2. Risk Factors
Version 1 - Released and Dated 14th November 2022
2. Risk Factors
2.1 General Risks of Investing
Introduction
Investing in the Notes may involve a number of significant risk factors. Prospective investors should carefully consider the following factors, among others, in making their investment decision and should consult their own legal, tax and financial advisors as to all of these risks and an investment in the Issuer. The risk factors set out below represent a non-exhaustive list of risks that investors ought to consider.
General Risks of Investing
An investment in the Notes is subject to all risks incidental to investment in securities, risks, receivables, future cash flows and any other movable and immovable assets, which may be owned. These factors include without limitation, changes in government rules and fiscal and monetary policies, changes in laws and political and economic conditions throughout the world and changes in general market conditions. Substantial risks are involved in investing in securities, currencies, derivatives and the various other instruments in which the Compartment may invest. The prices of these investments are volatile, market movements are difficult to predict, and financing sources and related interest rates are subject to rapid change. One or more markets in which the Issuer may invest may move against the positions held, thereby causing substantial losses. Government policies, especially those of central banks worldwide, have profound effects on interest and exchange rates which, in turn, affect prices in areas of the Underlying Assets. Many other unforeseeable events, including actions by various government agencies and domestic and international political events, may cause sharp market fluctuations.
Reliance on Key Individuals
The Issuer is dependent upon the expertise of the staff in the various Agents and service providers to the Issuer, its Compartments and its Underlying Assets. In many instances, one or two key personnel are critical to the success. Any future unavailability of their services could have an adverse impact on the performance of the Underlying Assets.
Highly Volatile Markets
The prices of derivative instruments, including options, are highly volatile. Price movements of derivatives in which the Compartment may be invested are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programmes and policies of governments, and national and international political and economic events and policies. In addition, governments from time to time intervene, directly and by regulation, in certain markets, particularly those in currencies and financial instrument options. Such intervention often is intended directly to influence prices and may, together with other factors, cause all of such markets to move rapidly in the same direction because of, among other things, interest rate fluctuations. The Issuer also is subject to the risk of the failure of any of the exchanges on which its positions trade or of their clearing houses.
Illiquidity of Markets
Futures and certain options and other instruments which involve an element of gearing carry a high degree of risk. A relatively small market movement or certain investment strategies involving such instruments will have a disproportionately large impact, unfavourable as well as favourable, on the amount of funds invested or committed to such instruments or strategies. At various times, the markets for some securities purchased or sold may be illiquid, making purchases or sales of securities at desired prices or in desired quantities difficult or impossible. For example, securities exchanges and regulatory agencies have authority to suspend trading in a particular security without notice. Because there may not be a recognisable market for some investments, it may be difficult for the Issuer to deal in any such investments or to obtain reliable information about their value or the extent of the risks to which such investments are exposed.
Economic and Market Conditions
The Underlying Assets will be affected by general economic and market conditions, such as interest rates, availability of credit, credit defaults, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation of the investments), trade barriers, currency exchange controls, and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of the prices and the liquidity of the investments. Volatility or illiquidity could impair the Compartment's profitability or result in losses.
Investors
Each prospective investor in Notes should have sufficient financial resources and liquidity to bear all of the risks of an investment in the relevant Notes, including where principal and interest may reduce as a result of the occurrence of different events whether related to the creditworthiness of any entity or otherwise or changes in particular rates, prices, values or indices, or where the currency for principal or interest payments is different from the prospective investor's currency, including a loss of their entire invested amount and any potential returns related to it. Investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities. Each prospective investor should therefore consult its professional advisers to determine whether and to what extent (a) the Notes are legal investments for him, and/or (b) other restrictions apply to his purchase of any Notes. Financial institutions should consult their professional advisers or the appropriate regulators to determine the appropriate treatment of Notes under any applicable risk-based capital or similar rules. For the purposes of these risk factors, references to "Noteholders" or "holders of Notes" should generally be read as including holders of beneficial interests in such Notes, except where the context otherwise requires.
The Notes
The Notes are complex instruments that involve substantial risks and are suitable only for sophisticated investors who have sufficient knowledge and experience and access to such professional advisers as they shall consider necessary in order to make their own evaluation of the risks and the merits of such an investment (including without limitation the tax, accounting, credit, legal, regulatory and financial implications for them of such an investment) and who have considered the suitability of such Notes in light of their own circumstances and financial condition. Prospective investors should ensure that they understand the nature of the risks posed by an investment in the Notes, and the extent of their exposure as a result of such investment in the Notes and, before making their investment decision, should consider carefully all of the information set forth in this Private Placement Memorandum and, in particular, the considerations set forth below. Owing to the structured nature of the Notes, their price may be more volatile than that of unstructured securities. The Issuer believes that the following factors may affect its ability to fulfil its scheduled obligations under the Notes issued under the Programme. The Issuer is not in a position to express a view on the likelihood of any contingency highlighted by a risk factor occurring. Factors which the Issuer believes may be material for the purpose of assessing the market risks associated with Notes issued under the Programme are also described below. The Issuer believes that the factors described below represent the principal risks inherent in investing in Notes issued under the Programme, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with any Notes or the reduction of any such amounts may occur for other reasons not set out herein and the Issuer does not represent that the statements below regarding the risks of holding any Notes are exhaustive. Prospective investors should also read the detailed information set out elsewhere in this Private Placement Memorandum and the applicable Final Terms, and reach their own views prior to making any investment decision.
23 Private Placement Memorandum – FRICTIONLESS MARKETS SECURITIES – Version 1 dated 14/11/2022 The risk factors identified in this Private Placement Memorandum are provided as general information only and the Issuer disclaims any responsibility to advise purchasers of Notes of the risks and investment considerations associated therewith as may exist at the date hereof or as may from time to time alter. Additional risk factors may be set out in any Final Terms.
No Reliance
A prospective investor may not rely on the Issuer, the Agents or the Security Trustee (or any of their respective affiliates) in connection with his determination as to the legality of his acquisition of the Notes or as to any of the other matters referred to above.
No representations
Neither one of the Issuer, the Agents and the Security Trustee (or any of their respective affiliates) makes any representation or warranty, express or implied, in respect of any (a) Underlying Assets or in respect of any information contained in any documents prepared, provided or filed in respect of such Underlying Assets with any exchange, governmental, supervisory or self-regulatory authority or any other person, (b) issuer or obligor of any Underlying Assets or in respect of any information contained in any documents prepared, provided or filed by or on behalf of such issuer or obligor with any exchange, governmental, supervisory or self-regulatory authority or any other person, (c) relevant swap counterparty or in respect of any information contained in any documents prepared, provided or filed in respect of such party with any exchange, governmental, supervisory or self-regulatory authority or any other person or (d) relevant swap agreement or in respect of any information contained in any documents prepared, provided or filed in respect of such agreement with any exchange, governmental, supervisory or self- regulatory authority or any other person.
Neither the Agents or the Security Trustee makes any representation or warranty, express or implied, in respect of the Issuer or in respect of any information contained in any documents prepared, provided or filed by or on behalf of the Issuer.
No Strict Fiduciary Role
Neither one of the Issuer, the Agents and the Security Trustee (or any of their respective affiliates) is acting as an investment adviser to Noteholders or as an adviser to Noteholders in any other capacity, and neither one of them (or any of their respective affiliates) assumes any fiduciary obligation to any Noteholder or any other party (other than the Security Trustee in its capacity as security trustee for itself and the other secured creditors identified in the relevant Final Terms and then in the Security Agreement, being the specific terms governing the appointment of such security trustee). Neither one of the Issuer, the Agents and the Security Trustee assumes any responsibility for conducting or failing to conduct any investigation into the business, financial condition, prospects, creditworthiness, status and/or affairs of any issuer or obligor of any Underlying Assets or the terms thereof (or of any swap counterparty or the terms of any swap agreement). Investors may not rely on the views of the Issuer, the Agents or the Security Trustee (or any of their respective affiliates) for any information in relation to any person.
Cybersecurity Risk
The Issuer processes, stores and transmits large amounts of electronic information, including information relating to the transactions of the Issuer and personally identifiable information of the Noteholders. Similarly, service providers of the Issuer or the Issuer, may process, store and transmit such information. The Issuer has procedures and systems in place that it believes are reasonably designed to protect such information and prevent data loss and security breaches. However, such measures cannot provide absolute security. The techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time. Hardware or software acquired from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Network connected services provided by third parties to the Issuer may be susceptible to compromise, leading to a breach of the Issuer’s network or administration. The Issuer’s systems or facilities may be susceptible to employee error or malfeasance, government surveillance, or other security threats. On-line services provided by the Issuer to the Noteholders may also be susceptible to compromise. Breach of the Issuer’s information systems may cause information relating to the transactions of the Issuer and personally identifiable information of the Noteholders to be lost or improperly accessed, used or disclosed. The service providers of the Issuer and the Issuer are subject to the same electronic information security threats as the Issuer. If a service provider fails to adopt or adhere to adequate data security policies, or in the event of a breach of its networks, information relating to the transactions of the Issuer and personally identifiable information of the Noteholders may be lost or improperly accessed, used or disclosed. The loss or improper access, use or disclosure of the Issuer’s or the Issuer’s proprietary information may cause the Issuer or the Noteholders to suffer, among other things, financial loss, the disruption of its business, liability to third parties, regulatory intervention or reputational damage. Any of the foregoing events could have a material adverse effect on the Issuer and the Noteholders' investments therein.
Outbreaks of Communicable Infections or Diseases, or Other Public Health Pandemics, Such As the Recent Outbreak of the Novel Coronavirus (“Covid-19”).
Disease outbreaks and other public health conditions, such as the global outbreak of Covid-19 currently being experienced, in markets in which the Issuer makes investments, could have a significant negative impact on the Securitisation Fund’s investments. While the Covid-19 outbreak is ongoing globally, international financial markets continue to reflect the uncertainty associated with the slowdown in the economy and the impact of businesses, workers, customers and others which are prevented or restricted from conducting business activities due to quarantines, business closures or other restrictions imposed by businesses or governmental authorities in response to the Covid-19 outbreak. This could result in another economic downturn, a delayed recovery and cause continued market disruption which negatively impacts the Securitisation Fund’s investments. The imposition of international travel restrictions and the potential disruption to the Issuer’s business if the Director(s) is/are subject to quarantine, contract Covid-19, or are otherwise unable to work due to restrictions related to the Covid-19 outbreak or a resurgence could negatively impact the Issuer’s business and could have a material adverse effect on the Management Company’s ability to manage the Compartment Assets.
2.2 Risks Relating to the Issuer
The Issuer is a special purpose entity
The Issuer is in the business of issuing Notes for the purposes of purchasing or otherwise acquiring assets, cash flows and/or entering into derivatives and other contracts with the issue proceeds. As such, no Compartment of the Issuer will have any assets other than the assets acquired with the net proceeds from the issue of Notes by such Compartment and the assets received by the relevant Compartment from time to time in respect of the foregoing assets. Underlying Assets may decline in value and the relevant Compartment may have to sustain a total loss of investment in its Underlying Assets.
Securitisation Law and Compartments
The Issuer is organised as a securitisation fund under the Securitisation Law with several Compartments.
This means that, under the Securitisation Law, the Articles, the General Management Regulations and the Conditions as amended and/or supplemented by any applicable Final Terms, claims against the Issuer by the holders of Notes of any Series will be limited to the Underlying Assets (including the net proceeds of the security created pursuant to the applicable Security Agreement and/or any additional security) of the Compartment that issued that particular Series of Notes. It also means that (a) each Compartment is a separate and distinct part of the Issuer's estate (patrimoine), such that any Compartment's Underlying Assets are exclusively available to satisfy the rights of the holders of Notes issued by and other creditors of that Compartment (and not of other creditors of the Issuer) and that, conversely, the recourse of a Compartment's Noteholders and other creditors is limited to the Underlying Assets of that Compartment and (b) the fees, costs and expenses in relation to a Series of Notes are fees, costs and expenses of the Compartment that issued the relevant Series of Notes. However, under the Conditions, the Issuer's general expenses and liabilities, which do not specifically relate to any Compartment or which otherwise relate to the general core of the Issuer, may be apportioned between the Compartments by the Management Company. Any such apportionment will reduce the amounts that would otherwise have been payable in respect of the Notes of any Series.
No action against the Issuer
Under the Conditions, subject to and in accordance with article 64, paragraph (1) of the Securitisation Law, no Noteholder can attach property of the Issuer or apply for bankruptcy of the Issuer or request the opening of any other collective or restructuring proceedings in respect of the Issuer.
Fees and expenses
In relation to any Series of Notes, fees and expenses (including fees payable to the Agents and the Security Trustee) as set out in the applicable Final Terms, shall rank senior to payments of principal and interest on the Notes of such Series.
Anti-money laundering
The Issuer may be subject to anti-money laundering legislation in its jurisdiction of incorporation. If the Issuer or the Noteholders were determined to be in violation of any such legislation, any such violation could materially and adversely affect payments made by the Issuer in respect of any Notes.
No registration under U.S. securities laws
The Issuer has not registered with the U.S. Securities and Exchange Commission as an investment company pursuant to any U.S. securities laws. If the U.S. Securities and Exchange Commission or a court of competent jurisdiction were to find that the Issuer is required to register but, in violation of applicable law, had failed to register as an investment company, possible consequences include the U.S. Securities and Exchange Commission applying to a court to enjoin the violation and/or investors suing the Issuer and recovering any damages caused by the violation. In any such instance, the Issuer would be materially and adversely affected.
Requirement for the Issuer to be licensed or authorised
The Issuer is not required to be licensed or authorised under any current Luxembourg laws or regulations. There is no assurance, however, that any Luxembourg regulatory authorities would not take a contrary view regarding the applicability of any such laws or regulations to the Issuer. There is also no assurance that the regulatory authorities in other jurisdictions would not require the Issuer to be licensed or authorised under the laws or regulations of those jurisdictions. Any requirement to be licensed or authorised could have an adverse impact on the Issuer or the holders of Notes of any Series.
The Issuer is organised as a securitisation undertaking within the meaning of the Securitisation Law and shall not be required to be authorised by the CSSF within the meaning of the Securitisation Law (and as further clarified in the CSSF Securitisation Frequently Asked Questions). The Issuer did its own related self-assessment.
Borrowing or Leverage
Borrowing money to purchase an instrument may provide the opportunity for greater capital appreciation but at the same time may increase the risk of loss with respect to the instrument. Although borrowing could increase returns to the Issuer, borrowing could also decrease returns if it fails to earn as much on such incremental positions as it pays for such funds. In addition, the level of interest rates generally, and the rates at which the Issuer can borrow in particular, will ultimately affect its operating results. Adverse fluctuations in the value of the currencies in which the Issuer borrows may also affect its operating results. If loans to the Issuer are collateralised with assets of the Issuer that decrease in value, the Issuer could be obligated to provide additional collateral to the lender in the form of cash or securities to avoid liquidation of the pledged assets. Any such liquidation could result in substantial losses. Moreover, counterparties of the Issuer, at their sole discretion, may change the leverage limits that they extend to the Issuer.
The Issuer’s working capital reserves may not be adequate to meet its obligations
The Issuer intends to maintain working capital reserves to meet its obligations, including operating expenses and premium payments. If the Issuer does not have adequate cash reserves to continue its operations (including, without limitation, funding one of the Compartment Obligations in some cases) investors could suffer substantial losses unless the Issuer is able to secure additional funds. Under such circumstances, the Issuer may need to borrow funds. There is no assurance that such borrowing will be available or on terms acceptable to the Issuer. The Issuer may be required to liquidate investments unless it is able to secure additional funds.
Consequences of winding-up proceedings
If the Issuer fails for any reason to meet its obligations or liabilities (that is, if the Issuer is unable to pay its debts and cannot obtain further credit), a creditor, who has not (and is not deemed to have) accepted non-petition and limited recourse provisions in respect of the Issuer, may be entitled to make an application for the commencement of insolvency proceedings against the Issuer. In that case, such creditor would however not have recourse to the assets of any Compartment created by the Issuer but would have to exercise its rights against the general assets (if any) of the Issuer unless such rights arise in connection with the "creation, operation or liquidation" of a Compartment, in which case, the creditor would have recourse to the assets of such Compartment but he would not have recourse to the assets of any other Compartment. Furthermore, the commencement of such proceedings may, in certain conditions, entitle creditors to terminate contracts with the Issuer and claim damages for any loss created by such early termination. The Issuer will seek to contract only with parties who agree not to make application for the commencement of winding-up, liquidation and bankruptcy or similar proceedings against the Issuer. Legal proceedings initiated against the Issuer in breach of these provisions will, in principle, be declared inadmissible by a Luxembourg court.
Catastrophe and terrorism
The Underlying Assets and the Issuer’s operations are exposed to risks of a catastrophic nature such as earthquakes, floods and hurricanes as well as to acts of terrorism. If such risks materialise, they will impact the ability of the Issuer to repay the obligations. Terrorist attacks may adversely affect or even completely destroy the value of individual properties or wide areas around individual properties. Economic disruption or recession stemming from such attacks can reduce the value of the Underlying Assets of all kinds and delay the process of treatment, accounting, valuation, disposal, audit, re-payment, administration and servicing of these assets.
Legal Opinion
A legal opinion relating to the obligations of the Issuer may be obtained on issue with respect to the laws of Luxembourg but no such opinion will be obtained with respect to any other applicable laws and no investigations will be made into the validity or enforceability of the laws of any other jurisdiction in respect of the Obligations under the Notes. Any such legal opinions will not be addressed to, and may not be relied on by, Noteholders. In particular, save as aforesaid, no legal opinions will be obtained in relation to:
(i) the laws of the country of incorporation of any obligor(s) in respect of the Underlying Assets; or
(ii) the laws of the country in which the Underlying Assets are situated; or
(iii) the laws of the country which are expressed to govern the Underlying Assets. Such laws, depending upon the circumstances, may affect, among other things, the validity and legal and binding effect of the Underlying Assets and the effectiveness and ranking of any security for the Notes. Consequently, no responsibility is accepted by the Issuer in relation to such matters.
2.3 Risks relating to the Notes
Subscription Risk
Moneys subscribed in advance of a dealing day as specified in the Issuer Terms and held pending investment may be viewed by the courts as assets of the Issuer or a Compartment in the event of the insolvency of the Issuer or the Compartment prior to that dealing day.
Exchange Rate Fluctuations
Noteholders bear all risks of exchange rate fluctuations between the Compartment’s currencies and other currencies. Some expenses of a Compartment may be incurred in other currencies. Where appropriate the Issuer will seek to procure foreign currency hedging agreements in order to mitigate Foreign Exchange rate risk for the noteholders.
Limited recourse obligations
The Notes are expressed to be limited recourse in nature. Payments due in respect of the Notes of any Series will be made solely out of amounts received by or on behalf of the Compartment of the Issuer in respect of its Underlying Assets. The relevant Compartment of the Issuer will have no other assets or sources of revenue available for payment of any of its obligations under the Notes issued by it. If the proceeds of the realisation of any security received by the Security Trustee for the benefit of the holders of Notes of any given Series proves insufficient to make payments on or deliveries under such Notes, as the case may be, no other assets will be available for payment or delivery in respect of the shortfall, and, following distribution of the proceeds of such realisation, any outstanding claim against the Issuer in relation to such Notes shall be extinguished and no debt shall be owed by the Issuer in respect thereof.
Security
Subject to the applicable Final Terms, the Notes of any Series can have the benefit of a security over the assets of the relevant Compartment and the rights of the Issuer under the Transaction Documents (as defined in the Conditions) relevant to such Series of Notes which are granted to the Security Trustee (in its capacity as security trustee for itself and the other secured creditors identified in the relevant Final Terms for a specific Series). Only the Security Trustee may enforce such a security interest in any Underlying Assets and no Noteholder shall be entitled to proceed directly against the Issuer in relation to the security unless the Security Trustee, having become bound to proceed in accordance with the Security Agreement, fails to do so within a reasonable period and such failure is continuing.
Security over Underlying Assets shall be obtained at all times by external legal counsel with appropriate legal opinions and professional liability equivalent to the principle value of the note issuance.
Meetings of Noteholders, written resolutions, modifications and waivers
The Conditions contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally and to obtain written resolutions on matters relating to a Series of Notes from Noteholders without calling a meeting. A written resolution signed by or on behalf of the holders of more than 50% in principal amount of the Series of Notes then outstanding or a resolution passed by electronic consent in accordance with the rules and procedures of the relevant clearing systems by or on behalf of the holders of more than 50% in principal amount of that Series of Notes then outstanding will, for all purposes, be deemed to be a resolution passed in/as a meeting of noteholders. The Issuer may also effect amendments to the Series of Notes and the Conditions without the consent of the Noteholders (a) for the purpose of curing any ambiguity or for curing, correcting or supplementing any defective provision contained in the Conditions, or (b) in any manner which the Issuer may deem necessary or desirable and which shall not materially adversely affect the interests of the holders of the Notes of that Series. In addition, the parties to the Agency Agreement, the Custody Agreement and/or any Central Administration Service Agreement may agree to modify any provision thereof but the Issuer shall not agree, without the consent of the Noteholders, to any such modification unless it is of a formal, minor or technical nature, it is made to correct a manifest error or it is, in the opinion of the Issuer, not materially prejudicial to the interests of the Noteholders. If a Security Trustee has been appointed in relation to a Series of Notes, the consent of the Security Trustee will be required to amend any Transaction Document that the Security Trustee is a party to or under which it has assigned rights as part of the Security for such Series and such consent shall only be given by the Security Trustee in accordance with the Security Agreement.
No gross-up
In the event that any withholding tax or deduction for tax is imposed on payments on or in respect of the Notes (as a result of CRS, FATCA or otherwise), the Noteholders will not be entitled to receive grossed-up amounts to compensate for such withholding tax nor be reimbursed for the amount of any shortfall.
Early redemption
If so provided in the relevant Final Terms, the Notes of any Series may be redeemed on a date other than the fixed maturity date. Subject to the Final Terms, any such redemption of notes shall be at their Redemption Amount together with interest accrued to the date fixed for redemption (where relevant). In addition, the holders of Notes of any Series have the right to direct a redemption of the Notes of such Series upon the occurrence of an event of default with respect to the Notes of such Series. In such circumstances, the Issuer may be required to liquidate some or all of the relevant Underlying Assets and/or the relevant security may have to be enforced.
Market value of Notes
The market value of the Notes will be affected by a number of factors, including, but not limited to (a) the value and volatility of the Underlying Assets and the creditworthiness of the issuers of any Underlying Assets and/or the obligors of any Compartment, (b) the value and volatility of any index, securities, commodities or other obligations to which payments on the Notes may be linked, directly or indirectly, and the creditworthiness of the issuers or obligors in respect of any securities or other obligations to which payments on the Notes may be linked, directly or indirectly, (c) market perception, interest rates, yields and foreign exchange rates, (d) the time remaining to the maturity date of the Notes, and (e) the nature and liquidity of any swap agreement or any other derivative transaction entered into by the Issuer or embedded in the Notes or the Underlying Assets. Any price at which Notes may be sold prior to their maturity date may be at a discount, which could be substantial, to the value at which the Notes were acquired on the Issue Date. Prospective purchasers should be aware that not all market participants would determine prices in respect of the Notes in the same manner, and the variation between such prices may be substantial.
Notes held in a clearing system
Because the Global Notes are to be held by or on behalf of Euroclear and/or Clearstream, investors will have to rely on their procedures for transfer, payment and communication with the Issuer. Euroclear and/or Clearstream, as the case may be, will maintain records of the beneficial interests in the Global Notes. While the Notes are represented by one or more Global Notes, investors will be able to trade their beneficial interests only through Euroclear and/or Clearstream, as the case may be. Because the Notes are represented by one or more Global Notes, the Issuer will discharge its payments obligations under the Notes by making payments to Euroclear and/or Clearstream, as the case may be, for distribution to their accountholders. A holder of an interest in a Global Note must rely on the procedures of Euroclear and/or Clearstream, as the case may be, to receive payments under the relevant Notes. The Issuer has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in Global Notes.
Restrictions on Transfer
The Notes have not been registered under the Securities Act, or under any U.S. state securities or "Blue Sky" laws or the securities laws of any other jurisdiction and are being issued and sold in reliance upon exemption from registration provided by such laws. There is no market for the Notes being offered hereby and, as a result, a purchaser must be prepared to hold the Notes for an indefinite period of time or until the maturity thereof. No Notes may be sold or transferred without the consent of the Issuer and unless such sale or transfer
(i) is exempt from the registration requirements of the Securities Act (for example, in reliance on exemptions provided by Rule 144A) and applicable state securities laws;
(ii) will not constitute or result in a non-exempt "prohibited transaction" under ERISA or Section 4975 of the Code or any substantially similar law;
(iii) does not cause the Issuer to become subject to the registration requirements of the Investment Company Act; and
(iv) is made to a United States person under the Code or to a person eligible for certain income tax treaty benefits. Prospective Transferees of the Notes will be required to deliver a certificate to the Issuer relating to compliance with the Securities Act, applicable state securities laws, ERISA, Section 4975 of the Code and the Investment Company Act. The Issuer will not provide registration rights to any purchaser of the Notes and neither the Issuer, nor any other person may register the Notes under the Securities Act or any state securities or "Blue Sky" laws nor may the Issuer take such action with respect to the Underlying Assets.
2.4 Risks Relating to Underlying Assets
No Independent Investigation in Relation to the Underlying Assets
None of the Issuer, the Agents, their legal advisers or the Calculation Agents has undertaken or will undertake any investigations, searches or other actions in respect of Underlying Assets. Investment in the Notes involves significant risks.
While it is the intention of the Issuer to implement strategies that are designed to minimise these risks, there can be no assurance that these strategies will be successful. An investor may potentially lose a substantial portion or all of its investment in the Notes. The income associated with the Notes (where income is distributed) may be subject to market fluctuations. As a result, each investor should carefully consider whether it can bear the risks of investing in the Issuer. Where appropriate, the Arranger, the Arranger’s legal advisors, the Issuer’s legal advisors and third party due diligence providers shall conduct a reasonable level of due diligence as may required for the Underlying Assets. In some cases where necessary, enhanced due diligence on the Underlying Assets and its related counterparties shall be carried out.
Exposure To Only One Asset Class
The Issuer may invest all the proceeds of an issuance of a Series of Notes into one single type of Underlying Assets. The only source of income/yield for the related Compartment will be exclusively generated by that type of Underlying Assets. If the Issuer is not able to receive the income from such Underlying Asset nor to dispose of it, the Issuer may not be able to make payments under the Conditions and the investor may receive in specie redemptions as an equivalent to cash. The Issuer's investments may be subject to more rapid change in value than would be the case if the Issuer were to maintain diversification among types of securities and other instruments and countries.
Realisation of Underlying Assets
The Underlying Assets underlying any Series of Notes may be subject to a variety of risks including credit, liquidity and interest rate risks. In the event of an insolvency of an obligor of any Compartment, various insolvency and related laws applicable to such obligor may (directly or indirectly) limit the amount the Issuer or the Security Trustee may recover in case of liquidation of the Underlying Assets on redemption of the relevant Series. Noteholders should be aware that they may be exposed to fluctuations in the market price of the Underlying Assets underlying any Series of Notes. There can be no assurance as to the amount of proceeds of any sale or realisation of Underlying Assets as the market value of such Underlying Assets will be affected by a number of factors including the creditworthiness and financial condition of any obligor of the relevant Compartment, volatility of financial markets, general economic conditions, domestic and international political events, trends in a particular industry, interest rates, yields and foreign exchange rates, the time remaining to the scheduled maturity of Underlying Assets and the liquidity of the Underlying Assets. The price at which Underlying Assets are sold or realised may therefore be at a substantial discount to the market value and/or the principal amount of Underlying Assets on the issue date and the proceeds of any such sale or realisation may not be sufficient, following deduction of amounts to be paid to prior ranking claimants, to repay the principal and interest on the relevant Notes that the holders of such Notes would expect to receive in the event that the Notes were redeemed in accordance with their terms on their maturity date. Noteholders should recognise that Noteholders bear a risk of a default of the Underlying Assets as well as any decline in value of the Underlying Assets. If the value of any Underlying Assets has declined since the date of purchase, the Notes may decline in value and Noteholders should be prepared to sustain a total loss of Noteholders' investment in the Notes.
Illiquid Underlying Assets
The Underlying Assets may comprise or include privately placed, unlisted securities or domestic securities or other assets which are not admitted to any trading market and which are not readily realisable.
Country and regional risk
The price and value of Underlying Assets, and/or the ability of any issuer of Underlying Assets to perform its obligations, may be influenced by the political, financial and economic stability of the country and/or region in which the issuer of the Underlying Assets or the obligor of the relevant Compartment is incorporated or has its principal place of business or of the country in the currency of which the Underlying Assets are denominated. The value of securities and other assets issued by entities located in, or governments of, emerging market countries is generally more volatile than the value of similar assets issued by entities in well-developed markets. However, in certain cases, the price and value of assets originating from countries not ordinarily considered to be emerging markets countries may behave in a manner similar to those of assets originating from emerging markets countries. Where appropriate, the Issuer will carry out risk mitigation methods suitable for any Underlying Assets related to emerging markets, such risk mitigation methods shall consist of appropriate insurance policies including but not limited to political risk, contract frustration etc and/or credit-worthy guarantees.
Substitution of Underlying Assets
The terms of the Notes may provide that the Underlying Assets may be substituted or replaced at the discretion of the Issuer but they might not be exactly of the same kind nor fully fungible.
Credit Risk of Counterparties
In certain cases, the security for the Notes (if any) may be limited to the claims of the Issuer against an obligor under an agreement entered into by the Issuer in relation to such Notes and in such circumstances, Noteholders will be exposed to the risk of the obligor. Where necessary the Arranger shall only give priority to counterparties related to the credit quality of the Underlying Assets that hold an investment grade rating. In the absence of such a rating of the counterparties, credit enhancement will be provided as an additional form of recourse to improve the overall credit quality of the issuance.
Provision of information
The Issuer, the Agents and the Security Trustee, whether by virtue of the types of relationships described herein or otherwise, may possess information in relation to any obligor of a Compartment or any entity that is or may be material in the context of Notes and that may or may not be publicly available or known to the Noteholders or any other person. The Notes will not create any obligation on the part of the Issuer or any of the Agents or the Security Trustee to disclose any such relationship or information (whether or not confidential).
2.5 Specific Risks linked to Underlying Assets when invested in Securities
Distressed Securities
Distressed securities are securities issued by companies that are involved in bankruptcy or insolvency proceedings or experiencing other financial difficulties. The performance of investments in distressed securities may be adversely affected to a greater extent by specific economic developments affecting an issuer, or by a general economic downturn, than investment in securities of issuers not facing such difficulties. Investments in distressed securities may also be affected by the consequences of bankruptcy proceedings, restructuring negotiations or other extraordinary corporate transactions.
Money Market and Other Liquid Instruments.
Money market instruments are short-term fixed-income obligations, which generally have remaining maturities of one year or less, and may include government securities, commercial paper, certificates of deposit, bankers’ acceptances, and repurchase agreements.
Short Selling
Short selling involves trading on margin and accordingly can involve greater risk than investments based on a long position. A short sale of a security involves the risk of a theoretically unlimited increase in the market price of the security, which could result in an inability to cover the short position and a theoretically unlimited loss. There can be no guarantee that securities necessary to cover a short position will be available for purchase. Due to regulatory or legislative action taken by regulators around the world as a result of recent volatility in the global financial markets, taking short positions on certain securities has been restricted. The levels of restriction vary across different jurisdictions and are subject to change in the short to medium term. These restrictions have made it difficult and, in some cases, impossible for numerous market participants either to continue to implement their investment strategies or to control the risk of their open positions.
Equity Securities and Equity-Related Instruments
Stocks, options and other equity-related instruments may be subject to various types of risk, including market risk, liquidity risk, counterparty credit risk, legal risk and operations risk. In addition, equity-related instruments can involve significant economic leverage and may, in some cases, involve a significant risk of loss. “Equity securities” and “Equity Related Instruments” may include ordinary shares, preferred shares, convertible debt obligations, convertible preferred securities, equity interests in trusts, partnerships, joint ventures or limited liability companies and similar enterprises, warrants and share purchase rights. In general, securities values fluctuate in response to the activities of individual companies and in response to general market and economic conditions. The stock markets tend to be cyclical, with periods when share prices generally rise and periods when share prices generally decline.
Warrants and Rights
Warrants are derivatives that permit but do not obligate, their holder to subscribe to other securities or commodities. Rights are similar to warrants but normally have a shorter duration. Warrants and rights do not carry with them the right to dividends or voting rights with respect to the securities that they entitle the holder to purchase, and they do not represent any interest in the assets of the issuer. As a result, warrants and rights may be considered more speculative than certain other types of equity-like securities. In addition, the values of warrants and rights do not necessarily change with the values of the underlying securities or commodities and these instruments cease to have value if they are not exercised prior to their expiration dates.
Emerging Markets
Emerging market investments generally are subject to higher levels of risk than investments in fully developed markets. Emerging market investments are subject to other risks, including policies of governments with respect to possible nationalisation of their industries, political difficulties and expropriation of assets or confiscatory taxation. Where appropriate, the Issuer will carry out risk mitigation methods suitable for any underlying related to emerging markets, such risk mitigation methods shall consist of appropriate insurance policies including but not limited to political risk, contract frustration etc and/or credit-worthy guarantees.
Unregulated Entity
Any entity invested in by the Issuer for the purposes of meeting the Final Terms may not be regulated and shall not be managed or controlled by the Issuer.
Underlying Fund
Any fund or other vehicle invested in by the Issuer for the purposes of meeting the Final Terms which entity may not be regulated and shall not be managed or controlled by the Issuer.
2.6 Specific Risks linked to Underlying Assets when invested in derivatives
General
Derivatives are financial instruments that derive their performance, at least in part, from the performance of an underlying asset, index or interest rate. Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative. Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could result in large potential losses.
Options and Futures
Options transactions may be effected on securities or commodity exchanges or in the over-the-counter market. When options are purchased over the counter, the owner bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and, in such cases, the owner may have difficulty closing out its position. Over-the-counter options also may include options on baskets of specific securities. A put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security, commodity, or futures contract at a stated exercise price, typically at any time prior to the expiration of the option. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security, commodity, or futures contract at a stated exercise price, typically at any time prior to the expiration of the option. A covered call option is a call option with respect to which the seller of the option owns the underlying security, commodity, or futures contract. The sale of such an option exposes the seller during the term of the option to possible loss of opportunity to realise appreciation in the market price of the underlying security, commodity, or futures contract or to the possible continued holding of a security, commodity, or futures contract that might otherwise have been sold to protect against depreciation in the market price of the security, commodity, or futures contract. A covered put option is a put option with respect to which cash or liquid securities have been placed in a segregated account on the books of or with a custodian to fulfil the obligation undertaken. The sale of such an option exposes the seller during the term of the option to a decline in the price of the underlying security, commodity, or futures contract while depriving the seller of the opportunity to invest the segregated assets. Engaging in transactions in futures contracts involves risk of loss. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, preventing prompt liquidation of futures positions and potentially subjecting a Compartment to substantial losses.
Securities Indices
A stock index fluctuates with changes in the market values of the stocks included in the index.
Forward Contracts
Forward contracts are transactions to purchase or sell a specific instrument at a future date at a specified price. Forward contracts may be used for hedging purposes, such as to protect against uncertainty in the level of future foreign currency exchange rates. For example, this technique would allow the “locking in” of the U.S. dollar price of the security. Forward contracts may also be used to attempt to protect the value of existing holdings of securities held in currencies other than its denominated currency. There may, however, be an imperfect correlation between the value of the securities and the forward contracts entered into with respect to those holdings. Forward contracts and options thereon, unlike futures contracts, are not traded on exchanges and are not standardised; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and “cash” trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience periods of illiquidity, sometimes of significant duration.
Swap Agreements
The transactions are entered into in an attempt to obtain a particular return without the need to actually purchase the reference asset. Swap agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease exposure to long-term or short-term interest rates, currency values, or other factors such as security prices, baskets of securities, or inflation rates.
Structured Products
Structured products or hybrid derivative instruments in which swaps, options, futures or forwards are embedded in other securities. Their return is linked to the performance of the embedded security or basket of securities. Investments in structured products entail varying degrees of risk and while some structured products offer full or partial principal protection, others can subject the owner to losses of its full investment amount. Structured products may use unsecured and unsubordinated debt obligations and may not be publicly listed or traded on an exchange and may therefore be illiquid investments.
Creditworthiness of Counterparties
OTC markets, such as those in which the Compartment may invest or trade forward contracts, swaps and other derivatives, are principal markets where the counterparty to the Issuer’s trade is likely to be an international commercial business, bank or brokerage fund. OTC contracts are not transacted pursuant to exchange rules and, except in limited instances, do not have the benefits afforded by a clearing house which steps in to take the other side of each trade. As a consequence, the creditworthiness of the counterparty becomes extremely important. Where necessary, the Arranger shall give priority to counterparties related to the credit quality of the Underlying Assets that hold an investment grade rating. In the absence of such a rating of the counterparties, credit enhancement will be provided as an additional form of recourse to improve the overall credit quality of the issuance.
2.7 Specific Risks Linked to Underlying Assets when invested in fund structures
Valuation of Investments
In valuing a fund’s underlying investments in order to determine the Net Asset Value per share, the fund will be dependent upon financial information provided by such investment vehicles (where appointed, from the independent administrator of such vehicles but in the absence of such appointment, sourced from an entity that may not be independent of the fund manager). Such financial information could be incorrect, delayed or subject to significant adjustments, any of which events could adversely affect the valuation of the fund. Prospective investors should also be aware that the valuation or pricing of certain asset classes, particularly hard-to-price assets such as illiquid, unlisted and unquoted securities, may result in subjective prices being applied to the administrator’s calculations of the Net Asset Value of funds.
Risks of Multi-Classes in one Fund
When a Fund has established a number of classes of shares which do not constitute a separate and distinct fund each but all fall under the same fund. Investors should note that all liabilities of such fund will be borne by all other shareholders invested in the fund on a pro-rata basis.
Lack of Operating History
A fund can be a recently formed entity and has no operating history upon which prospective investors can evaluate its likely performance.
Limited Transferability
Since shares are sometimes transferable only with prior approval, a Compartment may not be able to sell or redeem its investments. Liquidity of fund shares There might be no secondary market for fund shares and, consequently, a Compartment can dispose of such shares only by means of redemption. Lockup may be applicable and subject to high fees. Since there is no assurance that a fund will be able to liquidate the portfolio securities without losses, a Compartment may incur a loss upon redeeming such shares. In the event of unsettled market conditions, a Compartment may be unable to redeem such shares
Redemption / Repurchase of Investor Shares
Substantial redemption/repurchase of the fund’s shares could require such a fund to liquidate positions more rapidly than would otherwise be desirable, which could adversely affect the value of the other investors. In these circumstances, a fund may defer redemptions/repurchases. Substantial redemptions/repurchases might cause the liquidation of a fund.
Side Pockets
In certain limited circumstances such as insufficient liquidity in the underlying funds, the directors of such a fund may establish “side pockets”, consisting of a separate class of shares of the fund (the “Side Pocket”) to which the directors may allocate or attribute particular investments (for example a side pocket class of shares held in an underlying fund, illiquid or difficult to value securities or securities which are subject to a lock-up or non-withdrawal provisions). The Side Pocket will only be created in exceptional circumstances and the fund will only allocate the least possible assets in the Side Pocket as circumstances may require. In the event that the directors of a fund create a Side Pocket, any investment in such shares by an existing shareholder in the fund will be made by way of redemption of the existing shares and subscription for the Side Pocket shares. Existing investors in such a fund will be allocated a pro rata holding in the new class of units representing the illiquid assets. Redemption of such Side-Pocket shares will only be affected upon realization of the investments allocated to the Side-Pocket shares. Such Side Pockets will also be subject to a different fee structure as agreed to with the service providers of the fund upon the creation of the Side Pocket. The initial valuation of an asset on entering a Side Pocket can be, subject to the fund’s directors’ discretion, at cost, the latest available market price (as appropriate) or a lower value or nil, depending on all the circumstances of the case.
2.8 Specific Risks linked to Underlying Assets when invested in Underlying Funds & Unregulated Entities
The Issuer may securitise Underlying Funds and Unregulated Entities for one or several of its Compartments. The Issuer will seek assurances that robust risk management procedures are in place in the Underlying Funds and Unregulated Entities, but no guarantees can be made as to the success of these procedures. Unregulated Entities operate, by definition, outside of a regulated environment and therefore have less oversight than Underlying Funds. Additional risks therefore exist in investing in Unregulated Entities. These may include, but are not limited to, the following:
No requirement to appoint third party service providers such as an administrator, depositary and auditor;
No compulsory reporting of financial and no financial information to third parties;
No independent valuation procedure;
No independent members on the board of directors;
Potential conflicts of interest existing within the management of the entity;
Unregulated Entities are more likely to invest in assets and asset classes that are not available to regulated funds;
The investments held by Unregulated Entities may not be diversified to the same extent as in a regulated fund;
Unregulated Entities may not be subject to investment and borrowing restrictions
The Issuer will seek to minimise these risks in its due diligence process, but no assurance can be given that these factors can be mitigated.
Periods of Investment Concentration
The Issuer may have an unusually high concentration in certain types of positions. Such a lack of diversification could result in greater losses than otherwise might be anticipated.
Leverage Risk
The Issuer does not intend to use explicit leverage in seeking to achieve a Compartment’s target return. However, it may do so by holding securities, funds and other instruments using margin and may therefore become implicitly leveraged through the use of margin. The Underlying Funds and Unregulated Entities in which the Issuer may invest may use leverage in their investment strategy. Leverage increases the opportunity to achieve higher returns on the amount invested, but also increases the risk of loss. As a result of leverage, a relatively small price movement may result in a substantial loss for investors. Underlying Funds and Unregulated Entities may borrow funds from brokerage firms, banks and other financial institutions in order to increase the amount of capital available for investment. Consequently, the level of interest rates at which they can borrow will affect the operating results of the Underlying Fund, its subsidiaries and Unregulated Entities (where relevant). In addition, Unregulated Entities, an Underlying Fund and its subsidiaries may in effect borrow funds through entry into repurchase agreements and may “leverage” its investment return with such instruments as forwards, futures, options and other derivative contracts. An Unregulated Entity or Underlying Funds’ use of borrowing results in certain additional risks. For example, should the securities pledged to brokers to secure their margin accounts decline in value, the Underlying Fund and its subsidiaries, or the Unregulated Entity, could be subject to a “margin call” and shall need to deposit additional funds with the broker or suffer mandatory liquidation of the pledged securities to compensate for the decline in value. In the event of a sudden drop in the value of their assets, the Underlying Fund and its subsidiaries, or the Unregulated Entity, might not be able to liquidate assets quickly enough to pay off its margin debt. In addition, leverage can increase the loss to investors. In the futures markets, margin deposits are typically low. Low-margin deposits mean that a relatively small price movement in a futures contract may result in immediate and substantial losses. The amount borrowed by the Issuer should be ancillary in comparison with the aggregate value of the securitisation transaction.
Competition Risk
The Issuer may invest in a variety of strategies all of which are subject to a high degree of competition, including from larger securities and investment banking firms which have substantially greater financial resources and research capabilities.
Credit Risk
The Issuer may invest directly and indirectly in an Unregulated Entity or Underlying Funds which invest in securities that are not rated or are rated in the lower rating categories by various credit rating agencies. These securities are subject to a greater risk of loss of principal and interest than highly rated securities. Consequently, the Issuer may be exposed to the credit risk of counterparties who engage in such transactions.
Fraud Risk
Whilst the Issuer attempts to mitigate against the risk of fraud through due diligence, no assurance can be given that fraud will not occur either at the Unregulated Entity or Underlying Funds, in transactions invested in by such entities, or in transactions associated with Unregulated Entities.
Legal Risk
Certain Underlying Funds and Unregulated Entities may choose to make investments in certain smaller and emerging markets which are typically those of less developed countries. In doing so the Fund may indirectly incur political, legal and economic exposure to these jurisdictions. These risks may be mitigated through legal agreements and other documentation. However, no assurance can be given as to the robustness of the legal system in these jurisdictions and hence the protection given by this documentation.
Liquidity Risk
Liquidity risk refers either to the potential asset/liability mismatch in the funds in which our clients are invested or to the risk of one or several of the funds in the portfolio not honouring their redemption terms (or a combination of the two). It is often the prior risk that leads to the latter, so our due diligence usually focuses on mismatches between assets and liabilities in the manager’s portfolio. Additionally, at various times the markets for other securities may be “thin” or illiquid, making purchases or sales of securities at desired prices or in desired quantities difficult or impossible. The liquidity of the market may also be affected by a halt in trading on a particular futures or securities exchange or exchanges. Illiquid markets may make it difficult for the fund's underlying investments to get an order executed at a desired price. As the fund may invest in Underlying Funds where there is a long redemption or “lock-up” period, delays may occur in receiving redemption proceeds. All of the above could result in delays in the calculation of the Net Asset Value and/or payment of any redemption or repurchase proceeds. All funds are valued by the underlying administrator based on audited results. Options The Underlying Funds and some Unregulated Entities may purchase and sell (“write”) options on securities and currencies on European and international derivatives and securities exchanges. The seller (“writer”) of a put or call option which is uncovered (i.e. the writer has effectively a long or a short position in the underlying security or currency) assumes the risk (which theoretically may be unlimited) of a decrease or increase in the market price of the underlying security or currency below or above the sale or purchase price. Trading in options is a highly specialised activity and although it may increase total return it may also entail significantly greater than ordinary investment risk.
Commodity Shocks
Some of the investments that Underlying Funds and Unregulated Entities may make will exhibit a high level of sensitivity to commodity prices. As some commodity markets have a degree of independence, a price shock in one commodity may cause a shock in another, further exacerbating the impact on the Underlying Fund and Unregulated Entity.
Joint Investments
The Underlying Funds and Unregulated Entities in which the fund invests may enter into partnerships or joint ventures with other parties to make investments. Such investments may involve risks not present in direct fund investments, including, for example, the possibility that a co-investor might become bankrupt, or may at any time have economic or business interests or goals that are inconsistent with those of the fund, or that such co-investor may be in a position to take action contrary to the fund's objectives. In addition, the Underlying Fund and Unregulated Entity may be liable for the actions of its co-investor.
2.9 Risks Relating to the Security Trustee
Indemnity and Remuneration
In certain circumstances, the Noteholders may be dependent on the Security Trustee to take certain actions in respect of a Series of Notes, in particular, if the security in respect of such Series (if any) becomes enforceable. Prior to taking such action, the Security Trustee may be required to be indemnified and/or secured and/or pre-funded to its satisfaction. If the Security Trustee is not indemnified and/or secured and/or pre-funded to its satisfaction it may decide not to take such action and such inaction will not constitute a breach of its obligations under the Security Agreement. Consequently, the Noteholders would have to either arrange for such indemnity and/or security and/or pre-funding or accept the consequences of such inaction by the Security Trustee. Noteholders should be prepared to bear the costs associated with any such indemnity and/or security and/or pre-funding and/or the consequences of any such inaction by the Security Trustee. So long as any Note is outstanding, the Issuer shall pay the Agents and the Security Trustee remuneration for their services. Such remuneration may reduce the amount payable to Noteholders. A Security Trustee shall only be appointed in relation to a secured Series of Notes. To the extent that a Series of Notes is unsecured, each Noteholder shall be solely responsible for the enforcement of its rights under the Transaction Documents and shall not be entitled to request any Agent to take action on its behalf.
Priority of claim
During the term of the Notes and on enforcement of the security granted by the Issuer in favour of the Security Trustee (if any), the rights of the Noteholders to be paid amounts due under the Notes shall be subordinated to the fees, costs, charges, expenses and liabilities due and payable to the Security Trustee and the Agents including costs incurred in the enforcement of the security and the Security Trustee's remuneration and the remuneration of the Agents.
2.10 Risks relating to other parties
Risks relating to the Paying Agent
Any payments and/or deliveries made to Noteholders in accordance with the Conditions will be made by the Paying Agent on behalf of the Issuer. Pursuant to the agency agreement in respect of the Notes by and between the Issuer and the Paying Agent (the "Agency Agreement"), the Issuer is to transfer to the Paying Agent such amount as may be due under the Notes, on or before each date on which such payment and/or deliveries in respect of the Notes becomes due. If the Paying Agent, while holding funds for payment to Noteholders in respect of the Notes, is declared insolvent, the Noteholders may not receive all (or any part) of any amounts due to them in respect of the Notes from the Paying Agent. The Issuer will still be liable to Noteholders in respect of such unpaid amounts but the Issuer will have insufficient assets to make such payments (or any part thereof) and Noteholders may not receive all, or any part, of any amounts due to them. Consequently, the Noteholders are relying not only on the creditworthiness of the Issuer, but also on the creditworthiness of the Paying Agent in respect of the performance of its obligations under the Agency Agreement to make or facilitate payments to Noteholders.
Risks relating to the Calculation Agent
The Calculation Agent (if any) shall have no obligations to the Noteholders, and shall only have the obligations expressed to be binding on it pursuant to its appointment terms. All designations and calculations made by the Calculation Agent in respect of any Notes shall be conclusive and binding on the Noteholders. If for any reason the Calculation Agent's appointment is terminated and the Issuer will be required to appoint a replacement institution to take its place, such replacement may delay certain determinations and related payments and/or deliveries on the Notes and there is no guarantee that any replacement will be found. Any delay or failure to appoint such a replacement may have adverse consequences for the Noteholders.
Application of negative interest rates
Negative interest rates may apply from time to time in certain circumstances to any cash funds held by the Custodian on behalf of the Issuer. To the extent that such negative interest rates were to apply, the amount of cash collateral held by or on behalf of the Issuer would be reduced.
Custodian
Underlying Assets in the form of cash or transferable securities may be held in an account of the Custodian in the name of the Issuer. Where the Underlying Assets consist of assets other than cash or transferable securities, they may be held in the name of the Issuer or under the control of the Custodian (to the extent appointed in respect of a Series of Notes) or in such other manner as is approved by the Security Trustee (acting on instructions pursuant to the Security Agreement). The ability of the Issuer to meet its obligations with respect to the Notes will be dependent upon receipt by the Issuer of payments from the Custodian under the Custody Agreement for the Notes. Consequently, the Noteholders are relying on the ability of the Custodian to perform its obligations under the Custody Agreement. Any cash deposited with the Custodian by the Issuer and any cash received by the Custodian for the account of the Issuer in relation to a Series will be held by the Custodian as a banker and not as a trustee. Accordingly, such cash will not be held as client money and will represent only an unsecured claim against the Custodian's assets.
Risks relating to the Index Provider
The Index Provider (if any) shall have no obligations to the Noteholders, and shall only have the obligations expressed to be binding on it pursuant to its appointment terms vis-à-vis the Compartment for which it has been appointed. All transmission of the Index, its allocation and the implementation of the allocation made by the Issuer in respect of any Notes shall be conclusive and binding on the Noteholders. If for any reason the Index Provider's appointment is terminated and the Issuer will be required to appoint a replacement institution to take its place, such replacement may delay certain determinations and related payments and/or deliveries on the Notes and there is no guarantee that any replacement will be found. Any delay or failure to appoint such a replacement may have adverse consequences for the Noteholders.
Credit Risk
Under the Custody Agreement the Issuer authorises the Custodian (to the extent appointed in respect of a Series of Notes) to hold certain Underlying Assets in the Custodian's account or accounts with any sub-custodian, any securities depositary or at such other account keeper or clearing system as may be appropriate for the type of instruments which comprise the Underlying Assets. Where the Underlying Assets are held with a sub-custodian, the Custodian will only be liable for losses of such sub-custodian where the Custodian failed to exercise due care and skill in the appointment of such sub-custodian. Where the Underlying Assets are held with a securities depositary or clearing system (whether via the Custodian, a sub-custodian or otherwise), the ability of the Issuer to meet its obligations with respect to the Notes will be dependent upon receipt by the Issuer of payments from the Custodian under the Custody Agreement for the Notes (if the Underlying Assets are so held) and, in turn, the Custodian (and any applicable sub-custodian) will be dependent (in whole or in part) upon receipt of payments from such securities depositary or clearing system. Consequently, the Noteholders are relying not only on the creditworthiness of the Underlying Assets and the Custodian in respect of the performance of its obligations under the Custody Agreement for such Notes (and any obligations of any sub-custodian under or pursuant to the Custody Agreement or otherwise), but also on the creditworthiness of any securities depositary or clearing system holding the Underlying Assets deposited by the Custodian or any sub-custodian.
Lien
Pursuant to their terms of engagement, sub-custodians, security depositaries or clearing systems may have liens or rights of set-off with respect to the Underlying Assets held with them in relation to any of their fees and/or expenses. If, for whatever reason, the Custodian fails to pay such fees and/or expenses, the relevant sub-custodian, security depositary or clearing system may exercise such lien or right of set-off, which may result in the Issuer failing to receive any payments due to it in respect of the Underlying Assets, and thereby adversely affecting the ability of the Issuer to meet its obligations with respect to the Notes. Therefore, the ability of the Issuer to meet its obligations with respect to the Notes will not only be dependent upon receipt by the Issuer of payments from the Custodian under the Custody Agreement for the Notes (if the Underlying Assets are so held) but will also be dependent on any sub-custodian, security depositary or clearing system not exercising any lien or right of set-off in respect of any Underlying Assets that it holds. Consequently, the Noteholders are relying not only on the creditworthiness of the Underlying Assets, but also on the creditworthiness of the Custodian in paying when due any fees or expenses of such sub-custodian, security depositaries or clearing systems (or the ability of the Issuer to pay such amounts due to the Custodian and/or the sub-custodians, security depositary or clearing system).
Calculation Agent calculations and determinations
The Calculation Agent (to the extent appointed in respect of a Series of Notes) shall act in good faith and a commercially reasonable manner when making any determinations or calculations under the Conditions in relation to the Notes. Any determinations made by the Calculation Agent in relation to the Notes shall (in the absence of manifest error) be binding, final and conclusive. In making calculations and determinations with regard to the Notes, there may be a difference of interest between the investors and the Calculation Agent. The Calculation Agent is required to act in good faith and in a commercially reasonable manner but does not have any obligations of agency or trust for any investors and has no fiduciary obligations towards them. In particular, the Calculation Agent and its affiliated entities may have interests in other capacities (such as other business relationships and activities).
2.11 Risks relating to the market
General In the past years, the global economy has experienced high levels of instability and financial crisis, which has led to a general tightening of available credit and liquidity in the global financial markets, a lowering of credit rates, etc.
No assurance can be given that any recovery will be sustained or that certain economies will not encounter a long-lasting recession, accumulate excessive public debt or enter into credit defaults, further aggravating the global crisis. The above factors have also led to substantial volatility in markets across asset classes, including (without limitation) stock markets, foreign exchange markets, fixed-income markets and credit markets.
Prospective investors should ensure that they have sufficient knowledge and awareness of the global financial crisis and the response thereto and of the economic situation and outlook as they consider necessary to enable them to make their own evaluation of the risks and merits of an investment in the Notes. In particular, prospective investors should take into account the considerable uncertainty as to how the global financial crisis and the wider economic situation will develop over time. Any person who had held securities during the periods considered above, particularly structured securities, would be highly likely to have suffered significant adverse effects as a result of such holding, including, but not limited to, major reductions in the value of those securities and a lack of liquidity. Prospective investors should consider carefully whether they are prepared to take on similar risks by virtue of an investment in the Notes.
Change of law
The terms and conditions of the Notes (including any non-contractual obligations arising therefrom or connected therewith) are based on relevant laws in effect as at the date of this Private Placement Memorandum. No assurance can be given as to the impact of any possible judicial decision or change to such laws, or the official application or interpretation of such laws or administrative practices after the date of this Private Placement Memorandum.
Regulatory risk
The global financial crisis led to an increased regulation of financial activities. The United States of America, the European Union and other jurisdictions have implemented, and are still in the process of implementing, various reform measures. Such regulatory changes and the method of their implementation may have a significant effect on the operation of financial markets. In many cases, it is uncertain how such regulatory reform would affect the Issuer, the treatment of instruments such as the Notes or the activities of other parties that have roles with respect to the Notes, such as (if and where relevant) any swap counterparty, the Paying Agent and the Security Trustee. In addition, governments have shown an increased willingness, wholly or partially to nationalise financial institutions, corporates and other entities in order to support the economy. Such nationalization may impact adversely on the value of the equity or the obligations of any such entity. In addition, in order to effect such nationalization, existing obligations or equity might have their terms mandatorily amended or be forcibly redeemed. To the extent that any relevant person or entity connected with the Notes is subject to nationalization or other government intervention, it may have an adverse effect on a holder of a Note.
Currency risk
An investment in Notes denominated or payable in a currency other than the currency of the jurisdiction of a particular Noteholder, entails significant risks that are not associated with a similar investment in Notes denominated and/or payable in the noteholder's currency. These risks include, but are not limited to:
(a) the possibility of significant market changes in rates of exchange between the Noteholder's currency and the currency in which the Notes are denominated and/or payable;
(b) the possibility of significant changes in rates of exchange between the Noteholder's currency and the currency in which the Notes are denominated and/or payable resulting from the official redenomination or revaluation of the currency; and
(c) the possibility of the imposition or modification of foreign exchange controls by either the jurisdiction of the purchaser or foreign governments.
Where appropriate, the Issuer will seek to procure foreign currency hedging agreements in order to mitigate Foreign Exchange rate risk for the Noteholders.
Investor suitability
Prospective investors who consider purchasing the Notes should reach an investment decision only after carefully considering the suitability of the Notes in light of their particular circumstances. Investment in the Notes may only be suitable for investors who:
(a) have substantial knowledge and experience in financial, business matters and expertise in assessing credit risk which enable them to evaluate the merits and risks of an investment in the Notes and the rights attached to the Notes;
(b) are capable of bearing the economic risk of an investment in the Notes for an indefinite period of time;
(c) are acquiring the Notes for their own account (as principal and not as agent) for investment, not with a view to resale, distribution or other disposition of the Notes (subject to any applicable law requiring that the disposition of the investor's property be within its control); and
(d) recognise that it may not be possible to make any transfer of the Notes for a substantial period of time, if at all.
Independent review and advice
Each prospective purchaser of the Notes must determine, based on its own independent review (including as to the financial condition and affairs and its own appraisal of the creditworthiness of the Issuer, any swap counterparty and any relevant obligor in respect of the Underlying Assets and such professional advice (including, without limitation, tax, accounting, credit, legal and regulatory advice)) as it deems appropriate under the circumstances, to assess the economic, social and political condition of the jurisdiction in which each relevant obligor is located and determine whether an investment in the Notes is appropriate in its particular circumstances. In so doing, and without limiting the generality of the preceding paragraph, such prospective purchaser must determine that its acquisition and holding of the Notes (a) is fully consistent with its (or if it is acquiring the Notes in a fiduciary capacity, the beneficiary's) financial needs, objectives and condition, (b) complies and is fully consistent with all investment policies, guidelines and restrictions applicable to it (whether it is acquiring the Notes as principal or in a fiduciary capacity), and (c) is a fit, proper and suitable investment for it (or if it is acquiring the Notes in a fiduciary capacity, for the beneficiary), notwithstanding the clear and substantial risks inherent in investing in or holding the Notes. None of the Issuer, the Paying Agent, the Security Trustee or any of their respective affiliates is acting as an investment adviser, or assumes any fiduciary obligation, to any purchaser of Notes (other than the Security Trustee as collateral taker under any applicable security agreement securing the obligations owed by a Compartment to the Noteholders of such Compartment). Neither this Private Placement Memorandum nor any Final Terms are intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation or as constituting an invitation or offer that any recipient of this Private Placement Memorandum or any Final Terms should purchase any of the Notes. The Paying Agent and the Security Trustee expressly do not undertake to review the financial condition, creditworthiness or affairs of any relevant obligor(s).
Limited liquidity of the Notes
Although an application may be made to admit the Notes to trading on a stock exchange, there is currently no secondary market for the Notes. There can be no assurance that a secondary market for any of the Notes will develop, or, if a secondary market does develop, that it will provide the holders of the Notes with liquidity or that it will continue for the life of the Notes. Consequently, any investor in the Notes must be prepared to hold such Notes for an indefinite period of time or until redemption of the Notes. There may be less liquidity in any secondary market for the Notes if the Notes are exclusively offered to the public and not to institutional investors. In addition, any secondary market price for the Notes may not reflect any embedded fees and/or other additional costs or inducements included in the price paid for the Notes by initial investors.
Listing may be discontinued
The Issuer may discontinue any listing of the Notes and listed Notes may be listed on another stock exchange or exchanges (which may or may not be EEA-regulated markets and may or may not be in Western Europe). This could have adverse consequences for the Noteholders.
Impact on credit
The events outlined above have negatively affected the creditworthiness of a number of entities or governments, in some cases to the extent of collapse or requiring rescue from governments or international or supra-national bodies. Such credit deterioration has been and may continue to be widespread. The value of the Notes or of the amount of payments and/or deliveries on them may be negatively affected by such widespread credit deterioration. Prospective investors should note that recoveries on assets of affected entities have in some cases been de minimis and that similarly low recovery levels may be experienced with respect to other entities or governments in the future, which may have adverse consequences for the Noteholders. Prospective investors should also consider the impact of a default by the Paying Agent and/or the Security Trustee, and possible delays and costs in being able to access property held with a failed custodian, sub-custodian, security depository or clearing system.
Risks associated with the reform of SOFR, EURIBOR and other interest rate 'benchmarks’
The Secured Overnight Financing Rate (SOFR), the Euro Interbank Offered Rate (EURIBOR) and other interest rates or other types of rates and indices which are deemed "benchmarks" (each a "Benchmark" and together, the "Benchmarks") have become the subject of regulatory scrutiny and recent national and international regulatory guidance and proposals for reform. Some of these reforms are already effective whilst others are still to be implemented. These reforms may cause such Benchmarks to perform differently than in the past, or disappear entirely, or have other consequences which cannot be predicted. Any such consequence could have a material adverse effect on any Notes linked to such a Benchmark. International proposals for reform of Benchmarks include the European Council's Regulation (EU) 2016/1011 of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (the "Benchmark Regulation"). The Benchmark Regulation could have a material impact on Notes linked to a Benchmark, including in any of the following circumstances:
a rate or index which is a Benchmark may only be used if its administrator obtains authorisation or is registered and in case of an administrator which is based in a non-EU jurisdiction, if the administrator's legal benchmark system is considered equivalent (Article 30 Benchmark Regulation), the administrator is recognised (Article 32 Benchmark Regulation) or the Benchmark is endorsed (Article 33 Benchmark Regulation) (subject to applicable transitional provisions). If this is not the case, Notes linked to such Benchmarks could be impacted; and
the methodology or other terms of the Benchmark could be changed in order to comply with the terms of the Benchmark Regulation, and such changes could have the effect of reducing or increasing the rate or level or affecting the volatility of the published rate or level, and could impact the Notes, including Calculation Agent determination of the rate. In addition to the aforementioned Benchmark Regulation, there are numerous other proposals, initiatives and investigations which may impact Benchmarks.
44 Private Placement Memorandum – FRICTIONLESS MARKETS SECURITIES – Version 1 dated 14/11/2022 Following the implementation of any such potential reforms, the manner of administration of Benchmarks may change, with the result that they may perform differently than in the past, or Benchmarks could be eliminated entirely, or there could be other consequences which cannot be predicted. Although it is uncertain whether or to what extent any of the above mentioned changes and/or any further changes in the administration or method of determining a Benchmark could affect the level of the published rate, including to cause it to be lower and/or more volatile than it would otherwise be, and/or could have an effect on the value of any Notes whose interest or principal return is linked to the relevant Benchmark, investors should be aware that they face the risk that any changes to the relevant Benchmark may have a material adverse effect on the value of and the amount payable under the Notes whose rate of interest or principal return is linked to a Benchmark (including, but not limited to, Floating Rate Notes). Benchmarks could also be discontinued entirely. For example, on 27 July 2017, the United Kingdom 36 Financial Conduct Authority ("FCA") announced that it will no longer persuade or compel banks to submit rates for the calculation of the SOFR benchmark after 2021. The FCA announcement indicates that the continuation of SOFR on the current basis cannot and will not be guaranteed after 2021. On 5 March 2021, the FCA announced that (i) the publication of 24 SOFR settings (as detailed in the FCA announcement) will cease immediately after 31 December 2021, (ii) the publication of the overnight and 12 month U.S. dollar SOFR settings will cease immediately after 30 June 2023, (iii) immediately after 31 December 2021, the 1-month, 3-month and 6-month sterling SOFR settings will no longer be representative of the underlying market and economic reality that they are intended to measure and representativeness will not be restored (and the FCA will consult on requiring the ICE Benchmark Administration Limited ("IBA") to continue to publish these settings on a synthetic basis, which will no longer be representative of the underlying market and economic reality they are intended to measure, for a further period after end 2021) and (iv) immediately after 30 June 2023, the 1-month, 3- month and 6- month U.S. dollar SOFR settings will no longer be representative of the underlying market and economic reality that they are intended to measure and representativeness will not be restored (and the FCA will consider the case for using its proposed powers to require IBA to continue publishing these settings on a synthetic basis, which will no longer be representative of the underlying market and economic reality they are intended to measure, for a further period after end June 2023). If a Benchmark were to be discontinued or otherwise unavailable, the rate of interest for Floating Rate Notes which are linked to such Benchmark will be determined for the relevant period by the fall-back provisions applicable to such Notes, which in the end could lead, inter alia, to a previously available rate of the Benchmark being applied until maturity of the Floating Rate Notes, effectively turning the floating rate of interest into a fixed rate of interest, or, to determination of the applicable interest rate on the basis of another benchmark determined by the Issuer in its discretion or to an early termination of the relevant Notes at the option of the Issuer. Any changes to a Benchmark as a result of the Benchmark Regulation or other initiatives, could have a material adverse effect on the costs of refinancing a Benchmark or the costs and risks of administering or otherwise participating in the setting of a Benchmark and complying with any such regulations or requirements. Although it is uncertain whether or to what extent any of the above-mentioned changes and/or any further changes in the administration or method of determining a Benchmark could have an effect on the value of any Notes linked to the relevant Benchmark, investors should be aware that any changes to a relevant Benchmark may have a material adverse effect on the value or liquidity of, and the amounts payable on, Floating Rate Notes whose rate of interest is linked to such Benchmark.
Risks associated with new reference rates such as SONIA, SOFR and €STR
Interest rates of Floating Rate Notes may be linked to SONIA, SOFR and €STR. SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions. Investors should be aware that the market continues to develop in relation to the SONIA as a reference rate in the capital markets and its adoption as an alternative to Sterling SOFR. The market or a significant part thereof may adopt an application of SONIA that differs significantly from that set out in the Private Placement Memorandum and Final Terms. It may be difficult for investors in Notes which reference a SONIA rate to reliably estimate the amount of interest which will be payable on such Notes. Further, if the Notes become due and payable, the rate of interest payable shall be determined on the date the Notes became due and payable. Investors should consider these matters when making their investment decision with respect to any such Notes. On 22 June 2017, the Alternative Reference Rates Committee ("ARRC") convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York identified the SOFR as the rate that represented best practice for use in certain new U.S. dollar derivatives and other financial contracts. The Federal Reserve Bank of New York notes that the use of the SOFR is subject to important limitations and disclaimers. SOFR is published based on data received from other sources. There can be no guarantee that the SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the interests of investors in the respective Notes. If the manner in which the SOFR is calculated is changed, that change may result in a reduction of the amount of interest payable on the Notes and the trading prices of the Notes. SOFR has been published by the Federal Reserve Bank of New York since April 2018. Investors should not rely on any historical changes or trends in the SOFR as an indicator of future changes in the SOFR. Also, since the SOFR is a relatively new market index, the Notes will likely have no established trading market when issued. Trading prices of the Notes may be lower than those of later-issued indexed debt securities as a result. Similarly, if the SOFR does not prove to be widely used in securities like Notes, the trading price of the Notes may be lower than those of debt securities linked to indices that are more widely used. Investors in the Notes may not be able to sell the Notes at all or may not be able to sell the Notes at prices that will provide them with a yield comparable to similar investments that have a developed secondary market, and may consequently suffer from increased pricing volatility and market risk. Investors should consider these matters when making their investment decision with respect to any such Notes. In light of these developments and similar to the approaches in the United States and the United Kingdom, the Governing Council of the European Central Bank ("ECB") has decided to develop a euro short-term rate ("€STR") based on data already available to the Eurosystem. €STR reflects the wholesale euro unsecured overnight borrowing costs of euro area banks, complements existing benchmark rates provided by the private sector and has been published on each TARGET2 banking day since 2 October 2019. Given that it cannot be excluded that further changes will be implemented and, in particular, that there is no historical data or trends that investors could rely on and that the transition from existing reference rates to €STR could result in further uncertainties and limitations, investors in the Notes should consider all these factors when making their investment decision with respect to any such Notes.”
2.12 Specific risks linked to the digital currency industry and the digital currency markets.
Counterparties in which the Issuer may invest may be directly exposed to the digital currency industry and the digital currency markets, such as Bitcoin market
The Issuer may make investments in counterparties which operate in the digital currency markets and as such are directly exposed to the digital currency industry and the digital currency markets, such as the Bitcoin market. Events or circumstances which have an adverse impact on the digital currency industry and/or the digital currency markets may have an adverse impact on such counterparties, their ability to repay any investments made by the Issuer, the yield the Issuer is able to generate on its investments, and/or the Issuer’s ability to redeem the Underlying Assets, and/or the value or realizability of any collateral provided by such counterparties to the Issuer. Digital assets such as bitcoin are relatively new, and the value of such assets is influenced by a wide variety of factors that are uncertain and difficult to evaluate, such as the infancy of their development, their dependence on technologies such as cryptographic protocols, their dependence on the role played by miners and developers and the potential for malicious activity. Any such events or circumstances may also have an adverse impact on the value of the Underlying Assets, the value of the Notes and the ability of the holders of Notes to redeem their investment. For example, the following are some of the risks that could materially adversely affect the value of the investments made by the Issuer, the yield that the Issuer is able to achieve on its investments and the value of the Notes as a result. The trading prices of many digital assets have experienced extreme volatility in recent periods and may continue to do so. For instance, there were steep increases in the value of certain digital assets, including bitcoin, over the course of 2017, and multiple market observers asserted that digital assets were experiencing a “bubble.” These increases were followed by steep drawdowns throughout 2018 in digital asset trading prices, including for bitcoin. Following the drawdowns, bitcoin prices increased during 2019, then decreased significantly again in early 2020 before increasing significantly during late 2020 and early 2021, before falling back again in the second quarter of 2021. There can be no assurance that any increases will continue in the future, or that they will not be offset by declines. The bitcoin markets may still be experiencing a bubble or may experience a bubble again in the future. Extreme volatility in the future, including further declines in the trading prices of bitcoin, could have a material adverse effect on the value of the Underlying Assets, the Notes and the Notes could lose all or substantially all of their value. Digital asset networks and the software used to operate them are in the early stages of development. Digital assets have experienced, and the Sponsor expects will experience in the future, sharp fluctuations in value. Given the infancy of the development of digital asset networks, parties may be unwilling to transact in digital assets, which would dampen the growth, if any, of digital asset networks. Digital asset networks are dependent upon the internet. A disruption of the internet or a digital asset network would affect the ability to transfer digital assets and, consequently, adversely affect their value. The acceptance of software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in a digital asset network, could result in a “fork” in such network’s blockchain, resulting in the creation of multiple separate networks, which could compete with one another for users, miners, and developers. Governance of many digital asset networks is by voluntary consensus and open competition. As a result, there may be a lack of consensus or clarity on the governance of a network, which may stymie the network’s utility and ability to grow and solve challenges. In particular, it may be difficult to find solutions or martial sufficient effort to overcome current or future problems on such network. The open-source structure of many digital asset network protocols means that developers and other contributors are generally not directly compensated for their contributions in maintaining and developing such protocols. As a result, the developers and other contributors of a particular digital asset may lack a financial incentive to maintain or develop the network, or may lack the resources to adequately address emerging issues. Alternatively, some developers may be funded by companies whose interests are at odds with other participants in a particular digital asset network. A failure to properly monitor and upgrade the software protocol of a network could damage the network, and adversely affect the value of that digital currency. The loss or destruction of a private key required to access a digital asset may be irreversible. If a private key is lost, destroyed or otherwise compromised, including by the Issuer or a counterparty in which the Issuer has invested, the Issuer or the counterparty will be unable to access the digital currency corresponding to that private key, resulting in loss and a reduction in value of the Notes. Miners, developers and users may switch to or adopt certain digital asset networks at the expense of their engagement with other digital asset networks, which may negatively impact those networks. Over the past several years, digital asset mining operations have become more costly as they have evolved from individual users mining with computer processors, graphics processing units and first generation application specific integrated circuit machines to “professionalized” mining operations using specialized hardware or sophisticated machines. If the profit margins of digital asset mining operations are not sufficiently high, digital asset miners are more likely to immediately sell tokens earned by mining, resulting in an increase in liquid supply of that digital asset, which would generally tend to reduce that digital asset’s market price. To the extent that any miners cease to record transactions that do not include the payment of a transaction fee in solved blocks or do not record a transaction because the transaction fee is too low, such transactions will not be recorded on the blockchain until a block is solved by a miner who does not require the payment of transaction fees or is willing to accept a lower fee. Any widespread delays in the recording of transactions could result in a loss of confidence in th relevant digital asset network.
47 Private Placement Memorandum – FRICTIONLESS MARKETS SECURITIES – Version 1 dated 14/11/2022 In the past, flaws in the source code for digital asset networks have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information and/or resulted in the theft of users’ digital assets. The cryptography underlying a digital asset could prove to be flawed or ineffective, or developments in mathematics and/or technology, such as advances in quantum computing, could result in such cryptography becoming ineffective, enabling a malicious actor to take the Issuer’s digital assets, which would adversely affect the value of the Notes. Even if another digital asset other than bitcoin were affected by similar circumstances, any reduction in confidence in the robustness of the source code or cryptography underlying digital assets generally could negatively affect the demand for all digital assets, including bitcoin, and therefore adversely affect the value of the Notes. Banks and other established financial institutions may refuse to process funds for digital currency transactions; process wire transfers to or from digital currency exchanges, digital currency-related companies or service providers; or maintain accounts for persons or entities transacting in digital currencies. This could dampen liquidity in the market and damage the public perception of digital assets generally or any one digital asset in particular, such as bitcoin, and their or its utility as a payment system, which could decrease the price of digital assets generally or individually. Moreover, because digital assets, including bitcoin, have been in existence for a short period of time and are continuing to develop, there may be additional risks in the future that are impossible to predict or evaluate as of the date of this registration statement.
The Issuer may invest in Decentralised Finance Protocols
The Issuer may invest in Decentralised Finance (“DeFi”) Protocols, such as Uniswap or Aave, as a means of generating yield. DeFi protocols allow for value to be transferred without the use of centralized agencies. Protocol users continue to retain custody and control over their funds. The source code of DeFi protocols is open-source. This allows everyone to view and verify the code that powers these protocols. DeFi protocols are built on decentralized blockchains like Ethereum which are not controlled by any central authority. These are run by distributed nodes. Further, Decentralized Applications (DApps) are not governed by any single entity. The decisions about these DApps are taken by the community, allowing them to participate in the governance mechanism of these applications. While the leading DeFi protocols have seen substantial growth with high levels of collateral, very low levels of default and yields materially higher than those available in conventional finance, DeFi also carries risks, which, if they materialize, would potentially result in an adverse impact on the value of the Underlying Assets, the value of the Notes and the ability of the holders of Notes to redeem their investment. These risks include:
Price Volatility leading to a forced liquidation cascade: DeFi lending and borrowing protocols typically require a user who wants to borrow funds to first deposit digital assets (for example, Bitcoin or Ethereum) as collateral. The DeFi protocol then allows the user to borrow stable coins (for example, Tether or Circle USD) against this collateral. The Loan to Value Ratio (LTV) is generally 50 to 60%, but can be higher. In periods of extreme volatility, where the value of collateral drops significantly if the price of the digital asset deposited drops. As a result, if the collateral value drops below the LTV ratio, then the smart contract will automatically liquidate the collateral deposited by the borrower. This is known as forced liquidation and it can lead to a cascading effect, whereby more forced liquidations will result in more selling pressure on the price of digital assets deposited, which in turn will cause the price of the collateral to fall further. This would result in a potentially material reduction in the value of collateral, the value of the Underlying Assets and the value of the Notes.
Hacks and Exploits: All DeFi projects rely on smart contracts that are written on a platform such as Ethereum. There have been numerous cases of malicious actors exploiting the vulnerabilities in the smart contracts, to drain the users out of their assets locked in the smart contract protocols. In the spirit of transparency, the codes of most DeFi projects are open source and available to the public (and thereby hackers) for inspection. While the Issuer will only invest funds in robust, independently audited, protocols, any such occurrence in relation to a protocol in which the Issuer has invested would result in a potentially material reduction in the value of collateral, the value of the Underlying Assets and the value of the Notes.
Loss of Private Keys: The loss or destruction of a private key required to access a digital asset may be irreversible. If a private key is lost, destroyed or otherwise compromised, including by the Issuer or a counterparty in which the Issuer has invested, the Issuer or the counterparty will be unable to access the digital currency corresponding to that private key, resulting in loss and a reduction in value of the Notes.
Increased Regulation of the DeFi: Industry Government and quasi-government regulation of digital currencies, their use, and intermediaries and other businesses involved in digital currencies, noting in particular that the SEC has taken action against several cryptocurrency operators and has raised questions about whether certain digital currency exchanges must be registered with the SEC to continue operating. FATF has recently suggested that DeFi protocols such as Uniswap and AAVE should be regarded as virtual currency exchanges, and be subject to AML regulation, which many commentators feel would be challenging to implement and adverse to the industry’s growth.
High Gas price due to lack of scalability: Most of the DeFi protocols currently are built on Ethereum. This has resulted in clogging of the Ethereum network, thereby resulting in slower processing of transactions and an increase in gas prices. While several Layer 2 solutions are being built on top of Ethereum to solve this problem, it is going to be a while before they get ready to process transactions at scale. Without solving this problem of scalability, DeFi cannot achieve mass adoption and disrupt centralized finance. The current transaction fees (gas price) on the Ethereum network have resulted in most people not being able to access DeFi applications, representing an impediment to their growth.
2.13 Securitisation and AIFM
The EU Directive 2011/61/EU on Alternative Investment Fund Managers (the “AIFMD”), which became effective on 22 July 2013, provides, amongst other things, that all alternative investment funds (each, an AIF) must have a designated alternative investment fund manager (an “AIFM”) with the responsibility for portfolio and risk management. The AIFMD was implemented into Luxembourg law by virtue of the Law of 12 July 2013 on alternative investment fund managers (the “AIFM Law”). The application of the AIFMD to securitisation vehicles such as the Issuer is unclear. The Issuer does not operate in the same manner as a typical alternative investment fund. The Issuer has been established solely for the purpose of entering into, performing and serving as a vehicle for any securitisation transactions as permitted under the Securitisation Law. However, the definitions of AIF and AIFM in the AIFMD are broad in scope and is only limited guidance as to how such definitions should be applied in the context of a securitisation vehicle such as the Issuer. On 23 October 2013, the Commission de Surveillance du Secteur Financier of Luxembourg (the “CSSF”) issued an update to its Frequently Asked Questions on securitisation vehicles (the “FAQs”). The update addresses the consequences of the implementation of the AIFMD into Luxembourg law on securitisation vehicles governed by the Securitisation Law. The AIFM Law provides for an exemption in relation to “securitization special purpose entities” within the meaning of Regulation (EC) no24/2009 of the European Central Bank of 19 December 2008 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions(repealed by Regulation (EU) No 1075/2013 of the European Central Bank of 18 October 2013 concerning statistics on the assets and liabilities of financial vehicle corporations engaged in securitisation transactions) (the “ECB Regulation”) and the guidance note relating thereto. Thus, an undertaking falling within the definition of “securitisation special purpose entities of the AIFM Law, meaning an entity whose sole object is to carry out one or more securitisation transactions within the meaning of ECB Regulation, will not constitute an AIF under the AIFM Law. The Securitisation Law defines “securitisation” in broader terms than the ECB Regulation. Hence, certain transactions may qualify as securitisation transactions under the Securitisation Law but not under the ECB Regulation. As a consequence, the undertaking carrying out such a transaction may fall within the scope of the Securitisation Law but will fail to qualify as a “securitisation special purpose entity” under the AIFM Law and will not benefit from the exemption.
The CSSF’s updated FAQs emphasize that each securitisation undertaking is required to carry out a self-assessment to determine whether it constitutes an AIF by reference to the criteria set out in the AIFM Law or
whether it benefits from the exemption provided for by the AIFM Law in relation to “securitisation special purpose entities” as construed by the ECB Regulation. The CSSF considers that the following undertakings, which may qualify as securitisation undertakings under the Securitisation Law, do not, according to the ECB Regulation, constitute “securitisation special purpose entities” under the AIFM Law. They may, insofar as they meet the AIF criteria, constitute AIFs under the AIFM Law:
securitisation undertakings acting primarily as first lenders (i.e. undertakings that originate new loans) since there is no transfer of assets (and therefore no transfer of credit risk) by such entities;
securitisation undertakings are set up primarily to create or otherwise offer synthetic exposure to non-credit related assets, i.e., where the transfer of credit risk is only an accessory to the principal activity of the entity.
The CSSF further considers that securitisation undertakings that issue debt instruments only do not constitute AIFs. Finally, securitisation undertakings that are not managed in accordance with a defined investment policy do not constitute AIFs. This would be the case for securitisation undertakings that issue structured products offering synthetic exposure to assets based on a pre-established formula or Index and that acquire Underlying Assets and/or enter into derivative contracts for hedging purposes. The positions expressed by the CSSF in the FAQs are subject to any future changes and clarifications at the European level. If the Issuer is found to be an AIF or an AIFM, or any agent acting in respect of the Compartment(s) is found to be acting as an AIFM with respect to the AIF, the AIFM would be subject to the AIFMD. Owing to the special purpose nature of the Issuer, it would be unlikely that the AIFM could comply fully with the requirements of the AIFMD. In such circumstances, the Issuer would likely need to adapt its structure or be required to appoint a depository bank and an AIFM. No assurance can be given as to how the European Securities and Markets Authority or national regulators might, in the future, interpret the AIFMD or whether any such interpretation might find the Issuer to be an AIF or an AIFM, or find any agent appointed in connection with the Notes or the Compartment(s) to be acting as an AIFM with respect to the Issuer.
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