We are all familiar with forward and reverse stock splits of common stock and shares of exchange-traded funds ("ETFs"), and the related anti-dilution provisions contained in structured notes linked to those underliers. Those provisions disclose how to adjust for these events if the events should occur following the setting of an initial price for an underlying common share or ETF share. You will not find similar provisions in structured notes linked to an index.

But at least two indices have had, in effect, splits since their inception. An issuer of a structured note linked to an index that split would have to adjust the final index level for that event.

The Hang Seng China Enterprises Index had a base value of 1,000 at launch on August 8, 1994. On January 3, 2000 it was re-based to 2,000 (in effect, a split). Similarly, the Nadaq-100 Index® launched on January 31, 1985 with a base index value of 250. On January 1, 1994, the NDX was reset to 125 (in effect, a reverse split).

Holders of shares of common stock or an ETF that have had a two-for-one split or a one-for-two reverse split suffer no economic impact. They either end up with two shares with the same value as the pre-split share or with twice the value in a reverse split. When an index changes its base value, there is no equivalent as there are no ownership rights.

Draftspersons should consider this possibility when crafting provisions relating to index-linked structured notes. One would not want to have to deal with a change in the base index level without some disclosure in the terms of the note permitting an adjustment in the final index level to reflect the change.

Originally published in REVERSEinquiries, Volume 2, Issue 1.

Originally published 22 January 2019

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