Term sheet
To prospectus dated November 21, 2008,
prospectus supplement dated November 21, 2008 and
product supplement no. 212-A-I dated July 1, 2011
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Term
Sheet
Product Supplement No. 212-A-I
Registration Statement No. 333-155535
Dated August 1, 2011; Rule 433 |
Structured
Investments
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$
Return Notes Linked to the J.P. Morgan Strategic Volatility Index due November
30, 2012 |
General
- You may request that we repurchase your
notes on a daily basis in a minimum denomination equal to the Principal Amount,
subject to our acceptance of your request and your compliance with the procedural
requirements described below. While we intend to accept all requests for
early repurchase of notes, we are not obligated to accept any repurchase request.
We are not committed to purchasing any note at a particular time or price.
- Notwithstanding anything
to the contrary in the accompanying product supplement no. 212-A-I, the payment
at maturity or upon early repurchase will be reduced by a Deduction Amount
of $15 per $1,000 principal amount note. Accordingly, the descriptions of
the payment at maturity and payment upon early repurchase set forth below,
which reflect the Deduction Amount, supersede the descriptions of the payment
at maturity and payment upon early repurchase set forth in the accompanying
product supplement.
- The notes are designed for investors
who seek exposure to the J.P. Morgan Strategic Volatility Index, subject to
the Deduction Amount and, upon early repurchase, the Repurchase Fee Amount.
Investors should be willing to forgo interest payments and, if the level of
the Index (which reflects the deductions described below) decreases or does
not increase sufficiently to offset the Deduction Amount and, if applicable,
the Repurchase Fee Amount, be willing to lose some or all of their principal.
Any payment on the notes is subject to the credit risk of JPMorgan Chase
& Co.
- The level of the Index incorporates the
daily deduction of (a) an adjustment factor of 0.75% per annum (the index
fee) and (b) a daily rebalancing adjustment amount that is equal to the
sum of (1) a rebalancing adjustment factor of between 0.20% and 0.50% per
day (depending on the level of the VIX Index), applied to the aggregate notional
amount of each of the VIX futures contracts hypothetically traded that day
and (2) an additional amount equal to the rebalancing adjustment factor of
between 0.20% and 0.50% per day (depending on the level of the VIX Index)
applied to the amount of the change, if any, in the level of the exposure
to the synthetic short position. Unlike the index fee, the rebalancing adjustment
factor is not a per annum fee. The level of the Index and the value of
the notes will be adversely affected, perhaps significantly, if the performance
of the synthetic long position and the contingent synthetic short position
in the relevant VIX futures contracts, determined based on the official settlement
prices of the relevant VIX futures contracts, is not sufficient to offset
the daily deduction of the index fee and the daily rebalancing adjustment
amount. See Selected Risk Considerations The daily rebalancing adjustment
amount is likely to have a substantial adverse effect on the level of the
Index over time below.
- The daily rebalancing adjustment amount
is intended to approximate the slippage costs that would be experienced
by a professional investor seeking to replicate the hypothetical portfolio
contemplated by the Index at prices that approximate the official settlement
prices (which are not generally tradable) of the relevant VIX futures contracts.
Slippage costs are costs that arise from deviations between the actual official
settlement price of a VIX futures contract and the prices at which a hypothetical
investor would expect to be able to execute trades in the market when seeking
to match the expected official settlement price of a VIX futures contract.
- Senior unsecured obligations of JPMorgan
Chase & Co. maturing November 30, 2012
- The notes will be sold in minimum denominations
of $1,000 and integral multiples thereof.
- The notes are expected to price on or
about August 26, 2011 and are expected to settle on or about August 31, 2011.
- The notes are not
futures contracts and are not regulated under the Commodity Exchange Act of
1936, as amended (the Commodity Exchange Act). The notes are offered
pursuant to an exemption from regulation under the Commodity Exchange Act
that is available to securities that have one or more payments indexed to
the value, level or rate of one or more commodities, which is set out in section
2(f) of that statute. Accordingly, you are not afforded any protection provided
by the Commodity Exchange Act or any regulation promulgated by the Commodity
Futures Trading Commission.
- The notes will not be listed on any securities
exchange.
Key Terms
Index: |
The
J.P. Morgan Strategic Volatility Index (the Index) (Bloomberg ticker
symbol JPUSSTVL). For more information about the Index, please see
The J.P. Morgan Strategic Volatility Index in this term sheet. |
Principal
Amount: |
$1,000 |
Payment
at Maturity: |
For
each $1,000 principal amount note, unless earlier repurchased, you will
receive at maturity a cash payment equal to:
[$1,000 × (1 + Index Return)] Deduction
Amount
where the Index
Return is determined as of the Final Valuation Date. If the amount calculated
above is less than zero, the payment at maturity will be $0.
The return on
your initial investment at maturity will be reduced by the Deduction Amount
and will also reflect the deduction of the index fee and the daily rebalancing
adjustment amount from the level of the Index. Because the Index closing
level reflects the daily deduction of the index fee and the daily rebalancing
adjustment amount, the level of the Index will decrease if the performance
of the VIX futures contracts included in the Index, based on their official
settlement prices, is not sufficient to offset the deduction of the index
fee and the daily rebalancing adjustment amount. You will lose some or
all of your initial investment at maturity if the level of the Index decreases
over the term of the notes or does not increase sufficiently to offset
the Deduction Amount. |
Deduction
Amount: |
$15
per $1,000 principal amount note, which is equal to $1,000 × 1.50% |
Index
Return: |
On
any Valuation Date, the Index Return is equal to:
Index
closing level on such Valuation Date Initial Index Level
Initial Index Level |
Initial
Index Level: |
The
Index closing level on the Inception Date |
Inception
Date: |
On
or about August 26, 2011 |
Valuation
Date(s): |
Each
business day from and including the Inception Date to and including the
Final Valuation Date |
Final
Valuation Date: |
November
27, 2012 |
Maturity
Date: |
November
30, 2012 |
Additional
Key Terms: |
See
Additional Key Terms below. |
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Subject to postponement
in the event of certain market disruption events and as described under
Description of Notes Postponement of a Determination Date and Description
of Notes Payment at Maturity in the accompanying product supplement no.
212-A-I |
Investing in the Return Notes
involves a number of risks. See Risk Factors beginning on page PS-7 of the
accompanying product supplement no. 212-A-I and Selected Risk Considerations
beginning on page TS-4 of this term sheet.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of the notes
or passed upon the accuracy or the adequacy of this term sheet or the accompanying
product supplement, prospectus supplement and prospectus. Any representation
to the contrary is a criminal offense.
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Price
to Public (1) |
Fees
and Commissions (2) |
Proceeds
to Us |
|
Per
note |
$ |
$ |
$ |
|
Total |
$ |
$ |
$ |
|
(1) |
The price to the public includes the estimated
cost of hedging our obligations under the notes through one or more of
our affiliates, which includes the profit our affiliates expect to realize
in consideration for assuming the risks inherent in providing and managing
such hedge and for maintaining the Index during the term of the notes
through, among other things, the daily rebalancing adjustment amount.
For additional related information, please see Use of Proceeds and Hedging
on page PS-26 of the accompanying product supplement no. 212-A-I. |
(2) |
If the notes priced today, J.P. Morgan Securities
LLC, which we refer to as JPMS, acting as agent for JPMorgan Chase &
Co., would receive a commission of approximately $20.00 per $1,000 principal
amount note, all of which will be used to allow selling concessions to
an unaffiliated dealer. The Deduction Amount of $15.00 per $1,000 principal
amount note will be used by us to recover a portion of this JPMS commission.
In no event will this JPMS commission, all of which will be used to allow
concessions to an unaffiliated dealer, exceed $25.00 per $1,000 principal
amount note.
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JPMS, as an agent, will also receive the aggregate
profits generated from the deduction of the index fee of 0.75% per annum
to cover ongoing payments related to the distribution of the notes and
as a structuring fee for developing the notes. Payments constituting
underwriting compensation will not exceed a total of 8% of offering proceeds.
See Selected Purchase Considerations Return linked to the J.P. Morgan
Strategic Volatility Index in this term sheet and Plan of Distribution
(Conflicts of Interest) beginning on page PS-63 of the accompanying product
supplement no. 212-A-I. |
The notes are not bank
deposits and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency, nor are they obligations of, or
guaranteed by, a bank.
August 1, 2011
Additional
Terms Specific to the Notes
JPMorgan
Chase & Co. has filed a registration statement (including a prospectus)
with the Securities and Exchange Commission, or SEC, for the offering to which
this term sheet relates. Before you invest, you should read the prospectus
in that registration statement and the other documents relating to this offering that JPMorgan Chase & Co. has filed with the
SEC for more complete information about JPMorgan Chase & Co. and this offering.
You may get these documents without cost by visiting EDGAR on the SEC website
at www.sec.gov. Alternatively, JPMorgan Chase & Co., any agent or any dealer
participating in this offering will arrange to send you the prospectus, each
prospectus supplement, product supplement no. 212-A-I and this term sheet if
you so request by calling toll-free 866-535-9248.
You may revoke your offer
to purchase the notes at any time prior to the time at which we accept such
offer by notifying the applicable agent. We reserve the right to change the
terms of, or reject any offer to purchase the notes prior to their issuance.
In the event of any changes to the terms of the notes, we will notify you and
you will be asked to accept such changes in connection with your purchase.
You may also choose to reject such changes in which case we may reject your
offer to purchase.
You should read this term sheet
together with the prospectus dated November 21, 2008, as supplemented by the
prospectus supplement dated November 21, 2008 relating to our Series E medium-term
notes of which these notes are a part, and the more detailed information contained
in product supplement no. 212-A-I dated July 1, 2011. This term sheet, together
with the documents listed below, contains the terms of the notes and supersedes
all other prior or contemporaneous oral statements as well as any other written
materials including preliminary or indicative pricing terms, correspondence,
trade ideas, structures for implementation, sample structures, fact sheets,
brochures or other educational materials of ours. You should carefully
consider, among other things, the matters set forth in Risk Factors in the
accompanying product supplement no. 212-A-I, as the notes involve risks not
associated with conventional debt securities. We urge you to consult your investment,
legal, tax, accounting and other advisers before you invest in the notes.
You may access these documents
on the SEC website at www.sec.gov as follows (or if
such address has changed, by reviewing our filings for the relevant date on
the SEC website):
Our Central Index Key, or CIK,
on the SEC website is 19617. As used in this term sheet, the Company, we,
us and our refer to JPMorgan Chase & Co.
Additional
Key Terms
Payment
upon Early Repurchase: |
Subject
to our acceptance of your request and your compliance with the procedures
described under Description of Notes Early Repurchase at the Option
of the Holders and the potential postponements and adjustments as described
under Description of Notes Postponement of a Determination Date in
the accompanying product supplement no. 212-A-I, you may request that
we repurchase your notes on any Repurchase Date during the term of the
notes.
While we intend
to accept all requests for early repurchase of notes, notwithstanding
anything to the contrary in the accompanying product supplement no. 212-A-I,
we are not obligated to accept any repurchase request. We are not committed
to purchasing any note at a particular time or price. See Selected Risk
Considerations Lack of Liquidity in this term sheet for more information.
Upon early repurchase,
you will receive for each $1,000 principal amount note a cash payment
on the relevant Repurchase Date calculated as follows:
[$1,000
× (1 + Index Return)] Deduction Amount Repurchase Fee Amount
where the Index
Return is determined as of the Valuation Date corresponding to such Repurchase
Date. If the amount calculated above is less than zero, the payment upon
early repurchase will be $0.
The return on
your initial investment upon early repurchase will be reduced by the Deduction
Amount and the Repurchase Fee Amount and will also reflect the deduction
of the index fee and the daily rebalancing adjustment amount from the
level of the Index. Because the Index closing level reflects the daily
deduction of the index fee and the daily rebalancing adjustment amount,
the level of the Index will decrease if the performance of the VIX futures
contracts included in the Index, based on their official settlement prices,
is not sufficient to offset the deduction of the index fee and the daily
rebalancing adjustment amount. You will lose some or all of your initial
investment upon early repurchase if the level of the Index decreases over
the term of the notes or does not increase sufficiently to offset the
Deduction Amount and the Repurchase Fee Amount. |
Early
Repurchase Mechanics: |
In
order to request that we repurchase your notes on any Repurchase Date,
you must deliver a Repurchase Notice to us via email at dln_repurchase@jpmchase.com
by no later than 4:00 p.m., New York City time, on the business day prior
to the relevant Valuation Date and follow the procedures described under
Description of Notes Early Repurchase at the Option of the Holders
in the accompanying product supplement no. 212-A-I. If you fail to comply
with these procedures or if we fail to accept your request for repurchase,
your notice will be deemed ineffective. Our acceptance of your request
for repurchase will be evidenced by our or our affiliates acknowledgement
of receipt of the Repurchase Notice on the same business day referred
to in Description of Notes Early Repurchase at the Option of the Holders
Repurchase Requirements in the accompanying product supplement no.
212-A-I. |
Repurchase
Fee Amount: |
$5.00
per $1,000 principal amount note, which is equal to $1,000 × the Repurchase
Fee |
Repurchase
Fee: |
0.50% |
Repurchase
Date: |
The
third business day following each Valuation Date |
Repurchase
Notice: |
The
form of Repurchase Notice attached hereto as Annex A |
Note
Calculation Agent: |
J.P.
Morgan Securities LLC (JPMS), an affiliate of ours |
Index
Calculation Agent |
J.P.
Morgan Securities Ltd. (JPMSL), an affiliate of ours |
CUSIP: |
48125XE93 |
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JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-1 |
The J.P.
Morgan Strategic Volatility Index
The J.P. Morgan Strategic Volatility
Index (the Index) is a synthetic, rules-based proprietary index developed
and maintained by JPMSL. The level of the Index is published each trading day
under the Bloomberg ticker symbol JPUSSTVL. The Index was created on July
30, 2010, and therefore has limited historical performance.
The Index is a synthetic, dynamic
strategy that aims to replicate the returns from combining a long position and
a contingent short position in futures contracts (each, a VIX futures contract
and together, VIX futures contracts) on the CBOE Volatility Index®
(the VIX Index), where the synthetic long position and, when activated, the
synthetic short position, after being established initially in the second-month
VIX futures contract or the first-month VIX futures contract, respectively,
are rolled throughout each month as described below. The VIX Index is a benchmark
index designed to measure the market price of volatility in large cap U.S. stocks
over 30 days in the future. The calculation of the spot level of the VIX Index
is based on prices of put and call options on the S&P 500® Index.
Futures on the VIX Index allow investors the ability to invest in forward volatility
based on their view of the future direction of movement of the VIX Index.
The Index is a rolling index,
which rolls throughout each month. Unlike equities, which typically entitle
the holder to a continuing stake in a corporation, futures contracts normally
specify a certain date for the delivery of the underlying asset or financial
instrument or, in the case of futures contracts relating to indices such as
the VIX Index, a certain date for payment in cash of an amount determined by
the level of the relevant index. As described in more detail below, the synthetic
long position is maintained by synthetically selling VIX futures contracts on
a daily basis that specify cash settlement on a nearby date and synthetically
buying futures contracts on the VIX Index on a daily basis that specify cash
settlement on a later date. On the other hand, the synthetic short position,
when activated, is maintained by synthetically buying VIX futures contracts
on a daily basis that specify cash settlement on a nearby date and synthetically
selling VIX futures contracts on a daily basis that specify cash settlement
on a later date. This process is known as rolling a futures position.
The synthetic long position
rolls throughout each month from the second-month VIX futures contract into
the third-month VIX futures contract. When activated, the synthetic short position
rolls throughout each month from the first-month VIX futures contract into the
second-month VIX futures contract. One of the effects of daily rolling is to
maintain a specified weighted average maturity for the underlying VIX futures
contracts. The weighted average maturity for the VIX futures contracts underlying
the synthetic long position is approximately two months on any day and for the
VIX futures contracts underlying the synthetic short position is approximately
one month on any day.
Exposure to the synthetic short
position will vary between 0% and 100%. The exposure to the synthetic short
position will be increased by 20% on any Index Business Day (as defined in the
accompanying product supplement) if the level of the VIX Index for each of the
three immediately preceding Index Business Days was less than the rolling, weighted
average of the first-month and second-month VIX futures contracts included (or
that would have been included) in the synthetic short position, as long as the
exposure to the synthetic short position is less than 100%. Conversely, the
exposure to the synthetic short position will be decreased by 20% on any Index
Business Day if the level of the VIX Index for each of the three immediately
preceding Index Business Days was greater than or equal to the rolling, weighted
average of the first-month and second-month VIX futures contracts included in
the synthetic short position, as long as the exposure to the synthetic short
position is greater than 0%. On any Index Business Day for which these conditions
are not met, the synthetic short position will not be increased or decreased.
Because, at a minimum, eight
Index Business Days will elapse from a change in the relative level of the VIX
Index and the weighted average price of the relevant VIX futures contracts before
the synthetic short position can be fully activated or deactivated, the Index
is subject to a time lag. See Selected Risk Considerations Due to the time
lag inherent in the Index, the exposure to the synthetic short position may
not be adjusted quickly enough in response to a change in market conditions
for the investment strategy on which the Index is based to be successful below.
The Index aims to provide a
synthetic long exposure to VIX futures contracts with a weighted average maturity
of approximately two months. A synthetic long position may not generate positive
returns when the market for VIX futures contracts is in contango, meaning
that the price of a VIX futures contract with a later expiration is higher than
the price of a VIX futures contract with an earlier expiration. Excluding other
considerations, if the market for the relevant VIX futures contracts is in contango,
the synthetic purchase of the third-month VIX futures contract in connection
with the roll of the synthetic long position would take place at a price that
is higher than the price at which the synthetic sale of the second-month VIX
futures contract would take place, thereby creating a negative roll yield.
To address the potential for
a negative roll yield when VIX futures contracts are in contango, the Index
seeks to progressively activate a synthetic short position in VIX futures contracts
with a weighted average maturity of approximately one month when the market
for the relevant VIX futures contracts is in contango. Excluding other considerations,
if the market for the relevant VIX futures contracts is in contango, the synthetic
sale of the second-month VIX futures contract in connection with the roll of
the synthetic short position would take place at a price that is higher than
the price at which the synthetic purchase of the first-month VIX futures contract
would take place, thereby creating a positive roll yield, which is intended
to offset the negative roll yield generated by the synthetic long position.
If, however, the VIX futures contracts are in backwardation, meaning that
the price of a VIX futures contract with a later expiration is lower than the
price of a VIX futures contract with an earlier expiration, the roll of the
synthetic short position would create a negative roll yield.
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JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-2 |
No assurance can be given that
the Indexs strategy will be successful or that the Index will generate positive
returns. See Selected Risk Considerations below.
On each Index Business Day,
the calculation of the Index reflects the deduction of (a) an adjustment factor
of 0.75% per annum and (b) a daily rebalancing adjustment amount that is equal
to the sum of (1) a rebalancing adjustment factor of between 0.20% and 0.50%
per day (depending on the level of the VIX Index), applied to the aggregate
notional amount of each of the VIX futures contracts hypothetically traded that
day and (2) an additional amount equal to the rebalancing adjustment factor
of between 0.20% and 0.50% per day (depending on the level of the VIX Index)
applied to the amount of the change, if any, in the level of the exposure to
the synthetic short position. Unlike the adjustment factor, the rebalancing
adjustment factor is not a per annum fee. The daily rebalancing adjustment
amount is intended to approximate the slippage costs that would be experienced
by a professional investor seeking to replicate the hypothetical portfolio contemplated
by the Index at prices that approximate the official settlement prices (which
are not generally tradable) of the relevant VIX futures contracts. Slippage
costs are costs that arise from deviations between the actual official settlement
price of a VIX futures contract and the prices at which a hypothetical investor
would expect to be able to execute trades in the market when seeking to match
the expected official settlement price of a VIX futures contract.
For more information about the
Index, VIX futures contracts and the VIX Index, please see The J.P. Morgan
Strategic Volatility Index Background on Futures Contracts on the CBOE Volatility
Index® and Background on the CBOE Volatility Index®,
respectively, in the accompanying product supplement.
Selected
Purchase Considerations
- UNCAPPED APPRECIATION POTENTIAL
The
notes provide the opportunity to obtain an uncapped return at maturity or
upon early repurchase linked to the Index (which will reflect the daily deduction
of the index fee and
the daily rebalancing adjustment amount), which will be reduced by the Deduction
Amount and, in the case of an
early repurchase, the Repurchase Fee Amount. The notes are not subject to
a predetermined maximum return and, accordingly, any return will be based
on the performance of the Index (which will reflect the daily deduction of
the index fee and
the daily rebalancing adjustment amount), the Deduction Amount and, if applicable, the Repurchase
Fee Amount. Because the notes are our senior unsecured obligations, payment
of any amount at maturity is subject to our ability to pay our obligations
as they become due.
- RETURN LINKED TO THE
J.P. MORGAN STRATEGIC VOLATILITY INDEX The return on the notes
is linked to the J.P. Morgan Strategic Volatility Index, which seeks to replicate
the returns from combining a long position and a contingent short position
in futures contracts on the VIX Index. The level of the Index incorporates
the daily deduction of (a) an adjustment factor of 0.75% per annum (the index
fee) and (b) a daily rebalancing adjustment amount that
is equal to the sum of (1) a rebalancing adjustment factor of between 0.20%
and 0.50% per day (depending on the level of the VIX Index), applied to the
aggregate notional amount of each of the VIX futures contracts hypothetically
traded that day and (2) an additional amount equal to the rebalancing adjustment
factor of between 0.20% and 0.50% per day (depending on the level of the VIX
Index) applied to the amount of the change, if any, in the level of the exposure
to the synthetic short position. Unlike the adjustment factor, the rebalancing
adjustment factor is not a per annum fee. See The J.P. Morgan Strategic
Volatility Index above and in the accompanying product supplement no.
212-A-I.
- DAILY REPURCHASES
IN MINIMUM DENOMINATIONS EQUAL TO THE PRINCIPAL AMOUNT, SUBJECT TO REPURCHASE
FEE Subject to our acceptance of your request and your compliance
with the procedures and the potential postponements as described in the accompanying
product supplement no. 212-A-I, you may submit daily a request to have us
repurchase your notes on any Repurchase Date during the term of the notes.
If you request that we repurchase your notes, subject to our acceptance, the
notification requirements and the other terms and conditions set forth in
the accompanying product supplement no. 212-A-I and this term sheet, for each
note you will receive a cash payment on the relevant Repurchase Date calculated
as described under Additional Key Terms Payment upon Early Repurchase
above. You will be charged a Repurchase Fee Amount of $5.00 for each $1,000
principal amount note you request that we repurchase, in addition to the Deduction
Amount of $15.00 per $1,000 principal amount note. You may request that we
repurchase a minimum of $1,000 in principal amount of notes. While we intend
to accept all requests for early repurchase of notes, we are not obligated
to accept any repurchase request. We are not committed to purchasing any note
at a particular time or price.
- CAPITAL GAINS TAX TREATMENT You should review carefully
the section entitled Certain U.S. Federal Income Tax Consequences
in the accompanying product supplement no. 212-A-I. Subject to the limitations
described therein, and based on certain factual representations received from
us, in the opinion of our special tax counsel, Davis Polk & Wardwell LLP,
it is reasonable to treat the notes as open transactions for U.S.
federal income tax purposes. Assuming this characterization is respected,
the gain or loss on your notes should be treated as long-term capital gain
or loss if you hold your notes for more than a year, whether or not you are
an initial purchaser of notes at the issue price. However, the Internal Revenue
Service (the IRS) or a court may not respect this characterization
or treatment of the notes, in which case the timing and character of any income
or loss on the notes could be significantly and adversely affected. In addition,
in 2007 Treasury and the IRS released a notice requesting comments on the
U.S. federal income tax treatment of prepaid forward contracts
and similar
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-3 |
instruments, which might
include the notes. The notice focuses in particular on whether to require
holders of these instruments to accrue income over the term of their investment.
It also asks for comments on a number of related topics, including the character
of income or loss with respect to these instruments; the relevance of factors
such as the nature of the underlying property to which the instruments are
linked; the degree, if any, to which income (including any mandated accruals)
realized by Non-U.S. Holders should be subject to withholding tax; and whether
these instruments are or should be subject to the constructive ownership
regime, which very generally can operate to recharacterize certain long-term
capital gain as ordinary income and impose an interest charge. While the
notice requests comments on appropriate transition rules and effective dates,
any Treasury regulations or other guidance promulgated after consideration
of these issues could materially and adversely affect the tax consequences
of an investment in the notes, possibly with retroactive effect. Both U.S.
and Non-U.S. Holders should consult their tax advisers regarding the U.S.
federal income tax consequences of an investment in the notes, including possible
alternative treatments and the issues presented by this notice. Non-U.S.
Holders should also note that they may be withheld upon at a rate of up to
30% unless they have submitted a properly completed IRS Form W-8BEN or otherwise
satisfied the applicable documentation requirements.
The discussion in the preceding
paragraph, when read in combination with the section entitled Certain U.S.
Federal Income Tax Consequences in the accompanying
product supplement, constitutes the full opinion of Davis Polk &
Wardwell LLP regarding the material U.S. federal income tax consequences of owning and disposing of notes.
Selected Risk Considerations
Your investment in the notes
will involve significant risks. The notes do not guarantee any return of principal
at, or prior to, the Maturity Date or any Repurchase Date. Investing in the
notes is not equivalent to investing directly in the Index or any of its component
futures contracts. In addition, your investment in the notes entails other
risks not associated with an investment in conventional debt securities. These
risks are explained in more detail in the Risk Factors section of the accompanying
product supplement no. 212-A-I dated July 1, 2011. You should carefully
consider the following discussion of risks before you decide that an investment
in the notes is suitable for you.
- YOUR INVESTMENT IN
THE NOTES MAY RESULT IN A LOSS The notes may not return any of your
investment. The return on your initial investment will be reduced by the
Deduction Amount and, if applicable, the Repurchase Fee Amount and will also
reflect the daily deduction of the index fee and the daily rebalancing adjustment
amount from the level of the Index. Please see You May Receive Less Than
Your Initial Investment Due to the Deduction Amount, the Repurchase Fee Amount,
the Index Fee and the Daily Rebalancing Adjustment Amount below for more
information. You will lose some or all of your initial investment at maturity
or upon early repurchase if the level of the Index decreases over the term
of the notes or does not increase sufficiently to offset the Deduction Amount
and, if applicable, the Repurchase Fee Amount.
- CREDIT RISK OF JPMORGAN
CHASE & CO. The notes are subject to the credit risk of JPMorgan
Chase & Co., and our credit ratings and credit spreads may adversely affect
the market value of the notes. Investors are dependent on JPMorgan Chase
& Co.s ability to pay all amounts due on the notes at maturity or upon
early repurchase, and therefore investors are subject to our credit risk and
to changes in the markets view of our creditworthiness. Any decline in our
credit ratings or increase in the credit spreads charged by the market for
taking our credit risk is likely to affect adversely the value of the notes.
- YOU MAY RECEIVE LESS
THAN YOUR INITIAL INVESTMENT DUE TO THE DEDUCTION AMOUNT, THE REPURCHASE FEE
AMOUNT, THE INDEX FEE AND THE DAILY REBALANCING ADJUSTMENT AMOUNT Because
the Index closing level reflects the daily deduction of the index fee and
the daily rebalancing adjustment amount, the level of the Index will decrease
if the performance of the VIX futures contracts included in the Index, based
on their official settlement prices, is not sufficient to offset the deduction
of the index fee and the daily rebalancing adjustment amount. Please see
The Daily Rebalancing Adjustment Amount Is Likely to Have a Substantial
Adverse Effect on the Level of the Index Over Time below for more information.
Moreover, at maturity or upon early repurchase your payment on the notes will
be reduced by a Deduction Amount of $15.00 per $1,000 principal amount note
and, if you request that we repurchase your notes prior to maturity, you will
be charged a Repurchase Fee Amount of $5.00 for each $1,000 principal amount
note that you request that we repurchase. If the level of the Index decreases
(due to the index fee, daily rebalancing adjustment amount or otherwise) or
does not increase sufficiently to offset the Deduction Amount and, if applicable,
the Repurchase Fee Amount, you will lose some or all of your initial investment
at maturity or upon early repurchase.
- THE DAILY REBALANCING
ADJUSTMENT AMOUNT IS LIKELY TO HAVE A SUBSTANTIAL ADVERSE EFFECT ON THE LEVEL
OF THE INDEX OVER TIME Unlike the index fee, the rebalancing adjustment
factor, which is used to calculate the daily rebalancing adjustment amount,
is not a per annum fee. The daily rebalancing adjustment amount is equal
to the sum of (1) a rebalancing adjustment factor of between 0.20% and 0.50%
per day (depending on the level of the VIX Index), applied to the aggregate
notional amount of each of the VIX futures contracts hypothetically traded
that day and (2) an additional amount equal to the rebalancing adjustment
factor of between 0.20% and 0.50% per day (depending on the level of the VIX
Index) applied to the amount of the change, if any, in the level of the exposure
to the synthetic short position.
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The daily rebalancing adjustment amount, which
is deducted from the level of the Index each day, is intended to approximate
the slippage costs that would be experienced by a professional investor seeking
to replicate the hypothetical portfolio contemplated by the Index at prices
that approximate the official settlement prices (which are not generally tradable)
of the relevant VIX futures contracts. Slippage costs are costs that arise
from deviations between the actual official settlement price of a VIX futures
contract and the prices at which a hypothetical investor would expect to be
able to execute trades in the market when seeking to match the expected official
settlement price of a VIX futures contract. However, the actual slippage
costs that would be incurred if a professional investor were to seek to replicate
such a portfolio may be higher or lower than the daily rebalancing adjustment
amount used in the calculation of the Index.
Assuming that (a) the level of the VIX Index
is equal to or less than 35 (which corresponds to the lowest rate of 0.20%
per day for the rebalancing adjustment factor) and (b) the synthetic short
position is fully activated, the performance of the Index would be lower by
0.80% over a one-month roll period (or lower by 9.60% over the course of a
year) as compared to the performance of a hypothetical alternative index based
solely on the official settlement prices of the VIX futures contracts and
the deduction of the index fee but without accounting for a deduction of a
daily rebalancing adjustment amount.
When the level of the VIX Index is greater than
35, the rebalancing adjustment factor will be greater than 0.20% and can be
up to 0.50% per day. In this case, the impact on the Index performance due
to the daily rebalancing adjustment amount will be substantially greater.
For example, if the level of the VIX Index is greater than 70 (which corresponds
to the highest rate of 0.50% per day for the rebalancing adjustment factor)
and the synthetic short position is fully activated, the performance of the
Index would be lower by 2.0% over a one-month roll period as compared to the
performance of a hypothetical alternative index based solely on the official
settlement prices of the VIX futures contracts and the deduction of the index
fee, without accounting for a deduction of a daily rebalancing adjustment
amount. However, the VIX Index historically has not remained at such elevated
levels for more than a few days, weeks or months at a time. Nevertheless,
we cannot provide any assurance that the VIX Index will consistently remain
at or below 35 (which corresponds to the lowest rate of 0.20% per day for
the rebalancing adjustment factor) over the term of the notes.
In addition, on days on which the amount of
the exposure to the synthetic short position is adjusted (which adjustments
occur in increments of 20% per day), in determining the daily rebalancing
adjustment amount, the rebalancing adjustment factor of between 0.20% and
0.50% per day is effectively applied to an amount of up to twice the change
in the exposure to the synthetic short position. Therefore, a change in the
exposure to the synthetic short position will also result in a substantial
increase in the daily rebalancing adjustment amount.
While the amount of the daily rebalancing adjustment
amount cannot be predicted with certainty, the daily rebalancing adjustment
amount is likely to have a substantial adverse effect on the level of the
Index over time. For more information about the daily rebalancing adjustment
amount, see The J.P. Morgan Strategic Volatility Index II. Calculation
and Publication of Index Levels B. Calculation of Index Levels iii. The
Rebalancing Adjustment Factor in the accompanying product supplement.
- POTENTIAL CONFLICTS
We and our affiliates play a variety of roles in connection with the issuance
of the notes, including acting as Note Calculation Agent, the Index Calculation
Agent and the sponsor of the Index, and an agent for the offering of the notes
and hedging our obligations under the notes. In performing these duties,
the economic interests of the Note Calculation Agent, the Index Calculation
Agent, the sponsor of the Index, an agent for the offering of the notes and
other affiliates of ours are potentially adverse to your interests as an investor
in the notes. It is possible that such hedging or other trading activities
of ours could result in substantial returns for us or our affiliates while
the value of the notes declines. For example, in connection with the maintenance
of the Index, JPMS may receive a portion of the aggregate profits, if any,
that may be generated from time to time related to some portion of the deduction
of the daily rebalancing adjustment amount from the level of the Index.
- OUR AFFILIATE, J.P.
MORGAN SECURITIES LTD., OR JPMSL, IS THE INDEX CALCULATION AGENT AND THE INDEX
SPONSOR AND MAY ADJUST THE INDEX IN A WAY THAT AFFECTS ITS LEVEL JPMSL,
one of our affiliates, acts as the Index Calculation Agent and is responsible
for calculating the Index, and also acts as the sponsor of the Index and is
responsible for maintaining the Index and developing the guidelines and policies
governing their composition and calculation. The rules governing the Index
may be amended at any time by JPMSL, in its sole discretion, and the rules
also permit the use of discretion by JPMSL in specific instances, such as
the right to substitute or exclude a futures contract included in the Index
due to a change in law or otherwise and to calculate substitute closing levels
of the Index. Unlike other indices, the maintenance of the Index is not governed
by an independent committee. Although judgments, policies and determinations
concerning the Index are made by JPMSL, JPMorgan Chase & Co., as the parent
company of JPMSL, ultimately controls JPMSL.
In addition, the policies and judgments for
which JPMSL is responsible could have an impact, positive or negative, on
the level of the Index and the value of your notes. JPMSL is under no obligation
to consider your interests as an investor in the notes. Furthermore, the
inclusion of the futures contracts in the Index is not an investment recommendation
by us or JPMSL of any of the futures contracts underlying the Index.
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TS-5 |
- JPMS AND ITS AFFILIATES
MAY HAVE PUBLISHED RESEARCH, EXPRESSED OPINIONS OR PROVIDED RECOMMENDATIONS
THAT ARE INCONSISTENT WITH INVESTING IN OR HOLDING THE NOTES. ANY SUCH RESEARCH,
OPINIONS OR RECOMMENDATIONS COULD AFFECT THE MARKET VALUE OF THE NOTES
JPMS and its affiliates publish research from time to time on equity markets
and other matters that may influence the value of the notes, or express opinions
or provide recommendations that are inconsistent with purchasing or holding
the notes. JPMS and its affiliates may have published research or other opinions
that call into question the investment view implicit in an investment in the
notes. Any research, opinions or recommendations expressed by JPMS or its
affiliates may not be consistent with each other and may be modified from
time to time without notice. Investors should make their own independent
investigation of the merits of investing in the notes, the Index and the VIX
futures contracts underlying the Index.
- CERTAIN BUILT-IN COSTS
ARE LIKELY TO AFFECT ADVERSELY THE VALUE OF THE NOTES PRIOR TO MATURITY
While the payment, if any, at maturity or upon early repurchase described
in this term sheet is based on the full principal amount of your notes, the
original issue price of the notes includes the agents commission and the
estimated cost of hedging our obligations under the notes. As a result, and
as a general matter, the price, if any, at which JPMS will be willing to purchase
notes from you in secondary market transactions, if at all, will likely be
lower than the original issue price and any sale prior to the maturity date
could result in a substantial loss to you. This secondary market price will
also be affected by a number of factors aside from the agents commission
and hedging costs, including those referred to under Many Economic and Market
Factors Will Affect the Value of the Notes below.
- NOTES THAT PROVIDE
EXPOSURE TO EQUITY VOLATILITY, WHICH ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS,
ARE NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD ACTIVELY MANAGE YOUR INVESTMENT
IN THE NOTES Notes that provide exposure to equity volatility are not
suitable for all investors. The notes reflect the performance of the Index,
which is dependent on the price of the VIX futures contracts included in the
Index. VIX futures contracts allow investors the ability to invest in forward
equity volatility based on their view of the future direction of movement
of the VIX Index, which is a benchmark index designed to measure the market
price of volatility in large cap U.S. stocks, and is calculated based on the
prices of certain put and call options on the S&P 500® Index.
As a consequence, investors in the notes should
understand that their investment is exposed to the performance of the VIX
futures contracts, which can be volatile and move dramatically over short
periods of time. Because of the large and sudden price movements associated
with VIX futures contracts, the historical and hypothetical back-tested performance
of the Index has been highly volatile. It is likely that the Index will continue
to be highly volatile in the future, with the potential for significant fluctuations
in the daily performance of the Index. There can be no assurance that the
relevant synthetic exposures will not be subject to substantial negative returns.
Positive returns on the Index may therefore be reduced or eliminated entirely
due to movements in any of these market parameters. Accordingly, the notes
should be purchased only by sophisticated investors who understand risks associated
with investments linked to equity volatility and who intend to monitor and
manage their investments actively. You should consider your investment horizon
and objectives, financial resources and risk tolerance, as well as any potential
trading costs, when evaluating an investment in the notes. Investors should
regularly monitor their investment in the notes to ensure that it remains
consistent with their investment objectives.
- WHEN THE SYNTHETIC
SHORT POSITION IS ACTIVATED, YOUR RETURN ON THE NOTES IS DEPENDENT ON THE
NET PERFORMANCE, NOT THE ABSOLUTE PERFORMANCE, OF THE SYNTHETIC POSITIONS
When the synthetic short position is activated, your return on the notes
is dependent on the net performance of the synthetic long position minus the
synthetic short position (taking into account the exposure to the synthetic
short position). Under these circumstances, the absolute performance of the
synthetic long position and the synthetic short position is not relevant to
the return on your notes. The level of the Index and the value of the notes
may decline, perhaps significantly, even if the synthetic long position generates
a positive return.
- THERE IS UNLIMITED
LOSS EXPOSURE TO THE SYNTHETIC SHORT POSITION, WHEN ACTIVATED, AND SUCH EXPOSURE
MAY RESULT IN A SIGNIFICANT DROP IN THE LEVEL OF THE INDEX The Index
employs a technique generally known as a long-short strategy when the synthetic
short position is activated. This means the Index reflects the net return
of a synthetic long position and a synthetic short position and will suffer
losses when the value of the VIX futures contracts underlying the synthetic
short position increases. In a long-short strategy, the maximum increase
in the value of the synthetic long position is unlimited, while the maximum
decrease in the value of the synthetic long position is limited to a loss
of the entire value of the VIX futures contracts underlying the synthetic
long position. On the other hand, the maximum increase of the value of the
synthetic short position is limited to a loss of the entire value of VIX futures
contracts underlying the synthetic short position, while the maximum decrease
in value of the synthetic short position is unlimited. Because there is no
limit to possible increases in the value of the VIX futures contracts underlying
the synthetic short position, the potential losses as a result of short exposure
are unlimited; however, in no event will you lose more than your entire investment
in the notes.
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Notes Linked to the J.P. Morgan Strategic Volatility Index |
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- THE INDEX MAY NOT
BE SUCCESSFUL AND MAY NOT OUTPERFORM ANY ALTERNATIVE STRATEGY THAT MIGHT BE
EMPLOYED WITH RESPECT TO THE VIX FUTURES CONTRACTS UNDERLYING THE INDEX
The Index follows a proprietary strategy that operates on the basis on pre-determined
rules. No assurance can be given that the investment strategy on which the
Index is based will be successful or that the Index will outperform any alternative
strategy that might be employed with respect to the VIX futures contracts
underlying the Index.
- CHANGING PRICES OF
THE VIX FUTURES CONTRACTS INCLUDED IN THE INDEX MAY RESULT IN A REDUCED AMOUNT
PAYABLE AT MATURITY OR UPON EARLY REPURCHASE The Index is a rolling
index, which rolls throughout each month. Unlike equities, which typically
entitle the holder to a continuing stake in a corporation, futures contracts
normally specify a certain date for the delivery of the underlying asset or
financial instrument or, in the case of futures contracts relating to indices
such as the VIX Index, a certain date for payment in cash of an amount determined
by the level of the relevant index. As the VIX futures contracts included
in the Index approach expiration, they are replaced by similar contracts that
have a later expiration. Thus, for example, a VIX futures contract purchased
and held in August may specify an October expiration. As time passes, the
contract expiring in October may be gradually replaced by a contract for delivery
in November, through incremental synthetic sales of a portion of the position
in the October contract, accompanied by incremental synthetic purchases of
the November contract. This process is referred to as rolling.
The synthetic long position is not likely to
generate positive returns when the market for VIX futures contracts is in
contango, meaning that the price of a VIX futures contract with a later
expiration is higher than the price of a VIX futures contract with an earlier
expiration. Excluding other considerations, if the market for the relevant
VIX futures contracts is in contango, the purchase of the third-month VIX
futures contract in connection with the roll of the synthetic long position
would take place at a price that is higher than the price of the sale of the
second-month VIX futures contract, thereby creating a negative roll yield.
Contango in VIX futures contracts is typical in a low-volatility market environment.
To address this potential weakness, the Index
seeks to progressively activate a synthetic short position in short-dated
VIX futures contracts when the relevant VIX futures contracts are in contango.
Excluding other considerations, if the market for the relevant VIX futures
contracts is in contango, the sale of the second-month VIX futures contract
in connection with the roll of the synthetic short position would take place
at a price that is higher than the price of the purchase of the first-month
VIX futures contract, thereby creating a positive roll yield, which is intended
to offset or possibly exceed the negative roll yield generated by the synthetic
long position. If, however, the VIX futures contracts are in backwardation,
meaning that the price of a VIX futures contract with a later expiration is
lower than the price of a VIX futures contract with an earlier expiration,
the roll of the synthetic short position would create a negative roll yield.
Backwardation in VIX futures contracts is typical in a high-volatility market
environment. When the relevant VIX futures contracts are in backwardation,
the Index seeks to progressively deactivate the synthetic short position.
While the Index strategy is intended to cause
the synthetic short position to be fully activated during periods when the
market for VIX futures contracts is in contango so that positive roll yields
from the synthetic short exposure will offset or possibly exceed negative
roll yields from the synthetic long position, no assurance can be given that
the investment strategy on which the Index is based will be successful. In
addition, while the Index strategy is intended to cause the short position
to be fully deactivated during periods when the market for the relevant VIX
futures contracts are in backwardation so that negative roll yields for the
synthetic short position would be avoided, no assurance can be given that
negative roll yields will be avoided. See Due to the time lag inherent
in the Index, the exposure to the synthetic short position may not be adjusted
quickly enough in response to a change in market conditions for the investment
strategy on which the Index is based to be successful below for more information.
- THE LEVEL OF THE INDEX,
AND THEREFORE THE VALUE OF THE NOTES, MAY NOT INCREASE EVEN WHEN THE SYNTHETIC
LONG POSITION OR THE SYNTHETIC SHORT POSITION, WHEN ACTIVATED, GENERATES A
POSITIVE RETURN The performance of a rolling excess return index, like
the Index, is affected by the price return of the futures contracts underlying
the Index and the roll return from rolling such futures contracts over time.
See The Index is an excess return index, and not a total return index.
In addition, the performance of a long-short index, such as the Index when
the contingent synthetic short position is activated, is affected by the relative
performance of the synthetic long position and the synthetic short position,
and not by the absolute performance of either synthetic position. See
When the synthetic short position is activated, your return on the notes is
dependent on the net performance, not the absolute performance, of the synthetic
positions. Furthermore, the Index rolls its futures contracts throughout
each monthly rebalancing period in order to keep the weighted average maturity
of the relevant futures contracts underlying the synthetic positions to a
specified level (approximately two months for the synthetic long position
and approximately one month for the synthetic short position). Finally, when
activating the synthetic short position, the Index does so progressively in
20% increments on each rebalancing day (so long as the conditions for activating
the synthetic short position continue to hold true on such day) until it is
fully activated; however, the synthetic short position may not be fully activated,
may remain partially activated for a sustained period of time or may not be
activated at all.
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Effect of Market Conditions
on the Performance of the Synthetic Positions
When the market for VIX futures contracts is
in contango, the price of VIX futures contracts will decrease as the contracts
move nearer to maturity. Under these market conditions, the price return
of each VIX futures contract that composes the synthetic long position generally
will be negative, and the roll return generally will also be negative. Therefore,
under these market conditions, and if the synthetic short position is not
activated, generally, we expect the level of the Index and therefore the value
of the notes to decline. Conversely, under these market conditions, when
the synthetic short position is activated, although the price return of each
VIX futures contract that composes the synthetic short position generally
will also be negative, because this is a synthetic short position, the negative
price return of the relevant VIX futures contracts will generate a positive
return for the synthetic short position. In addition, the roll return generally
will also be positive. Therefore, generally under these market conditions,
the synthetic short position, when activated, will generate a positive return.
However, recall that, for a long-short index, the absolute performance of
each synthetic position is irrelevant and only the relative performance of
the two synthetic positions matters. Accordingly, under these market conditions,
when the synthetic short position is activated, generally, we expect the level
of the Index and therefore the value of the notes to decline if the positive
return from the synthetic short position is not sufficient to offset the negative
return from the synthetic long position.
When the market for VIX futures contracts is
in backwardation, the price of VIX futures contracts will increase as the
contracts move nearer to maturity. Under these market conditions, the price
return of each VIX futures contract that composes the synthetic long position
generally will be positive, and the roll return generally will also be positive.
Therefore, under these market conditions and if the synthetic short position
is not activated, generally, we expect the level of the Index and therefore
the value of the notes to increase. Conversely, under these market conditions,
when the synthetic short position is activated, although the price return
of each VIX futures contract that composes the synthetic short position generally
will also be positive, because this is a synthetic short position, the positive
price return of the relevant VIX futures contracts will generate a negative
return for the synthetic short position. In addition, the roll return generally
will also be negative. Therefore, generally under these market conditions,
the synthetic short position, when activated, will generate a negative return.
However, when the synthetic short position is activated, only the relative
performance of the two synthetic positions matter. Accordingly, under these
market conditions, when the synthetic short position is activated, generally,
we expect the level of the Index and therefore the value of the notes to decline
if the positive return from the synthetic long position is not sufficient
to offset the negative return from the synthetic short position.
In some cases, the market for VIX futures contracts
may not be in backwardation or contango, and the price of one VIX futures
contract underlying a synthetic position may increase while the other VIX
futures contracts underlying the same synthetic position may decrease. In
this situation, whether synthetic position generates positive or negative
returns will depend on the relative weights and price movements of the VIX
futures contracts underlying the synthetic position.
Effect of the Performance
of the Synthetic Positions on the Level of the Index and the Value of the
Notes
Generally, we expect the level of the Index,
and therefore the value of the notes, to increase in either of the following
situations, assuming, in each case, that the return from the synthetic long
position (if the synthetic short position is not activated) or the net return
of the synthetic positions (when the synthetic short position is activated)
is sufficient to offset the negative effect of the index fee and the daily
rebalancing adjustment amount:
the synthetic
long position generates a negative return, but the synthetic short position
generates a positive return that is greater than the negative return generated
by the synthetic long position; or
the synthetic
long position generates a positive return and the synthetic short position
is not activated.
Conversely, we expect the level of the Index,
and therefore the value of the notes, to decrease in any one of the following
four situations:
the return
from the synthetic long position (if the synthetic short position is not activated)
or the net return of the synthetic positions (when the synthetic short position
is activated) is not sufficient to offset the negative effect of the index
fee and the daily rebalancing adjustment amount.
the synthetic
long position generates a negative return and the synthetic short position
is not activated;
both synthetic
positions generate negative returns; or
the negative
return generated by one synthetic position is greater than the positive return
generated by the other synthetic position.
There can be no assurance that the synthetic
positions will always correlate in a manner that will result in an increase
in the level of the Index, resulting in an increase in the value of the notes.
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Structured Investments
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Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-8 |
- BECAUSE EXPOSURE TO
THE SYNTHETIC SHORT POSITION IS ADJUSTED ONLY IF THE APPLICABLE CONDITIONS
ARE SATISFIED FOR THREE CONSECUTIVE INDEX BUSINESS DAYS, THE EXPOSURE TO THE
SYNTHETIC SHORT POSITION MAY NOT BE ADJUSTED DURING NON-TRENDING MARKET CONDITIONS
Because exposure to the synthetic short position is adjusted only if the
applicable conditions are satisfied for three consecutive Index Business Days,
the exposure to the synthetic short position may not be adjusted during non-trending,
or choppy, market conditions. For example, the exposure to the synthetic
short position will not be adjusted if the level of the VIX Index is greater
than or equal to the rolling, weighted average price of the first-month and
second-month VIX futures contracts included in the synthetic short position
for one or two Index Business Days, after which the level of the VIX Index
is less than the rolling, weighted average price of the first-month and second-month
VIX futures contracts included in the synthetic short position for one or
two Index Business Days. As a result, the synthetic short position may not
be activated or deactivated or may be activated or deactivated over a long
period when non-trending market conditions persist. As a result, the Index
may incur negative roll yields for an activated (or partially activated) synthetic
short position or may fail to capture positive roll yields from a deactivated
(or partially deactivated) synthetic short position. See the immediately
following risk factor for additional information.
- DUE TO THE TIME LAG
INHERENT IN THE INDEX, THE EXPOSURE TO THE SYNTHETIC SHORT POSITION MAY NOT
BE ADJUSTED QUICKLY ENOUGH IN RESPONSE TO A CHANGE IN MARKET CONDITIONS FOR
THE INVESTMENT STRATEGY ON WHICH THE INDEX IS BASED TO BE SUCCESSFUL
Because large price movements in VIX futures contracts can occur suddenly
and over a short period of time, the VIX futures contracts may rapidly move
from backwardation to contango or from contango to backwardation; however,
the exposure to the synthetic short position will remain unchanged until the
applicable conditions described in the immediately preceding risk factor has
been satisfied for three consecutive Index Business Days, after which the
exposure to the synthetic short position will change in increments of 20%
per Index Business Day. Accordingly, at a minimum, eight Index Business Days
will elapse from the change in the futures market before the synthetic short
position can be fully activated or deactivated, by which time market conditions
may have changed. Due to this time lag, the exposure to the synthetic short
position may not be adjusted quickly enough for the investment strategy on
which the Index is based to be successful.
The Index may not activate or deactivate the
synthetic short position at all due to short-term changes in the VIX futures
contracts. Price movements in the VIX futures contracts over a period of
three Index Business Days could be significant. Accordingly, the Index may
not benefit from an activation of the synthetic short position in short periods
of contango and the Index may be adversely affected if the synthetic short
position is not deactivated during a short period of backwardation. In addition,
because it takes at least eight Index Business Days to activate or deactivate
fully the synthetic short position, by the time the synthetic short position
is activated or deactivated fully, the prices of the VIX futures contracts
may be moving in the opposite direction, which may adversely affect the level
of the Index.
- THE NOTES ARE LINKED
TO AN EXCESS RETURN INDEX AND NOT A TOTAL RETURN INDEX The notes are
linked to an excess return index and not a total return index. An excess
return index, such as the Index, reflects the changes in the price of the
relevant futures contracts (which is known as the price return) and any
profit or loss realized when rolling the relevant futures contracts (which
is known as the roll return) available through an unleveraged investment
in the futures contracts composing such index. By contrast, a total return
index, in addition to reflecting those returns, also reflects interest that
could be earned on funds committed to the trading of the underlying futures
contracts.
- CONCENTRATION RISKS
ASSOCIATED WITH THE INDEX MAY ADVERSELY AFFECT THE VALUE OF YOUR NOTES
The Index includes VIX futures contracts with a maturity of three months
or less and thus is less diversified than other funds, investment portfolios
or indices investing in or tracking a broader range of products and, therefore,
could experience greater volatility. You should be aware that other indices
may be more diversified than the Index in terms of both the number and variety
of VIX futures contracts. You will not benefit, with respect to the notes,
from any of the advantages of a diversified investment and will bear the risks
of a highly concentrated investment.
- DAILY REBALANCING
OF THE INDEX MAY AFFECT TRADING IN THE RELEVANT VIX FUTURES CONTRACTS
The daily rebalancing of the VIX futures contracts underlying the Index
may cause us, our affiliates or third parties with whom we transact to adjust
our or their hedges accordingly. The trading activity associated with these
hedging transactions will contribute to the trading volume of the VIX futures
contracts included in the Index and may affect the market price of these VIX
futures contracts and, in turn, adversely affect the level of the Index.
- AN INCREASE IN THE
MARGIN REQUIREMENTS FOR VIX FUTURES CONTRACTS INCLUDED IN THE INDEX MAY ADVERSELY
AFFECT THE VALUE OF THE NOTES Futures exchanges require market participants
to post collateral in order to open and to keep open positions in futures
contracts. If an exchange increases the amount of collateral required to
be posted to hold positions in VIX futures contracts underlying the Index,
market participants who are unwilling or unable to post additional collateral
may liquidate their positions, which may cause the price of the relevant VIX
futures contracts to decline significantly. As a result, the level of the
Index and the value of the notes may be adversely affected.
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Structured Investments
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Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-9 |
- VIX FUTURES CONTRACTS
HAVE LIMITED HISTORICAL INFORMATION VIX futures contracts have traded
freely only since March 26, 2004, and not all futures contracts of all relevant
maturities have traded at all times since that date. Because the VIX futures
contracts that underlie the Index are of recent origin and limited historical
performance data exists with respect to them, your investment in the notes
may involve a greater risk than investing in alternate securities linked to
one or more financial measures with an established record of performance.
The liquidity of trading in VIX futures contracts could decline in the future,
which could affect adversely the value of the notes.
- THE NOTES ARE NOT
LINKED TO THE VIX INDEX AND THE VALUE OF THE NOTES MAY BE LESS THAN IT WOULD
HAVE BEEN HAD THE NOTES BEEN LINKED TO THE VIX INDEX The value of the
notes will be linked to the value of the Index, and your ability to benefit
from any rise or fall in the level of the VIX Index is limited. The Index
is based upon holding a rolling synthetic long position and a contingent rolling
synthetic short position in VIX futures contracts. The VIX futures contracts
will not necessarily track the performance of the VIX Index or a long-short
position in the VIX Index. The notes may not benefit from increases or decreases
in the level of the VIX Index because such increases or decreases will not
necessarily cause the price of the relevant VIX futures contracts to rise
or fall. Accordingly, a hypothetical investment that was linked directly
to the performance of the VIX Index (long or short) could generate a higher
return than the notes.
- THE NOTES ARE NOT
LINKED TO THE OPTIONS USED TO CALCULATE THE VIX INDEX, TO THE ACTUAL VOLATILITY
OF THE S&P 500® INDEX OR TO THE EQUITY SECURITIES INCLUDED
IN THE S&P 500® INDEX The VIX Index measures the 30-day
forward volatility of the S&P 500® Index as calculated based
on the prices of certain put and call options on the S&P 500®
Index. The actual volatility of the S&P 500® Index may differ,
perhaps significantly, from the level predicted by the VIX Index or from the
prices of the put and call options included in the calculation of the VIX
Index. The value of the notes is based on the value of the relevant VIX futures
contracts included in the Index. The notes are not linked to the realized
or implied volatility over a specific period of time and will not reflect
the return you would realize if you owned, or held a short position in, the
equity securities underlying the S&P 500® Index or traded put
and call options used to calculate the level of the VIX Index or other instruments
intended to provided a return equal to that of the VIX Index.
- THE INDEX CLOSING
LEVEL ON THE RELEVANT VALUATION DATE MAY BE LESS THAN THE INDEX CLOSING LEVEL
ON THE MATURITY DATE, A REPURCHASE DATE OR AT OTHER TIMES DURING THE TERM
OF THE NOTES The Index closing level on the Maturity Date, a Repurchase
Date or at other times during the term of the notes, including dates near
the relevant Valuation Date, could be higher than the Index closing level
on the relevant Valuation Date. This difference could be particularly large
if there is a significant increase in the level of the Index after the relevant
Valuation Date, if there is a significant decrease in the level of the Index
prior to the relevant Valuation Date or if there is significant volatility
in the Index during the term of the notes.
- THE INDEX HAS A LIMITED
OPERATING HISTORY The Index was created on July 30, 2010, and therefore
has limited historical performance. Past performance should not be considered
indicative of future performance.
- NO INTEREST PAYMENTS
As a holder of the notes, you will not receive any interest payments.
- THERE ARE RESTRICTIONS
ON YOUR ABILITY TO REQUEST THAT WE REPURCHASE YOUR NOTES If you elect
to request that we repurchase your notes, your request is only valid if we
receive your Repurchase Notice by no later than 4:00 p.m., New York City time,
on the business day prior to the relevant Valuation Date and we (or our affiliates)
acknowledge receipt of the Repurchase Notice that same day (which will evidence
our acceptance of your repurchase request). If we do not receive such notice
or we (or our affiliates) do not acknowledge receipt of such notice (which
means we have declined to accept your repurchase request), your repurchase
request will not be effective and we will not repurchase your notes on the
corresponding Repurchase Date.
Because of the timing requirements of the Repurchase
Notice, settlement of the repurchase will be prolonged when compared to a
sale and settlement in the secondary market. As your request that we repurchase
your notes is irrevocable, this will subject you to market risk in the event
the market fluctuates after we receive your request. Furthermore, if we accept
your repurchase request, our obligation to repurchase the notes prior to maturity
may be postponed upon the occurrence of a market disruption event.
- YOU WILL NOT KNOW
THE AMOUNT YOU WILL RECEIVE UPON EARLY REPURCHASE AT THE TIME YOU ELECT TO
REQUEST THAT WE REPURCHASE YOUR NOTES You will not know the amount you
will receive upon early repurchase at the time you elect to request that we
repurchase your notes. Your notice to us to repurchase your notes is irrevocable
and must be received by us no later than 4:00 p.m., New York City time, on
the business day prior to the relevant Valuation Date and we (or our affiliates)
must acknowledge receipt of such notice, on the same day. As a result, you
will be exposed to market risk in the event the market fluctuates after we
accept your request that we repurchase your notes, and prior to the relevant
Repurchase Date.
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-10 |
- LACK OF LIQUIDITY
The notes will not be listed on any securities exchange. JPMS may act as
a market maker for the notes, but is not required to do so. We may suspend
or terminate market making at any time, at our own discretion and without
notice to holders of the notes. Even if there is a secondary market, it may
not provide enough liquidity to allow you to trade or sell the notes easily.
You may request that we repurchase your notes on a daily basis in a minimum
denomination equal to the Principal Amount, subject to our acceptance of your
request and your compliance with the procedural requirements described above.
While we intend to accept all requests for early repurchase of notes, we are
not obligated to accept any repurchase request. We are not committed to purchasing
any note at a particular time or price. Because other dealers are not likely
to make a secondary market for the notes, the price at which you may be able
to trade your notes is likely to be no higher than the payment you could receive
upon an early repurchase of your notes by us and could be substantially lower.
If we do not accept your request to repurchase your notes, you may be unable
to sell your notes prior to maturity. In addition, the number of notes outstanding
or held by persons other than our affiliates could be reduced at any time
due to early repurchases of the notes. Accordingly, the liquidity of the
market for the notes outside of an early repurchase request could vary materially
over the term of the notes.
- MANY ECONOMIC AND
MARKET FACTORS WILL AFFECT THE VALUE OF THE NOTES In addition to the
level of the Index on any day, the value of the notes will be affected by
a number of economic and market factors that may either offset or magnify
each other, including but not limited to:
- prevailing market prices
and forward volatility levels of the U.S. stock markets and the equity
securities included in the S&P 500® Index;
- prevailing market prices,
volatility and liquidity of any option or futures contracts relating to
the Index, the VIX Index, the S&P 500® Index, the equity
securities included in the S&P 500® Index or VIX futures
contracts;
- the volatility, frequency
and magnitude of changes in the levels of the Index and in the prices
of VIX futures contracts;
- the liquidity of VIX
futures contracts;
- the time to maturity
of the notes;
- interest and yield rates
in the market generally;
- economic, financial,
political, regulatory and judicial events that affect the VIX Index, the
market for VIX futures contracts and futures contracts generally;
- supply and demand in
the listed and over-the-counter equity derivative markets; and
- our creditworthiness,
including actual or anticipated downgrades in our credit ratings.
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-11 |
Hypothetical
Payment at Maturity or Upon Early Repurchase
The following table and examples
illustrate the hypothetical total returns at maturity or upon early repurchase
for each $1,000 principal amount note. The total return as used in this term
sheet is the number, expressed as a percentage, that results from comparing
the payment at maturity or upon early repurchase per $1,000 principal amount
note to $1,000. The hypothetical total returns set forth below assume an Initial
Index Level of 360 and reflect the Deduction Amount of $15.00 per $1,000 principal
amount note and the Repurchase Fee Amount of $5.00 per $1,000 principal amount
note. The hypothetical total returns set forth below are for illustrative purposes
only and may not be the actual total returns at maturity or upon early repurchase
applicable to a purchaser of the notes. The numbers appearing in the following
table and examples have been rounded for ease of analysis.
|
Index
closing level
on the relevant
Valuation Date |
Index
Return* |
At
Maturity |
Upon
Early Repurchase |
|
Payment |
Total
Return |
Payment |
Total
Return |
|
648.00 |
80.00% |
$1,785.00 |
78.50% |
$1,780.00 |
78.00% |
612.00 |
70.00% |
$1,685.00 |
68.50% |
$1,680.00 |
68.00% |
576.00 |
60.00% |
$1,585.00 |
58.50% |
$1,580.00 |
58.00% |
540.00 |
50.00% |
$1,485.00 |
48.50% |
$1,480.00 |
48.00% |
504.00 |
40.00% |
$1,385.00 |
38.50% |
$1,380.00 |
38.00% |
468.00 |
30.00% |
$1,285.00 |
28.50% |
$1,280.00 |
28.00% |
432.00 |
20.00% |
$1,185.00 |
18.50% |
$1,180.00 |
18.00% |
396.00 |
10.00% |
$1,085.00 |
8.50% |
$1,080.00 |
8.00% |
378.00 |
5.00% |
$1,035.00 |
3.50% |
$1,030.00 |
3.00% |
367.20 |
2.00% |
$1,005.00
|
0.50% |
$1,000.00
|
0.00% |
366.30 |
1.75% |
$1,002.50 |
0.25% |
$997.50 |
-0.25% |
365.40 |
1.50% |
$1,000.00
|
0.00% |
$995.00
|
-0.50% |
363.60 |
1.00% |
$995.00 |
-0.50% |
$990.00 |
-1.00% |
360.90 |
0.25% |
$987.50 |
-1.25% |
$982.50 |
-1.75% |
360.00 |
0.00% |
$985.00
|
-1.50% |
$980.00
|
-2.00% |
324.00 |
-10.00% |
$885.00 |
-11.50% |
$880.00 |
-12.00% |
288.00 |
-20.00% |
$785.00 |
-21.50% |
$780.00 |
-22.00% |
252.00 |
-30.00% |
$685.00 |
-31.50% |
$680.00 |
-32.00% |
216.00 |
-40.00% |
$585.00 |
-41.50% |
$580.00 |
-42.00% |
180.00 |
-50.00% |
$485.00 |
-51.50% |
$480.00 |
-52.00% |
144.00 |
-60.00% |
$385.00 |
-61.50% |
$380.00 |
-62.00% |
108.00 |
-70.00% |
$285.00 |
-71.50% |
$280.00 |
-72.00% |
72.00 |
-80.00% |
$185.00 |
-81.50% |
$180.00 |
-82.00% |
36.00 |
-90.00% |
$85.00 |
-91.50% |
$80.00 |
-92.00% |
0.00 |
-100.00% |
$0.00 |
-100.00% |
$0.00 |
-100.00% |
|
* The Index Return will reflect the daily deduction
of the index fee and the daily rebalancing adjustment amount. Accordingly,
the Index Return will be negative if the performance of the VIX futures contracts
included in the Index, based on their official settlement prices, is not sufficient
to offset the deduction of the index fee and the daily rebalancing adjustment
amount.
Hypothetical
Examples of Amounts Payable at Maturity or Upon Early Repurchase
The following examples illustrate
how the total returns set forth in the table above are calculated.
Example 1: The level
of the Index increases from the Initial Index Level of 360 to an Index closing
level of 396 on the relevant Valuation Date. Because the Index
closing level on the relevant Valuation Date of 396 is greater than the Initial
Index Level of 360, the investor receives a payment at maturity of $1,085 per
$1,000 principal amount note, or a payment upon early repurchase of $1,080 per
$1,000 principal amount note, calculated as follows:
At maturity: [$1,000
× [1 + (396 360) / 360]] $15 = $1,085; or
Upon early repurchase: [$1,000 × [1 +
(396 360) / 360]] $15 $5 = $1,080
Example 2: The level
of the Index increases from the Initial Index Level of 360 to an Index closing
level of 363.60 on the relevant Valuation Date. Even though the
level of the Index has increased, because of the negative effect of the Deduction
Amount and, in the case of early repurchase, the Repurchase Fee Amount, the
investor receives a payment at maturity of only $995 per $1,000 principal amount
note, or a payment upon early repurchase of only $990 per $1,000 principal amount
note, which are each less than the Principal Amount, calculated as follows:
At maturity: [$1,000
× [1 + (363.60 360) / 360]] $15 = $995; or
Upon early repurchase: [$1,000 × [1 +
(363.60 360) / 360]] $15 $5 = $990
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-12 |
Example 3: The level
of the Index increases from the Initial Index Level of 360 to an Index closing
level of 366.30 on the relevant Valuation Date. Because the Index
closing level on the relevant Valuation Date of 366.30 is greater than the Initial
Index Level of 360, the investor receives a payment at maturity of $1,002.50
per $1,000 principal amount note. However, upon early repurchase, the investor
receives a payment upon early repurchase of only $997.50 per $1,000 principal
amount note, which is less than the Principal Amount even though the level of
the Index has increased because of the negative effect of the Repurchase Fee
Amount, calculated as follows:
At maturity: [$1,000
× [1 + (366.30 360) / 360]] $15 = $1,002.50; or
Upon early repurchase: [$1,000 × [1 +
(366.30 360) / 360]] $15 $5 = $997.50
Example 4: The level
of the Index decreases from the Initial Index Level of 360 to an Index closing
level of 288 on the relevant Valuation Date. Because the Index
closing level on the relevant Valuation Date of 288is less than the Initial
Index Level of 360, the investor receives a payment at maturity of $785 per
$1,000 principal amount note, or a payment upon early repurchase of $780 per
$1,000 principal amount note, calculated as follows:
At maturity: [$1,000
× [1 + (288 360) / 360]] $15 = $785; or
Upon early repurchase: [$1,000 × [1 +
(288 360) / 360]] $15 $5 = $780
These returns and the payouts
on the notes shown above do not reflect fees or expenses that would be associated
with any sale in the secondary market. If these fees and expenses were included,
the hypothetical total returns and payouts shown above would likely be lower.
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-13 |
Hypothetical
Back-tested Data and Historical Information
J.P.
Morgan Strategic Volatility Index
The following graph sets forth
the hypothetical back-tested performance of the Index based on the hypothetical
back-tested weekly Index closing values from September 22, 2006 through July
23, 2010, and the historical performance of the Index based on the weekly Index
closing levels from July 30, 2010 through July 29, 2011. The Index was created
as of the close of business on July 30, 2010. The Index closing level on July
29, 2011 was 357.63. We obtained the Index closing levels below from Bloomberg
Financial Markets. We make no representation or warranty as to the accuracy
or completeness of the information obtained from Bloomberg Financial Markets.
The hypothetical back-tested
and historical levels of the Index should not be taken as an indication of future
performance, and no assurance can be given as to the closing level of the Index
on the Inception Date or any Valuation Date. We cannot give you assurance that
the performance of the Index will result in the return of any of your initial
investment. The hypothetical back-tested performance of the Index set forth
in the following graph was calculated on materially the same basis as the performance
of the Index is now calculated but does not represent the actual historical
performance of the Index.
The hypothetical historical
values above have not been verified by an independent third party. The back-tested,
hypothetical historical results above have inherent limitations. These back-tested
results are achieved by means of a retroactive application of a back-tested
model designed with the benefit of hindsight. No representation is made that
an investment in the notes will or is likely to achieve returns similar to those
shown.
Alternative modeling techniques
or assumptions would produce different hypothetical historical information that
might prove to be more appropriate and that might differ significantly from
the hypothetical historical information set forth above. Hypothetical back-tested
results are neither an indicator nor a guarantee of future returns. Actual
results will vary, perhaps materially, from the analysis implied in the hypothetical
historical information that forms part of the information contained in the chart
above.
Historical
Performance of the CBOE Volatility Index®
The following graph sets forth
the historical weekly performance of the VIX Index from January 6, 2006 through
July 29, 2011. We obtained the closing levels below from Bloomberg Financial
Markets. We make no representation or warranty as to the accuracy or completeness
of the information obtained from Bloomberg Financial Markets. Your notes
are linked to the Index and not to the VIX Index. Historical information with
respect to the VIX Index is provided for reference purposes only.
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
TS-14 |
ANNEX A
FORM OF
REPURCHASE NOTICE
To: dln_repurchase@jpmchase.com
Subject: Return Notes Linked
to the J.P. Morgan Strategic Volatility Index, due November 30, 2012, CUSIP
No. 48125XE93
Ladies and Gentlemen:
The undersigned
holder of JPMorgan Chase & Co.s Medium-Term Notes, Series E, Return
Notes Linked to the J.P. Morgan Strategic Volatility Index due November 30,
2012, CUSIP No. 48125XE93 (the notes) hereby irrevocably requests, with respect
to the principal amount of notes indicated below, as of the date hereof, that
you repurchase such notes on the Repurchase Date specified below as described
in the product supplement no. 212-A-I, as supplemented by the pricing supplement
dated _________, 20__ relating to the notes (collectively, the Supplement).
Terms not defined herein have the meanings given to such terms in the Supplement.
The undersigned
certifies to you that it will (i) instruct its DTC custodian with respect
to the notes (specified below) to book a delivery versus payment trade on the
relevant Valuation Date with respect to the principal amount of notes specified
below at a price per $1,000 principal amount note determined in the manner described
in the Supplement, facing DTC 352 and (ii) cause the DTC custodian to deliver
the trade as booked for settlement via DTC at or prior to 10:00 a.m. New York
City time, on the Repurchase Date.
Very truly yours,
[NAME OF HOLDER]
Name:
Title:
Telephone:
Fax:
Email:
Principal Amount of Notes surrendered
for Repurchase (in $1,000 or integral multiples thereof):
Applicable Valuation Date: _________,
20__*
Applicable Repurchase Date: _________, 20__*
DTC # (and any relevant sub-account):
Contact Name:
Telephone:
Acknowledgment: I acknowledge
that the notes specified above will not be repurchased unless all of the requirements
specified in the Supplement are satisfied, including the acknowledgment by you
or your affiliate of the receipt of this notice on the date hereof (which acknowledgment
will serve as evidence of your acceptance of my repurchase request).
Questions regarding the repurchase
requirements of your notes should be directed to dln_repurchase@jpmchase.com.
*Subject to adjustment as described
in the Supplement.
|
JPMorgan
Structured Investments
Return
Notes Linked to the J.P. Morgan Strategic Volatility Index |
A-1 |