EFTA01353521.pdf

becomes the obligor of a new reference obligation that is issued to holders of the remaining 30% of the original reference obligation. Company XYZ and LMN are identified by the listing options market as the successor entities. Following 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 rohn division of the reference obligation as specified by the listing options market. Adjustment of credit default basket options after a succession 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, If 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 obligations. 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 for a multiple payout default basket option and its 8% May 15, 2022 bond issue and its 8.5%September 1, 2030 bond issue are specified as its only reference obligations. During the life of the option, Company XYZ spins oft Company LMN. Company XYZ remains the obligor for the 2022 bond issue and LMN becomes the obligor of a debt security issued to holder of the 2030 bond issue. The listing options market adjusts the option by specifying XYZ and LMN as the successor reference entities. The reference obligations are the original 2O22 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). 3. On page 88, the following is Inserted immediately following 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 ilseli, a risk factor. In order to price these 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. 172 CONFIDENTIAL - PURSUANT TOCFEESCIR11O8087933 P. 6(e) CONFIDENTIAL SDNY_GM_00184117 EFTA01353521