursuant to their terms in whole only.
The Bank will give notice of intention to redeem such Notes to holders of the Notes not more than 45 nor less than 30 days prior to the date fixed for redemption specifying, among other things, the date fixed for redemption, and promptly after the redemption date, it will give notice of the redemption price.
Other than as described above, the Notes are not redeemable prior to their maturity.
HYPOTHETICAL PAYMENTS ON THE NOTES
The examples set out below are included for illustration purposes only. The hypothetical Percentage Changes of the Reference Asset used to illustrate the calculation of the Payment at Maturity (rounded to two decimal places) are not estimates or forecasts of the Initial Level, the Final Level or the level of the Reference Asset on any Trading Day prior to the Maturity Date. All examples assume that a holder purchased Notes with an aggregate Principal Amount of $1,000.00, a Maximum Redemption Amount of $1,198.75 (119.875% of the Principal Amount) and that no market disruption event occurs on the Valuation Date. Amounts below may have been rounded for ease of analysis.
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| Example 1— |
Calculation of the Payment at Maturity where the Percentage Change is positive. | |||
| Percentage Change: |
5.00% | |||
| Payment at Maturity: |
$1,000.00 + ($1,000.00 x 5.00% x 150%) = $1,000.00 + $75.00 = $1,075.00 | |||
| On a $1,000.00 investment, a 5.00% Percentage Change results in a Payment at Maturity of $1,075.00, a 7.50% return on the Notes. The 7.50% return corresponds to a compound annual return of 4.9349% per annum. | ||||
| Example 2— |
Calculation of the Payment at Maturity where the Percentage Change is positive (and the Payment at Maturity is subject to the Maximum Redemption Amount). | |||
| Percentage Change: |
40.00% | |||
| Payment at Maturity: |
$1,000.00 + ($1,000.00 x 40.00% x 150%) = $1,000.00 + $600.00 = $1,600.00 however, the Maximum Redemption Amount is $1,198.75 and the Payment at Maturity would be $1,198.75 | |||
| On a $1,000.00 investment, a 40.00% Percentage Change results in a Payment at Maturity of $1,198.75, a 19.875% return on the Notes. The 19.875% return corresponds to a compound annual return of 12.8334% per annum. | ||||
| Example 3— |
Calculation of the Payment at Maturity where the Percentage Change is negative. | |||
| Percentage Change: |
-50.00% | |||
| Payment at Maturity: |
$1,000.00 + ($1,000.00 x -50.00%) = $1,000.00 – $500.00 = $500.00 | |||
| On a $1,000.00 investment, a -50.00% Percentage Change results in a Payment at Maturity of $500.00, a -50.00% return on the Notes. The -50.00% return corresponds to a compound annual return of -36.9774% per annum.
Accordingly, if the Percentage Change is negative, the Bank will pay you less than the full Principal Amount, resulting in a loss on your investment that is equal to the negative Percentage Change. You may lose up to 100% of your principal. | ||||
Any payment on the Notes, including any repayment of principal, is subject to the creditworthiness of the Bank. If the Bank were to default on its payment obligations, you may not receive any amounts owed to you under the Notes and you could lose your entire investment.
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The following graph represents hypothetical returns only and is not indicative of actual results. The graph demonstrates the hypothetical return on the Notes at maturity for the set of Percentage Changes of the Reference Asset from -100.00% to 100.00% using the same assumptions as set forth above. Your investment may result in a complete loss of your principal at maturity.
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ADDITIONAL RISKS
An investment in the Notes involves significant risks. In addition to the following risks included in this pricing supplement, we urge you to read “Additional Risk Factors Specific to the Notes” beginning on page PS-5 of the accompanying product prospectus supplement and “Risk Factors” beginning on page S-2 of the accompanying prospectus supplement.
In particular, you should read the following risk factors (only headings included) in the “Additional Risk Factors Specific to the Notes —General Risks Relating to the Notes” and “—Risks Relating to the Applicable Reference Asset” sections of the accompanying product prospectus supplement: “The Notes May Not Pay Interest and Your Return May Be Lower than the Return on a Conventional Debt Security of Comparable Maturity”; “Your Potential Payment at Maturity May Be Limited”; “Owning the Notes Is Not the Same as Owning the Reference Asset or its Components or a Security Directly Linked to the Performance of the Reference Asset or its Components”; “There May Not Be an Active Trading Market for the Notes—Sales in the Secondary Market May Result in Significant Losses”; “The Market Value of Your Notes May Be Influenced by Many Unpredictable Factors”; “Payments on the Notes Are Subject to Our Credit Risk, and Changes in Our Credit Ratings Are Expected to Affect the Market Value of the Notes”; “The Amount to Be Paid at Maturity Will Not Be Affected by All Developments Relating to the Reference Asset”; “We Will Not Hold Any Asset Comprising the Reference Asset for Your Benefit”; “You Must Rely on Your Own Evaluation of the Merits of an Investment Linked to the Reference Asset”; “Changes that Affect an Index Included in the Reference Asset Will Affect the Market Value of the Notes and the Amount You Will Receive at Maturity”; “Trading and Other Transactions by the Bank or its Affiliates in the Reference Asset or Its Components, Futures, Options, Exchange-Traded Funds or Other Derivative Products May Adversely Affect the Market Value of the Notes”; “The Inclusion in the Purchase Price of the Notes of an Underwriting Commission and of Our Cost of Hedging Our Market Risk under the Notes is Likely to Adversely Affect the Market Value of the Notes”; “We Have No Affiliation with Any Index Sponsor and Will Not Be Responsible for Any Actions Taken by an Index Sponsor”; “The Business Activities of the Bank or its Affiliates May Create Conflicts of Interest”; “The Calculation Agent Can Postpone the Determination of the Final Level if a Market Disruption Event Occurs”; “There Are Potential Conflicts of Interest Between You and the Calculation Agent”; “The Historical Performance of the Reference Asset or its Components Should Not Be Taken as an Indication of Their Future Performance”; “U.S. Taxpayers Will be Required to Pay Taxes Each Year on Notes that Are Treated as Contingent Payment Debt Instruments and Notes that Are Issued with Original Issue Discount”; “Non-U.S. Investors May Be Subject to Certain Additional Risks”; “Employee Retirement Income Security Act and Considerations for Employee Benefit Plans”; “You Will Not Have Any Shareholder Rights and Will Have No Right to Receive any Shares of the Reference Asset at Maturity”; “An Investment in the Notes May Be Subject to Risks Associated with Non-U.S. Securities Markets”; “The Return on the Notes Will Be Exposed to Fluctuations in Exchange Rates that Might Affect the Level of the Reference Asset and the Payment at Maturity” and “We Do Not Control Any Company Included in a Reference Asset and Are Not Responsible for Any Disclosure Made by Any Other Company.”
You should understand the risks of investing in the Notes and should reach an investment decision only after careful consideration, with your advisors, of the suitability of the Notes in light of your particular financial circumstances and the information set forth in this pricing supplement and the accompanying base prospectus, prospectus supplement and product prospectus supplement.
Assuming No Changes in Market Conditions or Any Other Relevant Factors, the Market Value of Your Notes on the Trade Date (As Determined by Reference to Pricing Models Used By Goldman, Sachs & Co.) Is, and the Price You Receive for Your Notes May Be, Significantly Less than the Original Issue Price
The price at which Goldman, Sachs & Co. (as “Dealer” of the Notes) would initially buy or sell Notes (if Goldman, Sachs & Co. makes a market, which it is under no obligation to do) and the value that Goldman, Sachs & Co. will initially use for account statements and otherwise will significantly exceed the value of your Notes derived from pricing models used by Goldman, Sachs & Co. The amount of the excess will decline on a straight line basis over the period from the date hereof through December 3, 2012. After December 3, 2012, the price at which Goldman, Sachs & Co. would buy or sell Notes (if Goldman, Sachs & Co. makes a market) will reflect the value determined by reference to the pricing models, plus the Dealer’s customary bid and ask spread.
The value or quoted price of your Notes at any time will reflect many factors and cannot be predicted. If Goldman, Sachs & Co. makes a market in the Notes, the price quoted by Goldman, Sachs & Co. would reflect any changes in market conditions
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and other relevant factors, including deterioration in the Bank’s creditworthiness or perceived creditworthiness whether measured by the Bank’s credit ratings or other credit measures. These changes may adversely affect the market price of your Notes, including the price you may receive for your Notes in any market making transaction. To the extent that Goldman, Sachs & Co. makes a market in the Notes, it may receive income from the spreads between its bid and offer prices for the Notes, if any. The quoted price (and the value of your Notes that Goldman, Sachs & Co. will use for account statements or otherwise) could be higher or lower than the original issue price and may be higher or lower than the value of your Notes as determined by reference to pricing models used by Goldman, Sachs & Co.
If at any time a third party dealer quotes a price to purchase your Notes or otherwise values your Notes, that price may be significantly different (higher or lower) than any price quoted by Goldman, Sachs & Co. See “—The Price at Which the Notes may be Sold prior to Maturity will Depend on a Number of Factors and May Be Substantially Less Than the Amount for Which They Were Originally Purchased”.
Furthermore, if you sell your Notes, you will likely be charged a commission for secondary market transactions, or the price will likely reflect a dealer discount.
There is no assurance that Goldman, Sachs & Co. or any other party will be willing to purchase your Notes; and, in this regard, Goldman, Sachs & Co. is not obligated to make a market in the Notes. See “—The Notes Lack Liquidity”.
The Inclusion of Dealer Spread and Projected Profit from Hedging in the Original Issue Price is Likely to Adversely Affect Secondary Market Prices
Assuming no change in market conditions or any other relevant factors, the price, if any, at which Scotia Capital (USA) Inc. or any other party is willing to purchase the Notes at any time in secondary market transactions will likely be significantly lower than the original issue price, since secondary market prices are likely to exclude underwriting commissions paid with respect to the Notes and the cost of hedging our obligations under the Notes that are included in the original issue price. The cost of hedging includes the projected profit that we and/or our subsidiaries may realize in consideration for assuming the risks inherent in managing the hedging transactions. These secondary market prices are also likely to be reduced by the costs of unwinding the related hedging transactions. In addition, any secondary market prices may differ from values determined by pricing models used by Scotia Capital (USA) Inc. as a result of dealer discounts, mark-ups or other transaction costs.
Risk of Loss at Maturity
Any payment on the Notes at maturity depends on the Percentage Change of the Reference Asset. The Bank will only repay you the full Principal Amount of your Notes if the Percentage Change is zero or positive. If the Percentage Change is negative, you will lose a significant portion of your initial investment in an amount equal to the negative Percentage Change. Accordingly, you may lose your entire investment in the Notes if the percentage decline from the Initial Level to the Final Level is negative.
Participation Rate Applies Only at Maturity
You should be willing to hold your Notes to maturity. If you are able to sell your Notes prior to maturity in the secondary market, the price you receive will likely not reflect the full economic value of the Participation Rate or the Notes themselves, and the return may be less than the Percentage Change even if such return is positive you can receive the full benefit of the Participation Rate only if you hold your Notes to maturity.
Your Potential Payment at Maturity Is Limited by the Maximum Redemption Amount
The Payment at Maturity will not exceed the Maximum Redemption Amount. Therefore, if the appreciation of the Reference Asset exceeds the cap on appreciation in the Maximum Redemption Amount, the Notes will provide less opportunity to participate in the appreciation of the Reference Asset than an investment in a security linked to the Reference Asset providing full participation in the appreciation. Accordingly, the return on the Notes may be less than the return would be if you made an investment in a security directly linked to the positive performance of the Reference Asset.
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The Initial Level Will Not Be Determined Until the End of the Observation Period
Because the Initial Level will be the lowest closing level of the Reference Asset during the Observation Period, the Initial Level will not be determined until the end of the Observation Period. The Observation Period is each scheduled Trading Day in the two calendar months from and including the Trade Date to and including September 3, 2012, subject to adjustment as described elsewhere in this pricing supplement and the product prospectus supplement. Accordingly, you will not know the Initial Level for a significant period of time after the Trade Date. There can be no assurance that the closing level of the Reference Asset will decline below the level on the Trade Date during the Observation Period. Furthermore, even if the closing level of the Reference Asset declines below its level on the Trade Date during the Observation Period, there can be no assurance that the Final Level will be greater than the Initial Level so that you earn a positive return on the Notes. In addition, if the Calculation Agent determines that a Market Disruption Event occurs on any scheduled Trading Day during the Observation Period or such day is not a Trading Day, the closing level on such day will not be included in the calculation of the Initial Level.
The Notes Differ from Conventional Debt Instruments
The Notes are not conventional notes or debt instruments. The Notes do not provide you with interest payments prior to maturity as a conventional fixed-rate or floating-rate debt security with the same maturity would. The return that you will receive on the Notes, which could be negative, may be less than the return you could earn on other investments. Even if your return is positive, your return may be less than the return you would earn if you bought a conventional senior interest bearing debt security of the Bank.
No Interest
The Notes do not bear interest and, accordingly, you will not receive any interest payments on the Notes.
Your Investment is Subject to the Credit Risk of The Bank of Nova Scotia
The Notes are senior unsecured debt obligations of the Bank, and are not, either directly or indirectly, an obligation of any third party. As further described in the accompanying prospectus, prospectus supplement and product prospectus supplement, the Notes will rank on par with all of the other unsecured and unsubordinated debt obligations of the Bank, except such obligations as may be preferred by operation of law. Any payment to be made on the Notes, including the Payment at Maturity, depends on the ability of the Bank to satisfy its obligations as they come due. As a result, the actual and perceived creditworthiness of the Bank may affect the market value of the Notes and, in the event the Bank were to default on its obligations, you may not receive the amounts owed to you under the terms of the Notes. If you sell the Notes prior to maturity, you may receive substantially less than the Principal Amount of your Notes.
The Notes are Subject to Market Risk
The return on the Notes is directly linked to the performance of the Reference Asset and indirectly linked to the value of the Reference Asset constituent stocks, and the extent to which the Percentage Change is positive or negative. The levels of the Reference Asset can rise or fall sharply due to factors specific to the Reference Asset constituent stocks, as well as general market factors, such as general market volatility and levels, interest rates and economic and political conditions.
The Payment at Maturity Is Not Linked to the Level of the Reference Asset at Any Time Other Than the Valuation Date
The Payment at Maturity will be based on the Final Level (subject to adjustments as described). Therefore, for example, if the closing level of the Reference Asset declined substantially as of the Valuation Date compared to the Initial Level, the Payment at Maturity may be significantly less than it would otherwise have been had the Payment at Maturity been linked to the closing levels of the Reference Asset prior to the Valuation Date. Although the actual level of the Reference Asset at maturity or at other times during the term of the Notes may be higher than the Final Level, you will not benefit from the closing levels of the Reference Asset at any time other than the Valuation Date.
If the Levels of the Reference Asset or the Reference Asset Constituent Stocks Change, the Market Value of Your Notes May Not Change in the Same Manner
Your Notes may trade quite differently from the performance of the Reference Asset or the Reference Asset constituent stocks. Changes in the levels of the Reference Asset or the Reference Asset constituent stocks may not result in a comparable change in the market value of your Notes. We discuss some of the reasons for this disparity under “—The Price at Which the Notes may be Sold prior to Maturity will Depend on a Number of Factors and May Be Substantially Less Than the Amount for Which They Were Originally Purchased” below
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Holding the Notes is Not the Same as Holding the Reference Asset Constituent Stocks
Holding the Notes is not the same as holding the Reference Asset constituent stocks. As a holder of the Notes, you will not be entitled to the voting rights or rights to receive dividends or other distributions or other rights that holders of the Reference Asset constituent stocks would enjoy.
No Assurance that the Investment View Implicit in the Notes Will Be Successful
It is impossible to predict with certainty whether and the extent to which the level of the Reference Asset will rise or fall. There can be no assurance that the Final Level will rise above the Initial Level. The Final Level may be influenced by complex and interrelated political, economic, financial and other factors that affect the Reference Asset constituent stocks. You should be willing to accept the risks of the price performance of equity securities in general and the Reference Asset constituent stocks in particular, and the risk of losing some or all of your initial investment.
Furthermore, we cannot give you any assurance that the future performance of the Reference Asset or the Reference Asset constituent stocks will result in your receiving an amount greater than or equal to the Principal Amount of your Notes. Certain periods of historical performance of the Reference Asset or the Reference Asset constituent stocks would have resulted in you receiving less than the Principal Amount of your Notes if you had owned notes with terms similar to these Notes in the past. See “Information Regarding The Reference Asset” in this pricing supplement for further information regarding the historical performance of the Reference Asset.
The Reference Asset Reflects Price Return Only and Not Total Return
The return on your Notes is based on the performance of the Reference Asset, which reflects the changes in the market prices of the Reference Asset constituent stocks. It is not, however, linked to a “total return” index or strategy, which, in addition to reflecting those price returns, would also reflect dividends paid on the Reference Asset constituent stocks. The return on your Notes will not include such a total return feature or dividend component.
Past Performance is Not Indicative of Future Performance
The actual performance of the Reference Asset over the life of the Notes, as well as the amount payable at maturity, may bear little relation to the historical performance of the Reference Asset or to the hypothetical return examples set forth elsewhere in this pricing supplement. We cannot predict the future performance of the Reference Asset.
We May Sell an Additional Aggregate Principal Amount of the Notes at a Different Issue Price
We may decide to sell an additional aggregate Principal Amount of the Notes subsequent to the date of this pricing supplement. The issue price of the Notes in the subsequent sale may differ substantially (higher or lower) from the original issue price you paid as provided on the cover of this pricing supplement.
Changes Affecting the Reference Asset Could Have an Adverse Effect on the Value of the Notes
The policies of STOXX Inc., the sponsor of the Reference Asset (the “Sponsor”), concerning additions, deletions and substitutions of the Reference Asset constituent stocks and the manner in which the Sponsor takes account of certain changes affecting those Reference Asset constituent stocks may adversely affect the level of the Reference Asset. The policies of the Sponsor with respect to the calculation of the Reference Asset could also adversely affect the level of the Reference Asset. The Sponsor may discontinue or suspend calculation or dissemination of the Reference Asset. Any such actions could have a material adverse effect on the value of the Notes.
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The Bank Cannot Control Actions by the Sponsor and the Sponsor Has No Obligation to Consider Your Interests
The Bank and its affiliates are not affiliated with the Sponsor and have no ability to control or predict its actions, including any errors in or discontinuation of public disclosure regarding methods or policies relating to the calculation of the Reference Asset. The Sponsor is not involved in the Notes offering in any way and has no obligation to consider your interest as an owner of the Notes in taking any actions that might negatively affect the market value of your Notes.
The Percentage Change will not be Adjusted for Changes in Exchange Rates Relative to the U.S. Dollar Even Though the Reference Asset Constituent Stocks are Traded in a Foreign Currency and the Notes are Denominated in U.S. Dollars
The value of your Notes will not be adjusted for exchange rate fluctuations between the U.S. dollar and the currencies in which the Reference Asset constituent stocks are based. Therefore, if the applicable currencies appreciate or depreciate relative to the U.S. dollar over the term of the Notes, you will not receive any additional payment or incur any reduction in your return, if any, at maturity.
The Notes are Subject to Non-U.S. Securities Market Risk
The Reference Asset constituent stocks that comprise the STOXX 50® Index are issued by non-U.S. companies in non-U.S. securities markets. An investment in securities linked directly or indirectly to the value of securities issued by non-U.S. companies involves particular risks. Generally, non-U.S. securities markets may be more volatile than U.S. securities markets, and market developments may affect non-U.S. markets differently from U.S. securities markets. Direct or indirect government intervention to stabilize these non-U.S. markets, as well as cross shareholdings in non-U.S. companies, may affect trading prices and volumes in those markets. There is generally less publicly available information about non-U.S. companies than about those U.S. companies that are subject to the reporting requirements of the SEC, and non-U.S. companies are subject to accounting, auditing and financial reporting standards and requirements that differ from those applicable to U.S. reporting companies. Securities prices in non-U.S. countries are subject to political, economic, financial and social factors that may be unique to the particular country. These factors, which could negatively affect the non-U.S. securities markets, include the possibility of recent or future changes in the non-U.S. government’s economic and fiscal policies, the possible imposition of, or changes in, currency exchange laws or other non-U.S. laws or restrictions applicable to non-U.S. companies or investments in non-U.S. equity securities. Moreover, certain aspects of a particular non-U.S. economy may differ favorably or unfavorably from the U.S. economy in important respects, such as growth of gross national product, rate of inflation, capital reinvestment, resources and self-sufficiency. Finally, it will likely be more costly and difficult to enforce the laws or regulations of a non-U.S. country or exchange. All of these factors could have a material adverse effect on the value of the Notes.
In addition, the Reference Asset constituent stocks are companies located within the Eurozone. The Eurozone is and has been undergoing severe financial stress, and the political, legal and regulatory ramifications are impossible to predict. Changes within the Eurozone could have a material adverse effect on the performance of the Reference Asset and, consequently, on the value of the Notes.
The Price at Which the Notes May Be Sold Prior to Maturity will Depend on a Number of Factors and May Be Substantially Less Than the Amount for Which They Were Originally Purchased
The price at which the Notes may be sold prior to maturity will depend on a number of factors. Some of these factors include, but are not limited to: (i) actual or anticipated changes in the level of the Reference Asset over the full term of the Note, (ii) volatility of the level of the Reference Asset and the market’s perception of future volatility of the level of the Reference Asset, (iii) changes in interest rates generally, (iv) any actual or anticipated changes in our credit ratings or credit spreads, and (v) time remaining to maturity. In particular, because the provisions of the Note relating to the Payment at Maturity and the Maximum Redemption Amount behave like options, the value of the Note will vary in ways which are non-linear and may not be intuitive.
Depending on the actual or anticipated level of the Reference Asset and other relevant factors, the market value of the Notes may decrease and you may receive substantially less than 100% of the issue price if you sell your Notes prior to maturity.
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The Notes Lack Liquidity
The Notes will not be listed on any securities exchange or automated quotation system. Therefore, there may be little or no secondary market for the Notes. Scotia Capital (USA) Inc. and the Dealer may, but are not obligated to, make a market in the Notes. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the Notes easily. Because we do not expect that other broker-dealers will participate significantly in the secondary market for the Notes, the price at which you may be able to trade your Notes is likely to depend on the price, if any, at which Scotia Capital (USA) Inc. and the Dealer are willing to purchase the Notes from you. If at any time Scotia Capital (USA) Inc. and the Dealer were not to make a market in the Notes, it is likely that there would be no secondary market for the Notes. Accordingly, you should be willing to hold your Notes to maturity.
Hedging Activities by the Bank and the Dealer May Negatively Impact Investors in the Notes and Cause Our Respective Interests and Those of Our Clients and Counterparties to Be Contrary to Those of Investors in the Notes
The Bank or one or more of our respective affiliates and the Dealer or one or more of its affiliates has hedged or expects to hedge the obligations under the Notes by purchasing futures and/or other instruments linked to the Reference Asset. The Bank, the Dealer or one or more of our respective affiliates also expects to adjust the hedge by, among other things, purchasing or selling any of the foregoing, and perhaps other instruments linked to the Reference Asset or one or more of the Reference Asset constituent stocks, at any time and from time to time, and to unwind the hedge by selling any of the foregoing on or before the Valuation Date.
The Bank or one or more of our respective affiliates and the Dealer or one or more of its affiliates may also enter into, adjust and unwind hedging transactions relating to other basket- or index-linked Notes whose returns are linked to changes in the level or price of the Reference Asset or the Reference Asset constituent stocks. Any of these hedging activities may adversely affect the level of the Reference Asset—directly or indirectly by affecting the price of the Reference Asset constituent stocks—and therefore the market value of the Notes and the amount you will receive, if any, on the Notes. In addition, you should expect that these transactions will cause the Bank, or our respective affiliates, or the Dealer, or its affiliates, or our respective clients or counterparties, to have economic interests and incentives that do not align with, and that may be directly contrary to, those of an investor in the Notes. The Bank, or our respective affiliates, or the Dealer, or its affiliates will have no obligation to take, refrain from taking or cease taking any action with respect to these transactions based on the potential effect on an investor in the Notes, and may receive substantial returns with respect to these hedging activities while the value of the Notes may decline.
Market Activities by the Bank, Scotia Capital (USA) Inc. and by the Dealer for Our Own Account or for Our Clients Could Negatively Impact Investors in the Notes
The Bank, Scotia Capital (USA) Inc. and our respective affiliates and the Dealer and its affiliates provide a wide range of financial services to a substantial and diversified client base. As such, we each may act as an investor, investment banker, research provider, investment manager, investment advisor, market maker, trader, prime broker or lender. In those and other capacities, we, the Dealer and/or our respective affiliates purchase, sell or hold a broad array of investments, actively trade securities (including the Notes or other securities that we have issued), the Reference Asset constituent stocks, derivatives, loans, credit default swaps, indices, baskets and other financial instruments and products for our own accounts or for the accounts of our customers, and we will have other direct or indirect interests, in those securities and in other markets that may be not be consistent with your interests and may adversely affect the level of the Reference Asset and/or the value of the Notes. Any of these financial market activities may, individually or in the aggregate, have an adverse effect on the level of the Reference Asset and the market for your Notes, and you should expect that our interests and those of the Dealer and/or its affiliates, or our respective clients or counterparties, will at times be adverse to those of investors in the Notes.
The Bank, Scotia Capital (USA) Inc. and our respective affiliates and the Dealer and its affiliates regularly offer a wide array of securities, financial instruments and other products into the marketplace, including existing or new products that are similar to the Notes or other securities that we may issue, the Reference Asset constituent stocks or other securities or instruments similar to or linked to the foregoing. Investors in the Notes should expect that the Bank and our respective affiliates and the Dealer and its affiliates will offer securities, financial instruments, and other products that may compete with the Notes for liquidity or otherwise.
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The Bank, Scotia Capital (USA) Inc. and Our Respective Affiliates and the Dealer and Its Affiliates Regularly Provide Services to, or Otherwise Have Business Relationships with, a Broad Client Base, Which Has Included and May Include Us and the Issuers of the Reference Asset Constituent Stocks
The Bank, Scotia Capital (USA) Inc. and our respective affiliates and the Dealer and its affiliates regularly provide financial advisory, investment advisory and transactional services to a substantial and diversified client base. You should assume that we or they will, at present or in the future, provide such services or otherwise engage in transactions with, among others, us and the issuers of the Reference Asset constituent stocks, or transact in securities or instruments or with parties that are directly or indirectly related to these entities. These services could include making loans to or equity investments in those companies, providing financial advisory or other investment banking services, or issuing research reports. You should expect that the Bank, and our respective affiliates and the Dealer and its affiliates, in providing these services, engaging in such transactions, or acting for our own accounts, may take actions that have direct or indirect effects on the Notes or other securities that we may issue, the Reference Asset constituent stocks or other securities or instruments similar to or linked to the foregoing, and that such actions could be adverse to the interests of investors in the Notes. In addition, in connection with these activities, certain personnel within us, the Dealer or our respective affiliates may have access to confidential material non-public information about these parties that would not be disclosed to investors in the Notes.
Other Investors in the Notes May Not Have the Same Interests as You
The interests of other investors may, in some circumstances, be adverse to your interests. Other investors may make requests or recommendations to us or the Dealer regarding the establishment of transactions on terms that are adverse to your interests, and investors in the Notes are not required to take into account the interests of any other investor in exercising remedies, voting or other rights in their capacity as Noteholders. Further, other investors may enter into market transactions with respect to the Notes, assets that are the same or similar to the Notes, assets referenced by the Notes (such as stocks or stock indices) or other similar assets or securities which may adversely impact the market for or value of your Notes. For example, an investor could take a short position (directly or indirectly through derivative transactions) in respect of securities similar to your Notes or in respect of the Reference Asset.
The Calculation Agent Can Postpone the Valuation Date for the Notes if a Market Disruption Event with Respect to the Reference Asset Occurs
If the Calculation Agent determines, in its sole discretion, that, on a day that would otherwise be the Valuation Date, a market disruption event with respect to the Reference Asset has occurred or is continuing for the Reference Asset, the Valuation Date will be postponed until the first following trading day on which no market disruption event occurs or is continuing, although the Valuation Date will not be postponed by more than seven scheduled trading days. Moreover, if the Valuation Date is postponed to the last possible day, but a market disruption event occurs or is continuing on that day, that day will nevertheless be the Valuation Date, and the Calculation Agent will determine the applicable Final Level that must be used to determine the Payment at Maturity. Under certain circumstances, the determinations of the Calculation Agent will be confirmed by an independent expert. See “General Terms of the Notes—Unavailability of the Level of the Reference Asset on a Valuation Date” and “General Terms of the Notes—Market Disruption Events” beginning on PS-17 and “Appointment of Independent Calculation Experts” on page PS-20, in the accompanying product prospectus supplement.
There Is No Affiliation Between Any Constituent Stock Issuers or the Reference Asset Sponsor and Us or the Dealer, and Neither We Nor the Dealer Is Responsible for Any Disclosure by Any of the Other Reference Asset Constituent Stock Issuers or the Reference Asset Sponsor
The Bank, Scotia Capital (USA) Inc., and our respective affiliates and the Dealer and its respective affiliates may currently, or from time to time in the future, engage in business with the issuers of the Reference Asset constituent stocks. Nevertheless, none of us, the Dealer, or our or its respective affiliates assumes any responsibility for the accuracy or the completeness of any information about the Reference Asset or any of the other Reference Asset constituent stocks. Before investing in the Notes you should make your own investigation into the Reference Asset and the issuers of the Reference Asset constituent stocks. See the section below entitled “Information Regarding the Reference Asset” in this pricing supplement for additional information about the Reference Asset.
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Uncertain Tax Treatment
Significant aspects of the tax treatment of the Notes are uncertain. You should consult your tax advisor about your own tax situation. See “Certain Canadian Income Tax Consequences” and “Certain U.S. Federal Income Tax Considerations” in this pricing supplement.
Business of the Bank
For risk factors relating to the business of the Bank, you should consider the categories of risks (such as credit risk, market risk, liquidity risk, operational risk, reputational risk and environmental risk) identified and discussed in the Bank’s annual information form dated December 2, 2011 for the year ended October 31, 2011 (the “AIF”) and the Bank’s management’s discussion and analysis of financial condition and results of operations for the year ended October 31, 2011 (the “Annual MD&A”). Each of the AIF and the Annual MD&A is incorporated into the Base Shelf Prospectus.
INFORMATION REGARDING THE REFERENCE ASSET
The Euro STOXX 50® Index was created by STOXX Limited and SIX Swiss Exchange AG. Publication of the index began in February 1998, based on an initial level of 1,000 at December 31, 1991. Changes to the component stocks are implemented on the third Friday in September and are effective the following trading day. Changes in the composition of the index are made to ensure that the index includes the 50 market sector leaders from within the Dow Jones EURO STOXX Total Market Index. Additional information about the index is available on the STOXX Limited website: http://www.stoxx.com. However, information included in that website is not included or incorporated by reference in this pricing supplement.
For each of the 19 Euro STOXX regional supersector indices, the stocks are ranked in terms of free-float market capitalization. The largest stocks are added to the selection list until the coverage is close to, but still less than, 60% of the free-float market capitalization of the corresponding supersector index. If the next highest-ranked stock brings the coverage closer to 60% in absolute terms, then it is also added to the selection list. All current stocks in the index are then added to the selection list. All of the stocks on the selection list are then ranked in terms of free-float market capitalization to produce the final index selection list. The largest 40 stocks on the selection list are selected; the remaining 10 stocks are selected from the largest remaining current stocks ranked between 41 and 60; if the number of stocks selected is still below 50, then the largest remaining stocks are selected until there are 50 stocks. In exceptional cases, STOXX’s management board can add stocks to and remove them from the selection list.
The index components are subject to a capped maximum index weight of 10%, which is applied on a quarterly basis. The index is composed of 50 component stocks of market sector leaders from within the Dow Jones EURO STOXX® Total Market Index, which includes stocks selected from the Eurozone. The component stocks have a high degree of liquidity and represent the largest companies across a wide range of market sectors.
The top ten constituent stocks of the index as of June 29, 2012, by weight, were: Total (5.88%), Sanofi-Aventis (5.37%), Siemens (4.35%), BASF (3.75%), BCO Santander (3.65%), Bayer (3.50%), Anheuser-Busch InBev (3.40%), ENI (3.32%), SAP AG (3.21%) and Telefonica (3.08%); constituent weights may be found at http://www.stoxx.com/download/indices/factsheets/sx5e_fs.pdf under “Factsheets and Methodologies” and are updated periodically.
As of June 29, 2012, the 17 industry sectors which comprised the index represented the following weights in the index: banks (13.50%); oil and gas (9.90%); chemicals (9.40%); food and beverage (8.70%); insurance (8.10%); utilities (7.90%); industrial goods and services (7.70%); telecommunications (6.50%); healthcare (6.50%); automobiles and parts (5.10%); technology (4.90%); personal and household goods (4.00%); construction and materials (3.20%); retail (1.90%); media (1.40%); real estate (1.00%); and basic resources (0.80%). These sectors represent 17 of the 19 supersector indices described above. Percentages may not sum to 100% due to rounding. Sector designations are determined by the index sponsor using criteria it has selected or developed. Index sponsors may use very different standards for determining sector designations. In addition, many companies operate in a number of sectors, but are listed in only one sector and the basis on which that sector is selected may also differ. As a result, sector comparisons between indices with different index sponsors may reflect differences in methodology as well as actual differences in the sector composition of the indices.
As of June 29, 2012, the nine countries which comprise the EURO STOXX 50 Index represent the following weights in the index: France (36.20%); Germany (31.50%); Spain (12.00%); Italy (8.00%); Netherlands (6.90%); Belgium (3.40%); Luxembourg (0.80%); Ireland (0.80%); and Finland (0.50%); country weightings may be found at http://www.stoxx.com/download/indices/factsheets/sx5e_fs.pdf under “Factsheets and Methodologies” and are updated periodically.
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Index Composition and Maintenance
The composition of the index is reviewed annually, based on the closing stock data on the last trading day in August. The component stocks are announced on the first trading day in September.
The free float factors for each component stock used to calculate the index, as described below, are reviewed, calculated, and implemented on a quarterly basis and are fixed until the next quarterly review.
The index is subject to a “fast exist rule.” The index components are monitored for any changes based on the monthly selection list ranking. A stock is deleted from the index if: (a) it ranks 75 or below on the monthly selection list and (b) it has been ranked 75 or below for a consecutive period of two months in the monthly selection list. The highest-ranked stock that is not an index component will replace it. Changes will be implemented on the close of the fifth trading day of the month, and are effective the next trading day.
The index is also subject to a “fast entry rule.” All stocks on the latest selection lists and initial public offering (IPO) stocks are reviewed for a fast-track addition on a quarterly basis. A stock is added, if (a) it qualifies for the latest STOXX blue-chip selection list generated end of February, May, August or November and (b) it ranks within the “lower buffer” on this selection list.
The index is also reviewed on an ongoing basis. Corporate actions (including initial public offerings, mergers and takeovers, spin-offs, delistings, and bankruptcy) that affect the index composition are immediately reviewed. Any changes are announced, implemented, and much effective in line with the type of corporate action and the magnitude of the effect.
Index Calculation
The index is calculated with the “Laspeyres formula,” with measures the aggregate price changes in the component stocks against a fixed base quantity weight. The formula for calculating the index value can be expressed as follows:
Index = free float market capitalization of the index at the time
divisor of the index at the time
The “free float market capitalization of the index” is equal to the sum of the products of the closing price, number of shares, free float factor, weighting cap factor, and the exchange rate from local currency into the index currency for the component company as of the time that the index is being calculated.
The index is calculated using a divisor that helps to maintain the continuity of the index’s value so that corporate actions do not artificially increase or decrease the underlier level or the level of the index.
The divisor of the index is adjusted to maintain the continuity of the index’s values across changes due to corporate actions, such as cash dividends, rights offerings, stock dividends from treasury shares, repurchases of shares and self tender, and spin-offs.
The divisor is calculated by starting with the previous divisor in effect (which we call the “original divisor value”) for the index and multiplying it by a fraction, the numerator of which is the sum for all underlier stocks (calculated on an individual stock basis) of the original divisor value for that underlier stock (as described below), plus or minus the difference between the adjusted free float market capitalization of that stock and the original free float market capitalization of that stock, calculated using the values used to calculate the original divisor value, and the denominator of which is that stock’s original divisor value. The adjusted free float market capitalization is calculated for underlier stocks that have experienced a corporate action of the type described above as of the time the new divisor value is being calculated using the free float market capitalization calculated with adjusted closing prices (adjusted to account for such corporate action), the new number of shares, and the free float factor minus the free float market capitalization calculated with that stock’s original closing price, number of shares, and free float factor, in each case as used in calculating the original divisor value. The original divisor value is the sum for all underlier stocks (calculated on an individual stock basis using the values at the time the previous calculation of the divisor was made) of the product of (i) the stock price of that underlier stock, times (ii) the number of shares of such underlier stock, times (iii) the free float factor, times (iv) the weighting cap factor. Errors in divisor calculation are corrected on an intraday basis if discovered on the same day the new divisor is published. If the error is discovered later, the error is corrected on an intraday basis if feasible and only if the error is considered significant by the STOXX management board.
License Agreement
The Bank expects to enter into a non-exclusive license agreement with STOXX, which grants the Bank a license in exchange for a fee to use the index in connection with the issuance of certain securities, including the Notes.
STOXX has no relationship to the Bank, other than the licensing of the index and its service marks for use in connection with the Notes.
STOXX does not:
| • | sponsor, endorse, sell or promote the Notes; |
| • | recommend that any person invest in the Notes or any other financial products; |
| • | have any responsibility or liability for or make any decisions about the timing, amount or pricing of the Notes; |
| • | have any responsibility or liability for the administration, management or marketing of the Notes; and |
| • | consider the needs of the Notes or the owners of the Notes in determining, composing or calculating the index or have any obligation to do so. |
STOXX will not have any liability in connection with the Notes. Specifically, STOXX does not make any warranty, express or implied, and the STOXX disclaims any warranty about:
| • | the results to be obtained by the Notes, the owner of the Notes or any other person in connection with the use of the index and the data included in the index; |
| • | the accuracy or completeness of the index or its data; |
| • | the merchantability and the fitness for a particular purpose or use of the index or its data; |
| • | any errors, omissions or interruptions in the index or its data; and |
| • | any lost profits or indirect, punitive, special or consequential damages or losses, even if STOXX knows that they might occur. |
The licensing relating to the use of the index and trademark referred to above by the Bank will be solely for the benefit of the Bank, and not for any other third parties.
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Historical Information
The following table sets forth the quarterly high and low closing levels for the Reference Asset, based on daily closing levels. The closing level of the Reference Asset on July 3, 2012 was 2,320.43. Past performance of the Reference Asset is not indicative of the future performance of the Reference Asset.
| Quarter Begin |
Quarter End |
Quarterly High |
Quarterly Low |
Quarterly Close | ||||
| 1/2/2009 |
3/31/2009 | 2,578.43 |
1,809.98 |
2,071.13 | ||||
| 4/1/2009 |
6/30/2009 | 2,537.35 |
2,097.57 |
2,401.69 | ||||
| 7/1/2009 |
9/30/2009 | 2,899.12 |
2,281.47 |
2,872.63 | ||||
| 10/1/2009 |
12/31/2009 | 2,992.08 |
2,712.30 |
2,964.96 | ||||
| 1/4/2010 |
3/31/2010 | 3,017.85 |
2,631.64 |
2,931.16 | ||||
| 4/1/2010 |
6/30/2010 | 3,012.65 |
2,488.50 |
2,573.32 | ||||
| 7/1/2010 |
9/30/2010 | 2,827.27 |
2,507.83 |
2,747.90 | ||||
| 10/1/2010 |
12/31/2010 | 2,890.64 |
2,650.99 |
2,792.82 | ||||
| 1/3/2011 |
3/31/2011 | 3,068.00 |
2,721.24 |
2,910.91 | ||||
| 4/1/2011 |
6/30/2011 | 3,011.25 |
2,715.88 |
2,848.53 | ||||
| 7/1/2011 |
9/30/2011 | 2,870.19 |
1,995.01 |
2,179.66 | ||||
| 10/3/2011 |
12/30/2011 | 2,476.93 |
2,090.25 |
2,316.55 | ||||
| 1/3/2012 |
3/30/2012 | 2,608.42 |
2,286.45 |
2,477.28 | ||||
| 4/2/2012 |
6/30/2012 | 2,501.18 | 2,068.66 | 2,264.72 | ||||
| 7/2/2012* |
7/3/2012* | 2,320.43 |
2,292.08 |
2,320.43 |
| * | As of the date of this pricing supplement, available information for the third calendar quarter of 2012 includes data for the period from July 2, 2012 through July 3, 2012. Accordingly, the “Quarterly High,” “Quarterly Low” and “Quarterly Close” data indicated are for this shortened period only and do not reflect complete data for the third calendar quarter of 2012. |
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The graph below illustrates the performance of the Reference Asset from January 2, 2002 through July 3, 2012. In addition, below the graph is a table setting forth the year on year percentage gain or loss in the level of the Reference Asset. Past performance of the Reference Asset is not indicative of the future performance of the Reference Asset.
| Start of Period |
End of Period |
Percentage Increase or Decrease |
||||||
| 7/3/2002 |
7/3/2003 | -17.32 | % | |||||
| 7/3/2003 |
7/3/2004 | 15.00 | % | |||||
| 7/3/2004 |
7/3/2005 | 15.46 | % | |||||
| 7/3/2005 |
7/3/2006 | 13.91 | % | |||||
| 7/3/2006 |
7/3/2007 | 23.21 | % | |||||
| 7/3/2007 |
7/3/2008 | -26.19 | % | |||||
| 7/3/2008 |
7/3/2009 | -28.65 | % | |||||
| 7/3/2009 |
7/3/2010 | 5.53 | % | |||||
| 7/3/2010 |
7/3/2011 | 14.45 | % | |||||
| 7/3/2011 |
7/3/2012 | -19.15 | % | |||||
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We obtained the information regarding the historical performance of the Reference Asset in the tables and graph above from Bloomberg Financial Markets.
We make no representation or warranty as to the accuracy or completeness of the information obtained from Bloomberg Financial Markets and have not undertaken an independent review or due diligence of the information. The historical performance of the Reference Asset should not be taken as an indication of its future performance, and no assurance can be given as to the Final Level of the Reference Asset. We cannot give you assurance that the performance of the Reference Asset will result in any positive return on your initial investment.
SUPPLEMENTAL PLAN OF DISTRIBUTION (CONFLICTS OF INTEREST)
Scotia Capital (USA) Inc. or one of our affiliates will purchase the Notes at the Principal Amount and, as part of the distribution of the Notes, will sell the Notes to Goldman, Sachs & Co. at a discount and underwriting commissions of $2.50 per $1,000 Principal Amount of Notes in connection with the distribution of the Notes. In accordance with the terms of a distributor accession letter, Goldman, Sachs & Co. has been appointed as a distribution agent under the distribution agreement and may purchase Notes from The Bank of Nova Scotia or its affiliates. Scotia Capital (USA) Inc. will also receive a structuring and development fee of up to $0.50 per $1,000 Principal Amount of Notes.
In addition, Scotia Capital (USA) Inc. or another of its affiliates or agents may use the product prospectus supplement to which this pricing supplement relates in market-making transactions after the initial sale of the Notes. While Scotia Capital (USA) Inc. may make markets in the Notes, it is under no obligation to do so and may discontinue any market-making activities at any time without notice. See the sections titled “Supplemental Plan of Distribution” in the accompanying prospectus supplement and product prospectus supplement.
The price at which you purchase the Notes includes costs that the Bank or its affiliates expect to incur and profits that the Bank or its affiliates expect to realize in connection with hedging activities related to the Notes, as set forth above. These costs and profits will likely reduce the secondary market price, if any secondary market develops, for the Notes. As a result, you may experience an immediate and substantial decline in the market value of your Notes on the Issue Date.
We expect that delivery of the Notes will be made against payment therefor on or about the fifth business day following the date of pricing of the Notes (this settlement cycle being referred to as “T+5”). Under Rule 15c6-1 of the Securities and Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the Notes on the Trade Date will be required, by virtue of the fact that each Note initially will settle in five business days (T+5), to specify alternative settlement arrangements to prevent a failed settlement.
Conflicts of Interest
Each of Scotia Capital (USA) Inc., and Scotia Capital Inc. is an affiliate of the Bank and, as such, has a “conflict of interest” in this offering within the meaning of FINRA Rule 5121. In addition, the Bank will receive the gross proceeds from the initial public offering of the Notes, thus creating an additional conflict of interest within the meaning of Rule 5121. Consequently, the offering is being conducted in compliance with the provisions of Rule 5121. Neither Scotia Capital (USA) Inc. nor Scotia Capital Inc. is permitted to sell Notes in this offering to an account over which it exercises discretionary authority without the prior specific written approval of the account holder.
Scotia Capital (USA) Inc., Goldman, Sachs & Co., and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Scotia Capital (USA) Inc., Goldman, Sachs & Co., and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the Bank, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, Scotia Capital (USA) Inc., Goldman, Sachs & Co., and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related
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derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the Bank. Scotia Capital (USA) Inc., Goldman, Sachs & Co., and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
CERTAIN CANADIAN INCOME TAX CONSEQUENCES
See “Certain Income Tax Consequences — Certain Canadian Income Tax Considerations” at page S-20 of the Prospectus Supplement dated February 29, 2012.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The U.S. federal income tax consequences of your investment in the Notes are uncertain. No statutory, judicial or administrative authority directly discusses how the Notes should be treated for U.S. federal income tax purposes. We intend to treat the Notes as pre-paid cash-settled derivative contracts, Pursuant to the terms of the Notes, you agree to treat the Notes in this manner for all U.S. federal income tax purposes. If your Notes are so treated, you should generally recognize capital gain or loss upon the sale, exchange or payment on maturity in an amount equal to the difference between the amount you receive at such time and the amount that you paid for your Notes. Such gain or loss should generally be long-term capital gain or loss if you have held your Notes for more than one year.
For a more detailed discussion of the United States federal income tax consequences with respect to your Notes, you should carefully consider the discussion set forth in “Supplemental Discussion of U.S. Federal Income Tax Consequences” in the accompanying product prospectus supplement and the discussion set forth in “Certain United States Income Tax Considerations” of the accompanying prospectus supplement. In particular, U.S. holders (as defined in the prospectus supplement) should review the discussion set forth in “Supplemental Discussion of U.S. Federal Income Tax Consequences—Supplemental U.S. Tax Considerations—U.S. Holders” in the product prospectus supplement and Non-U.S. Holders (as defined in the prospectus supplement) should review the discussion set forth in “Supplemental Discussion of U.S. Federal Income Tax Consequences—Supplemental U.S. Tax Considerations—Non-U.S. Holders” in the product prospectus supplement. U.S. holders should also review the discussion under “—Medicare Tax”, “—Treasury Regulations Requiring Disclosure of Reportable Transactions”, “—Information With Respect to Foreign Financial Assets” and “—Information Reporting and Backup Withholding” under “Certain Income Tax Consequences—Certain United States Income Tax Considerations” in the prospectus supplement
We will not attempt to ascertain whether the issuer of any of the Reference Asset constituent stocks would be treated as a “passive foreign investment company” within the meaning of Section 1297 of the Internal Revenue Code of 1986, as amended (the “Code”) or a “United States real property holding corporation” within the meaning of Section 897 of the Code. If the issuer of one or more of such stocks were so treated, certain adverse U.S. federal income tax consequences could possibly apply. You should refer to any available information filed with the SEC by the issuers of the Reference Asset constituent stocks and consult your tax advisor regarding the possible consequences to you in this regard.
In this regard and in regard to a potential application of the “constructive ownership” rules, U.S. Holders (as defined in the Prospectus Supplement) should review the discussion set forth in “Supplemental Discussion of U.S. Federal Income Tax Consequences—Supplemental U.S. Tax Considerations—U.S. Holders” in the product prospectus supplement.
Because other characterizations and treatments are possible the timing and character of income in respect of the Notes might differ from the treatment described above. You should carefully review the discussion set forth in “Alternative Treatments” in the product prospectus supplement for the possible tax consequences of different characterizations or treatment of your Notes for U.S. federal income tax purposes. It is possible, for example, that the Internal Revenue Service (“IRS”) might treat the Notes as a series of derivative contracts, each of which matures on the next rebalancing date of the reference asset, in which case you would be treated as disposing of the Notes on each rebalancing date in return for a new derivative contract that matures on the next rebalancing date, and you would recognize capital gain or loss on each rebalancing date.
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The IRS has also issued a notice that may affect the taxation of the Notes. According to the notice, the IRS and the Treasury Department are actively considering whether the holder of an instrument such as the Notes should be required to accrue ordinary income on a current basis, and they are seeking comments on the subject. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the Notes will ultimately be required to accrue ordinary income currently and this could be applied on a retroactive basis. Holders are urged to consult their tax advisors concerning the significance, and the potential impact, of the above considerations. We intend to treat the Notes for U.S. federal income tax purposes in accordance with the treatment described above unless and until such time as the Treasury Department and the IRS determine that some other treatment is more appropriate.
PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CONSULT THEIR TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES TO THEM OF ACQUIRING, HOLDING AND DISPOSING OF NOTES AND RECEIVING PAYMENTS UNDER THE NOTES.
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