EFTA01353489.pdf

option. Company XYZ spins off Company LMN. Company XYZ remains the obligor with respect to 70% of the principal amount of the anginal reference obligation. Company LMN becomes the obligor of a new reference obligation that is issued to holders of the remaining 30% of the original refer- ence obligation. Company XYZ and LMN are identified by the listing options market as the successor entities. Follow- ing the succession event, the credit default option based on Company XYZ Is adjusted Into two separate credit default option contracts that specify Company XYZ and Company LMN as reference entities. The cash settlement amount of the original credit default option and the premium multiplier are allocated between the new credit default options in accordance with the 70/30 division of the reference obliga- tion as specified by the listing options market. Adjustment of credit default basket options after a suc- cession event. When a succession event occurs with respect to a reference entity that is included in a single payout or multiple payout credit default basket option, the listing options market will ordinarily adjust the option by replacing the affected reference entity with the successor entity or entities, and, it one or more new obligations are issued to replace some or all of the existing reference obligations, the new obligations will be substituted as the reference obliga- tions. The listing options market will specify the weight of each new reference entity, and the sum of the weights will equal the weight of the original reference entity. EXAMPLE: Company XYZ is one of ten equally weighted reference entities fore multiple payout default bas- ket option and its 8% May 15, 2022 bond issue and its 8.5% September 1. 2030 bond issue we specified as its only reference obligations. During the We of the option, Company XYZ spins off Company LMN. Company XYZ remains the obligor for the 2022 bond issue and LMN becomes the obli- gor of a debt security issued to holder of the 2030 bond issue. The listing options market adjusts the option by speci- fying XYZ and LMN as the successor reference entities. The reference obligations are the onginal 2022 bond issue and the replacement for the 2030 bond issue. The listing options market determines the appropriate basket weight for the successor reference entities is 7.5% and 2.5%. The sum of the newly specified weights equals the 10% weight of the predecessor basket reference entity (Company XYZ) replaced by the successor reference entities (Company XYZ and Company LMN). On page 88, the following is inserted immediately fol- lowing the last paragraph: SPECIAL RISKS OF CREDIT DEFAULT OPTIONS 1. Pricing of credit default options is complex. As stated elsewhere in this document, complexity not well understood is, in itself, a risk factor. In order to price Mese options, investors must estimate the probability of default from available security or other prices, primarily bond and credit default swap ("CDS") prices. Models typically used by market professionals to infer the probability of default from prices may be more complex than the average investor Is used to. 119 CONFIDENTIAL - PURSUANT TOCRESCIRPORW880 P. 6(e) CONFIDENTIAL SDNY_GM_00184064 EFTA01353489