The Commodity Exchange Act (“CEA”) and the Commodity Futures Trading Commission (“CFTC”) rules as well as the Securities Exchange Act of 1934 (“Exchange Act”) and the Securities and Exchange Commission (“SEC”) rules promulgated pursuant to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) impose regulatory requirements on swap dealers and security-based swap dealers, including business conduct standards with respect to the transacting of (i) a swap, foreign exchange swap, or foreign exchange forward (each as defined in Section 1a of the CEA and rules thereunder, and collectively, “Swaps”), (ii) a mixed swap (as defined in Sections 1a of the CEA and 3(a) of the Exchange Act and rules thereunder), or (iii) a security-based swap (as defined in Section 3(a) of the Exchange Act and rules thereunder ( “Security-Based Swap” or “SBS”) with certain counterparties.

 

These business conduct standards mandate that National Bank of Canada (“NBC”) provide certain disclosures and notifications to its Swap and Security-Based Swap counterparties (other than counterparties that are swap dealers, major swap participants, security-based swap dealers or major security-based swap participants) to allow such counterparties to assess the material risks and material characteristics of the Swap or SBS and the material incentives and conflicts of interest that NBC may have in connection with such Swap or SBS.

 

If you are a swap dealer, major swap participant, security-based swap dealer or major security-based swap participant or if you are a non-U.S. person to which NBC is not required by the CFTC or SEC to provide disclosures and notifications, such disclosures and notifications provided below do not apply to you.

 

The words, “you” and “your” refer to the NBC counterparty, and the words “we”, “our” and “us” refer to NBC.

General disclosures and product specific disclosures

The International Swaps and Derivatives Association (“ISDA”) has created standard industry documentation, such as general and product specific risk disclosures to capture general risks of Swap and SBS transactions. These disclosures describe generally the material risks, material characteristics, and material incentives and conflicts of interest related to Swaps and SBS in the following asset classes: interest rates, foreign exchange rates and currencies, credit instruments, asset-backed instruments, equities and commodities. The latest published documents are embedded below.

 

Material risks

Please see the ISDA General Disclosure Statement for Transactions and the ISDA product specific Disclosure Annexes above for material risks related to Swaps and SBS required to be provided to you pursuant to CFTC Regulation 23.431(a)(1) and SEC Regulation 240.15Fh-3(b)(1).

 

Before entering into any Swap or SBS transaction, you should conduct a thorough and independent evaluation of the terms of the transaction in light of your particular circumstances and the nature and extent of your exposure to, and willingness to incur, risk. You should also consider whether the transaction is appropriate for you in light of your experience, objectives, financial and operational resources and other relevant circumstances. Unless expressly agreed in writing, we are not providing you with legal, financial, tax, accounting or other advice in connection with any Swap or SBS transaction.

Material characteristics

Please see the ISDA General Disclosure Statement for Transactions and the ISDA product specific Disclosure Annexes above for the material economic terms of Swaps and SBS, the terms relating to the operation of Swaps and SBS, and the rights and obligations of the parties during the term of each Swap and SBS required to be provided to you pursuant to CFTC Regulation 23.431(a)(2) and SEC Regulation 240.15Fh-3(b)(1) (together, “Material Characteristics”). Material Characteristics are subject to and incorporate (i) the relevant ISDA master agreement and ISDA Credit Support Annex, if any, or such other master trading agreement and related collateral agreement, if any, previously executed between us, (ii) any master confirmation agreement or other similar agreement in writing between us, and (iii) the terms of any confirmation or other agreement evidencing a Swap or SBS transaction, including any terms incorporated by reference therein.

 

Before entering into any Swap or SBS transaction, you should conduct a thorough and independent evaluation of the terms of the transaction in light of your particular circumstances and the nature and extent of your exposure to, and willingness to incur, risk. You should also consider whether the transaction is appropriate for you in light of your experience, objectives, financial and operational resources and other relevant circumstances. Unless expressly agreed in writing, we are not providing you with legal, financial, tax, accounting or other advice in connection with any Swap or SBS transaction.

Material conflicts of interest

In respect of Swaps or SBS between us, our financial market activities may materially affect, either positively or negatively, the value of such Swaps or SBS, their usefulness for your intended purpose, the timing or amount of payments or deliveries, and, if applicable, the likelihood that you will be able to exercise any option rights. You should expect that our interests, and the interests of our customers or other counterparties, may at times be adverse to your interests under or in connection with Swaps or SBS we transact with you. Unless otherwise required by applicable law or agreed in connection with a particular Swap or SBS, we are not acting in your best interests and we are not assessing the suitability of the Swap or SBS for you.

 

Please see the ISDA General Disclosure Statement for Transactions above for additional disclosures related to material conflicts of interest that may arise between you and NBC in respect of Swaps or SBS, which are required to be provided to you pursuant to CFTC Regulation 23.431(a)(3) and SEC Regulation 240.15Fh-3(b)(2).

Daily marks

NBC is required to provide a post-trade daily mark (“Daily Mark”) to you in accordance with CFTC Regulation 23.431(d)(3) and SEC Regulation 240.15Fh-3(c), in each case in respect of uncleared Swaps or SBS only.

 

Daily Marks are indicative values as of the close of business on the indicated date(s). Daily Marks represent the midpoint between the bid and offer, or the calculated equivalent thereof as required by the SEC.

 

Daily Marks do not represent (i) the actual terms at which new transactions could be entered into, (ii) the actual terms at which existing transactions could be liquidated or unwound or (iii) the calculation or estimate of an amount that would be payable following the early termination of such transactions pursuant to any master trading agreement to which we are parties. Daily Marks may differ from valuations provided for collateral calculation purposes and should not be used for purposes of calculating amounts due under any credit support arrangement between us. Daily Marks may not necessarily reflect the value that is marked on NBC's books.

 

Daily Marks are prepared by discounting projected future cashflows to arrive at a current value. For each asset class, spot and forward curves, correlation and volatility levels are determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. These spot and forward curves, correlation and volatility levels are used to estimate future cashflows that are not certain (for example floating interest rates or options). In some cases, we may use probabilistic models to determine the expected value of future cashflows. These estimated cashflows, along with future cashflows that are known with certainty, are then discounted to their present value using discount factors derived from relevant market inputs.

 

In our sole discretion, we may use a variety of methodologies to prepare the estimated cashflows described above, including without limitation, preparing Monte Carlo simulations, utilizing Black-Scholes, or other mathematical pricing models. In our sole discretion, we may vary the inputs used in such simulations and modelling, and we are under no obligation to disclose to you the methodology used or the inputs thereto. Calculations based on different inputs or assumptions may yield different results. NBC expressly disclaims any responsibility for (i) the accuracy of the models or estimates used in deriving Daily Marks, (ii) any errors or omissions in computing or disseminating Daily Marks and (iii) any uses to which Daily Marks are put.

 

With respect to any cleared Swaps originally executed between you and NBC, you have the right, upon request, to receive a daily mark from the appropriate derivatives clearing organization in accordance with CFTC Regulation 23.431(d)(1).

 

With respect to any cleared SBS originally executed between you and NBC, you have the right, upon request, to receive a daily mark from us in accordance with SEC Regulation 240.15Fh-3(c)(1).

Clearing disclosures

With respect to any Swap that is subject to the mandatory clearing requirements under Section 2(h) of the CEA, subject to the terms of any agreement between us and to applicable laws, you have the sole right to select the derivative clearing organization or clearing agency at which the Swap will be cleared. With respect to any Swap that is not subject to these mandatory clearing requirements but is eligible for clearing, subject to the terms of any agreement between us and to applicable laws, you may in your sole discretion elect to clear such Swap, and, if you so elect, select the derivative clearing organization or clearing agency at which the Swap will be cleared.

 

With respect to clearable SBS, we must disclose to you the names of the clearing agencies where we are authorized to clear. In addition, you have the sole right to select the clearing agency in respect of clearable SBS.

 

Upon acceptance of a Swap or SBS for clearing:

 

  1. The original Swap or SBS between us is extinguished;
  2. The original Swap or SBS between us is replaced by equal and opposite Swaps or SBS with the clearing agency; and
  3. All terms of such Swaps or SBS will conform to the product specifications of the cleared Swap or SBS established under the clearing agency's rules.

Pre-hedging disclosure

When you provide us with a request to enter into a transaction or indicate your interest in a potential transaction, we may use that information to engage in pre-hedging and/or hedging activities, which may include entering into transactions prior to executing your potential transaction with a view to facilitating your potential transaction. Any transactions entered into by us with a view to facilitating your potential transaction (i) will be entered into by us as principal, not as agent for you, (ii) could be at prices different from the price at which we execute your transaction, (iii) may affect the market price and/or liquidity of the product(s) you are buying and/or selling and (iv) may result in profit or loss to us.

Segregation of assets held as collateral in uncleared swap transactions

Swaps

For any Swaps where Initial Margin is required to be exchanged, you have the right to require that such Initial Margin be segregated in accordance with CFTC Regulations 23.702 and 23.703 except in those circumstances where segregation is already required pursuant to rules adopted by NBC’s prudential regulators in the U.S. Upon request, we will identify one or more custodians, which must be creditworthy and must be a legal entity independent of both NBC and you, as an acceptable depository for the segregated Initial Margin.

 

If you elect not to segregate Initial Margin, NBC is required to, on a quarterly basis, report to you whether the back-office procedures of NBC relating to margin and collateral requirements were, at any point during the previous calendar quarter, not in compliance with the agreement between us.

SBS

We hereby notify you pursuant to Section 3E(f)(1)(A) of the Exchange Act that under Section 3E(f)(1)(B) of the Exchange Act, each SBS counterparty of NBC has the right to require segregation of the funds or other property supplied to margin, guarantee, or secure such counterparty’s uncleared SBS with NBC in a segregated account at an independent third-party custodian separate from the assets and other interests of NBC and designated as a segregated account for and on behalf of the counterparty. This right to require segregation applies only to SBS that are not submitted for clearing to a clearing agency and does not apply to variation margin payments. Such right is independent of other applicable laws, rules or regulations, if any, that may require segregation of SBS margin or collatera

 

Any margin collateral received and held by NBC in respect of uncleared SBS with an SBS counterparty of NBC will not be subject to a segregation requirement under Exchange Act Rule 18a-4. Accordingly, in the event of an insolvency proceeding, receivership or similar process in respect of NBC, absent an effective segregation of such margin collateral from the property of NBC established by contract or other law, such a claim could be treated as a general creditor claim against NBC or its estate.

Customer complaints

Swap dealers and security-based swap dealers are required to provide a notice to each counterparty that contains the physical address, email or other widely available electronic address and telephone number of the department of the swap dealer/security-based swap dealer to which any complaints may be directed. You may direct complaints via email to doddfrankcompliance@nbc.ca.