PRODUCT DISCLOSURE STATEMENT

Transcription

1 PRODUCT DISCLOSURE STATEMENT INTEREST RATE SWAPS ISSUED BY Bank of New Zealand 23 October 2015 This document provides important information about interest rate swaps to help you decide whether you want to enter into any of these derivatives. There is other useful information about this offer at Many derivatives are complex and high-risk financial products that are not suitable for most retail investors. If you do not fully understand a derivative described in this document and the risks associated with it, you should not enter into it. You can also seek advice from a financial adviser to help you make your decision. You should ask if that adviser has experience with these types of derivatives. Bank of New Zealand has prepared this document in accordance with the Financial Markets Conduct Act 2013.

2 i 1. KEY INFORMATION SUMMARY 1.1 What is this? This is a product disclosure statement for Interest Rate Swaps provided by Bank of New Zealand (BNZ). Interest Rate Swaps are derivatives, which are contracts between you and BNZ that may require you or BNZ to make New Zealand dollar (NZD or NZ$) payments to one another. The amounts that must be paid or received (or both) will depend on the level of the underlying fixed and floating interest rates. The contract specifies the terms on which those payments must be made. 1.2 Warning Risk that you may owe money under the derivative If the level of the underlying floating interest rate changes, you may suffer losses. In particular, unlike most other kinds of financial products, you may end up owing significant amounts of money. You should carefully read section 2.3 of this PDS (How payments under an Interest Rate Swap are calculated) on how payments are calculated. Risks arising from issuer's creditworthiness When you enter into derivatives with BNZ, you are exposed to a risk that BNZ cannot make New Zealand dollar payments as required. You should carefully read section 3 of the PDS (risks of these derivatives) and consider BNZ s creditworthiness. 1.3 About BNZ BNZ is a registered bank under the Reserve Bank of New Zealand Act Since its establishment in 1861, BNZ has been carrying on the business of providing a comprehensive range of banking and financial services in New Zealand. 1.4 Which derivatives are covered by this PDS? This PDS covers Interest Rate Swaps. An Interest Rate Swap is an agreement between you and BNZ to exchange payments on certain dates (the settlement dates) in the future. One of us will make payments calculated by applying a floating rate to a notional amount and the other will make payments calculated by applying a fixed rate to a notional amount. This notional amount is not exchanged. Interest Rate Swaps may allow you to manage interest rate risk associated with your borrowings or investments, without affecting any obligations that you have under those borrowings or investments. For example, you could enter into an Interest Rate Swap to receive floating rate payments to offset your interest payments on a floating rate debt obligation, in return for paying fixed rate amounts to us. The Interest Rate Swap is separate from your debt obligations. However, the Interest Rate Swap can have the effect of reducing your sensitivity to future wholesale market interest rate movements, and is referred to as "swapping" the floating rate debt to fixed. Wholesale market interest rates are the rates that apply to transactions between banks and large institutions and are generally beyond the direct control of BNZ. Hedging interest rate risk also means that you may not receive the benefit of interest rate movements in your favour.

3 ii TABLE OF CONTENTS 1. KEY INFORMATION SUMMARY... i 2. KEY FEATURES OF THE DERIVATIVES RISKS OF THESE DERIVATIVES FEES HOW BNZ TREATS FUNDS AND PROPERTY RECEIVED FROM YOU ABOUT BNZ HOW TO COMPLAIN WHERE YOU CAN FIND MORE INFORMATION HOW TO ENTER INTO CLIENT AGREEMENT NO OFFER OR DISTRIBUTION OUTSIDE NEW ZEALAND GLOSSARY... 20

4 1 2. KEY FEATURES OF THE DERIVATIVES A glossary of some of the key terms used in this PDS is included in section 11 of this PDS (Glossary). 2.1 What is an Interest Rate Swap? An Interest Rate Swap is an agreement between you and BNZ to exchange payments on certain settlement dates in the future. One of us will make payments calculated by applying a floating rate to a notional amount (paying floating) and the other will make payments calculated by applying a fixed rate to a notional amount (paying fixed). This notional amount is not exchanged, payments are simply calculated by reference to that amount. The Interest Rate Swap is separate from any underlying financial arrangement you are hedging. The floating rate is determined by reference to an interest rate derived from the wholesale market which will change from time to time. The floating rate that is typically used for NZD transactions is a BKBM rate, which is described in sections 2.3 of this PDS (How payments under an Interest Rate Swap are calculated) and 11 of this PDS (Glossary). The fixed rate is an interest rate that is set at a particular level for the purposes of the Interest Rate Swap. This fixed rate may be different from the fixed rate on any underlying financial arrangement you are hedging. The rate that is used to determine amounts you will pay under the Interest Rate Swap (that is, the fixed rate or the floating rate) will incorporate a margin as described in sections 2.3 of this PDS (How payments under an Interest Rate Swap are calculated) and 4 of this PDS (Fees). The notional amount, the method for determining the floating rate, the fixed rate, the settlement dates and the term of the Interest Rate Swap will be agreed with you before the Interest Rate Swap is entered into. BNZ generally offers interest rate swaps with terms from one to ten years. Settlement dates can be monthly, quarterly or semi-annual. 2.2 Why enter into an Interest Rate Swap? Interest Rate Swaps can reduce the uncertainty created by movements in interest rates or change the type of interest rates you are exposed to. This is because Interest Rate Swaps can have the economic effect of converting a floating rate exposure into a fixed rate exposure (for example, when used by a floating rate borrower concerned about rising interest rates) or converting a fixed rate exposure into a floating rate exposure (for example, when used by a fixed rate borrower wanting to benefit from falling interest rates). If you have a floating rate exposure, this means that the rate that applies to the underlying financial arrangement (for example, a loan) may change over time. Floating rates under financial arrangements (such as loans) are usually made up of a base rate and a margin. The: (b) base rate is usually derived from wholesale market interest rates (in New Zealand this is commonly a BKBM rate); and margin is agreed between you and the provider of your underlying financial arrangement.

5 Both the base rate and the margin may change from time to time. If you enter into an Interest Rate Swap with BNZ for protection in relation to a floating rate exposure, you will only be protected against changes in the base rate for your floating rate exposure. An Interest Rate Swap will not protect you against changes to the margin. You can tailor the cash flows and the dates on which the floating rate is reset under the Interest Rate Swap to match the specific terms of your underlying financial arrangement. The following are examples of the more commonly used structures for Interest Rate Swaps: 2 (b) (c) The notional amount is the same for the whole term of the Interest Rate Swap. For example, to match the principal amount of a non-amortising loan (meaning there are no principal repayments during the term) or a bond that you have invested in. The notional amount increases or decreases during the term of the Interest Rate Swap. For example, to match principal drawdowns or repayments on a loan. Forward starting, meaning the term of the Interest Rate Swap does not start until a future date. For example, to match the drawdown date of a loan or the issue date of a bond you are investing in. For an Interest Rate Swap to create an effective hedge, its terms (such as the notional amount, the floating rate or the fixed rate, the term and the settlement dates) should exactly match the terms of your underlying financial arrangement. For example, if the base rate on your loan is reset by reference to a different floating rate than is used to determine the floating interest payments under the Interest Rate Swap, for example, a 30 day rather than a 90 day BKBM rate, the Interest Rate Swap will not be an exact hedge. In this situation you will be exposed to the risk that the base rate on your loan increases more (or decreases less) than the reference floating rate on the Interest Rate Swap. An Interest Rate Swap can also be used to hedge only part of your exposure in respect of the underlying financial arrangement (for example, the notional amount may be less than the principal amount of your loan). An Interest Rate Swap has tax and accounting implications. You should get independent expert advice before making a decision about whether or not an Interest Rate Swap is suitable for you. 2.3 How payments under an Interest Rate Swap are calculated Calculation of rates The fixed rate on an Interest Rate Swap is set when you enter into the Interest Rate Swap. The fixed rate quoted to you by BNZ will usually have been adjusted for a margin. If you are paying fixed, a margin will have been added to the prevailing wholesale market interest rate for an interest rate swap for the same term to calculate the fixed rate. If BNZ is paying fixed, a margin will have been deducted from that wholesale market interest rate to calculate the fixed rate. The margin is explained further in section 4 of this PDS (Fees). If your underlying financial arrangement is subject to a fixed rate and you enter into an Interest Rate Swap where BNZ is paying fixed and the fixed rate BNZ offers to you on your Interest Rate Swap does not match the fixed rate under your underlying financial arrangement, you can ask BNZ to adjust our quoted fixed rate and the floating rate under the Interest Rate Swap by adding or subtracting the difference between the two fixed rates (being the rates under the Interest Rate Swap and the underlying financial arrangement). This is not a common transaction and arises when you enter into an Interest Rate Swap

6 other than for hedging purposes. An example of this type of Interest Rate Swap is included in Example 3 in section 2.4 of this PDS (Examples). The floating rate is determined at specified times during the term of the Interest Rate Swap, usually by reference to a BKBM rate. The applicable BKBM rate is a published screen rate for the relevant interest period. The screen rates are wholesale market interest rates, so do not include any margin calculated by BNZ and are currently published through Reuters and the New Zealand Financial Markets Association (NZFMA). The NZFMA captures, calculates and publishes the BKBM rates based on actual inter-bank transactions and quotes from electronic broker trading platforms. There are several different BKBM rates set out on the BKBM page (BKBM ASK, BKBM BID, BKBM FRA and BKBM MID) and each rate is quoted for several different maturities. Before BNZ enters into an Interest Rate Swap, we will agree with you which BKBM rate (or other published reference rate) will be used to determine the floating rate during the term of your Interest Rate Swap. This rate will be set out in your Confirmation. The floating rate used for your Interest Rate Swap should be the same as the floating rate that applies to your underlying financial arrangement. The wholesale market interest rates will be influenced by global and national factors including: 3 (b) (c) investment inflows and outflows (meaning whether institutions are adding to, or reducing, NZ dollar investments); economic and political circumstances; and market sentiment or expectations. As part of its business, BNZ regularly trades for its own account and the accounts of other wholesale and retail customers in the financial markets, including to manage its own interest rate risk. Those trades by BNZ may affect the market interest rates described above. Settlement dates Your Interest Rate Swap will typically require both you and BNZ to make a payment on each settlement date, although these payment obligations will be settled on a net basis as described below. The amount of each payment is calculated by multiplying the relevant interest rate (as a percentage) by the notional amount by the number of days in the calculation period out of a 365 day year. The calculation period is typically the period from one settlement date (or, in the case of the first settlement date, the start date or effective date of the Interest Rate Swap) to the next settlement date. On each settlement date: (b) (c) one of us (A) agrees to pay the other (B) an amount calculated by applying the fixed rate to the notional amount for the relevant calculation period; B agrees to pay A an amount calculated by applying the floating rate to the notional amount for the relevant calculation period; and our obligations will be settled on a net basis (this means whoever of A or B has the greater payment obligation will pay an amount equal to the difference between the two payment obligations. The other, with the smaller obligation, does not make any payment).

7 4 2.4 Examples Set out below are three examples of how an Interest Rate Swap may operate. They are included for illustrative purposes only and only reflect the circumstances described. The examples may not reflect current prices and are not indicative of the specific circumstances or obligations that may arise under an Interest Rate Swap you may enter into. The actual outcome and overall effect of any Interest Rate Swap that you enter into with BNZ will depend on (among other things) the terms of that Interest Rate Swap and your financial circumstances and other arrangements. Information that relates to each example In each example below: (b) (c) (d) floating loan and swap base rates are based on the 90 day BKBM mid rate; fixed rates or, in the case of Example 3, the floating rate, include a margin as described in section 4 of this PDS (Fees); interest is payable quarterly and the floating interest rate is reset at the start of each quarter; and there are 90 days in the relevant calculation period. The examples below do not address any tax or accounting effects of Interest Rate Swaps.

8 5 Example 1 You are a borrower with a two year NZ$20,000,000 floating rate loan. The floating rate is equal to the 90 day BKBM mid rate (the base rate) plus a margin. You are concerned that interest rates may rise and you would like to have certainty as to your interest costs under the loan. You decide to enter into an Interest Rate Swap to hedge the full loan amount for the entire term of your loan. To do this, you and BNZ enter into a two year Interest Rate Swap with a notional amount of NZ$20,000,000, where you pay a fixed rate of 4.00% per annum (which includes a margin), you receive the 90 day BKBM mid rate as the floating rate and net settlement takes place each quarter. If the 90 day BKBM mid rate is 5.00% per annum for a calculation period, meaning it is higher than the fixed rate, on the relevant settlement date: you owe BNZ an amount calculated by applying the fixed rate (4.00% per annum) to the notional amount (NZ$20,000,000) for the relevant calculation period (90/365): = NZ$20,000,000 x 0.04 x 90/365 = NZ$197, (b) BNZ owes you an amount calculated by applying the floating rate (the 90 day BKBM mid rate at 5.00% per annum) to the notional amount (NZ$20,000,000) for the relevant calculation period (90/365): = NZ$20,000,000 x 0.05 x 90/365 = NZ$246, (c) BNZ has the greater obligation, so BNZ pays you the difference between the amounts payable in and (b) above: = NZ$246, NZ$197, = NZ$49, The effect is that, while the base rate applicable to your loan (the 90 day BKBM mid rate) has increased to 5.00% per annum for that quarter, and your interest payments on your loan have increased as a result, the amount you received from BNZ under the Interest Rate Swap offsets that increase. Overall, the economic effect is the same as if the base rate applicable to your loan for that quarter had been 4.00% per annum.

9 6 Example 2 Assuming the same fact pattern as set out in Example 1, but the 90 day BKBM mid rate is 3.00% per annum for a calculation period, meaning it is lower than the fixed rate, on the relevant settlement date: you owe BNZ an amount calculated by applying the fixed rate (4.00% per annum) to the notional amount (NZ$20,000,000) for the relevant calculation period (90/365): = NZ$20,000,000 x 0.04 x 90/365 = NZ$197, (b) BNZ owes you an amount calculated by applying the floating rate (BKBM at 3.00% per annum) to the notional amount (NZ$20,000,000) for the relevant calculation period (90/365): = NZ$20,000,000 x 0.03 x 90/365 = NZ$147, (c) you have the greater obligation, so you pay BNZ the difference between the amounts payable in and (b) above: = NZ$197, NZ$147, = NZ$49, The effect is that, while the base rate applicable to your loan (the 90 day BKBM mid rate) has decreased to 3.00% per annum for that quarter, and your interest payments on your loan have decreased as a result, the amount paid by you under the Interest Rate Swap offsets that decrease. Overall, the economic effect is the same as if the base rate applicable to your loan for that quarter had been 4.00% per annum. This means you have not received the benefit of the decrease in the base rate.

10 7 Example 3 You are a borrower with a one year NZ$10,000,000 loan with a fixed rate of 4.00% per annum. You think that floating rates will drop below your fixed rate during the term of the loan and therefore that you will benefit from entering into an Interest Rate Swap where you make floating rate payments and receive fixed rate payments. This is not a common transaction but it illustrates the effect of using Interest Rate Swaps other than for hedging purposes. In particular, it does not provide you with certainty about your effective interest costs under the loan as you are exposed to market variations in floating interest rates. You would also like the fixed interest payments payable under your loan to be completely offset by the amounts calculated using the fixed rate under the Interest Rate Swap. However, the current one year Interest Rate Swap fixed rate offered to you by BNZ is 3.50% per annum. To offset the fixed interest payments under the loan you ask BNZ to increase both the fixed rate and the floating rate under the Interest Rate Swap by 0.50% per annum. You decide to enter into an Interest Rate Swap in relation to the full loan amount for the entire term of your loan. To do this, you and BNZ enter into a one year Interest Rate Swap with a notional amount of NZ$10,000,000, where you pay the 90 day BKBM mid rate plus 0.50% per annum as the floating rate and receive a fixed rate of 4.00% per annum. If the 90 day BKBM mid rate is 10.00% per annum for a calculation period, meaning it is higher than the fixed rate, on the relevant settlement date: BNZ owes you an amount calculated by applying the fixed rate (4.00% per annum) to the notional amount (NZ$10,000,000) for the relevant calculation period (90/365): = NZ$10,000,000 x 0.04 x 90/365 = NZ$98, (b) you owe BNZ an amount calculated by applying the floating rate (10.50% per annum, being the 90 day BKBM mid rate of 10.00% per annum plus 0.50% per annum) to the notional amount (NZ$10,000,000) for the relevant calculation period (90/365): = NZ$10,000,000 x x 90/365 = NZ$258, (c) you have the greater obligation, so you pay BNZ the difference between the amounts payable in and (b) above: = NZ$258, NZ$98, = NZ$160, The effect is that, while the fixed rate applicable to your loan has not changed, the 90 day BKBM mid rate has increased to 10.00% per annum for that quarter (which, including the additional 0.50% per annum, gives you a floating rate of 10.50% per annum), and your interest costs for that calculation period have more than doubled as a result of your entering into an Interest Rate Swap based on your view on the likely direction of interest rates.

11 8 2.5 Entering into an Interest Rate Swap Documentation Before entering into an Interest Rate Swap with you, BNZ will: (b) assess your financial position to determine if it satisfies BNZ's credit requirements; and assess your understanding of Interest Rate Swaps as described below. We will advise you of the outcome of this review as soon as possible. If your application is successful, you are required to enter into one of BNZ's standard documents (depending on your status and what types of derivatives you intend to enter into). BNZ's standard documents for Interest Rate Swaps are (in order of frequency of use): a Master Agreement for Foreign Exchange and Derivative Transactions (Derivatives Master Agreement); and (b) an ISDA Master Agreement. BNZ's general practice is to enter into a Derivatives Master Agreement. However, we will enter into an ISDA Master Agreement if you request, or where our risk assessment indicates that an ISDA Master Agreement would be more appropriate. The agreement that you and BNZ enter into governs your derivatives relationship with BNZ and sets out terms and conditions that apply to any derivatives, including any Interest Rate Swaps you enter into. You should read the terms and conditions of the relevant agreement carefully before entering into it. You should obtain independent legal advice if you do not understand any aspect of the relevant agreement. Agreement of terms The terms of a specific Interest Rate Swap are usually agreed verbally over the telephone or by . We are not required to enter into an Interest Rate Swap with you. Once we have reached an agreement, both you and BNZ are bound by the terms which have been agreed. Conversations with our dealing room are recorded. This is standard market practice. We do this to make sure that we have a complete record of the details of all derivatives. Recorded conversations are reviewed when there is a dispute and for staff monitoring purposes. s are retained by BNZ for the same purpose. Shortly after entering into an Interest Rate Swap, BNZ will send you a Confirmation outlining the commercial terms of the Interest Rate Swap. It is extremely important that you check the Confirmation to make sure that it accurately records the terms agreed by you and BNZ. In the case of any error, you will need to raise the matter with your Markets Salesperson or BNZ Partner immediately. Suitability of Interest Rate Swaps for you Before entering into an Interest Rate Swap we will ask you to provide us with information about your knowledge, experience and level of understanding in relation to that Interest

12 Rate Swap, unless we already hold that information. For non-individual customers this information will be requested in relation to the director(s), employee(s) or agent(s) acting on behalf of the customer entity. This information enables us to assess whether we think you are able to understand the Interest Rate Swap and the risks involved in entering into the Interest Rate Swap. 9 If you do not provide the information we request, there is a strong risk we may not be able to assess these matters, and we may choose not to enter into the Interest Rate Swap with you. If you do provide the information we request and, based on that information, we have concerns about your understanding of the Interest Rate Swap, we will not enter into the Interest Rate Swap with you. 2.6 Alterations Alteration of the Master Agreement If your derivatives relationship with BNZ is governed by a Derivatives Master Agreement, BNZ has a right to amend your agreement by giving 30 days written notice to you. Neither you nor BNZ has the right to amend an ISDA Master Agreement without the other's consent. Alteration of Interest Rate Swaps If your derivatives relationship is governed by a Derivatives Master Agreement and we exercise our right to amend your agreement by giving 30 days written notice to you, as described above, such an alteration could result in a change to your Interest Rate Swap. Other than as described in relation to the Derivatives Master Agreement, in general, neither you nor BNZ has the right to change an Interest Rate Swap (including any fees or charges) after it has been entered into unless both parties agree. If you want to vary an Interest Rate Swap by for example: (b) (c) extending or cancelling an Interest Rate Swap in whole or in part; changing the notional amount; or changing the applicable fixed or floating rates, margin or settlement dates, you must contact your Markets Salesperson or BNZ Partner. BNZ is not required to accept your request. If your request is accepted, you must pay any costs of varying the Interest Rate Swap (which may include break costs (calculated as described in section 2.8 of this PDS (Amounts payable on termination)) or a change in the margin (as described in section 4 of this PDS (Fees)) and agree to the terms and conditions of any replacement or amended Interest Rate Swap. When revised terms have been agreed for your Interest Rate Swap, you will receive an additional Confirmation outlining the varied terms. You are not entitled to sell or transfer an Interest Rate Swap unless BNZ agrees. Even if BNZ does agree, there is no guarantee that a third party will be willing to assume your obligations under that Interest Rate Swap on the same terms.

13 Terminating an Interest Rate Swap Depending on which of the Master Agreements referred to above you have entered into, both you and BNZ have additional rights to terminate some or all of the derivatives you have entered into with BNZ, primarily if adverse events occur. Derivatives Master Agreement If your relationship with BNZ is governed by a Derivatives Master Agreement, BNZ has a right to terminate any or all derivatives between you and BNZ if a default set out in that agreement occurs, a tax event occurs or if a market disruption event occurs in relation to BNZ. The events of default set out in that agreement include: (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) you fail to make a payment or you or a guarantor breaches any other obligation under the agreement; you or a guarantor become insolvent; you or a guarantor fail to make a payment or comply with obligations under another agreement with BNZ; a representation made by you or a guarantor to BNZ in connection with the agreement or under any other agreement with BNZ is untrue or misleading in any material respect; you fail to make a payment or comply with obligations in respect of money owed to another person; performance of the agreement or a related guarantee becomes illegal; you or a guarantor dies (if you or a guarantor are individuals); any security over you or a guarantor or your or a guarantor's assets becomes enforceable; in BNZ's opinion, a material adverse event occurs in relation to you or a guarantor; if you are acting as a trustee of a trust and certain events occur, including events in relation to the termination of the trust or you losing the right of indemnity from the trust assets or your right of indemnity being limited; if you are acting as a partner of a partnership and certain events occur, including you breaching the partnership agreement, the partnership being terminated or you ceasing to be a partner of the partnership; if you are acting as a general partner of a limited partnership and certain events occur, including the occurrence of a terminating event in respect of the limited partnership, any other steps being taken to terminate the limited partnership or you ceasing to be, or failing to perform your obligations as, a general partner; and any other event, which you and BNZ agree or is specified in your Confirmation as an event of default, occurs. A market disruption event can occur if BNZ is unable to make or receive payments under an Interest Rate Swap due to reasons beyond our control which could include disruption in markets, communication methods or a change in law.

14 A tax event can occur, if, as a result in a change of law, or any action taken by a taxing authority, we will, or there is a substantial likelihood that we will, be required to pay more, or will receive less in connection with the agreement on the next date on which a payment is due. In this case we may terminate the affected derivatives. ISDA Master Agreement If your relationship with BNZ is governed by an ISDA Master Agreement, you and BNZ each have a right to terminate any or all derivatives (depending on the relevant event) between you and BNZ if an event of default or termination event set out in that agreement occurs in relation to the other party. The events of default and termination events set out in that agreement will, unless you and BNZ have agreed otherwise, include: 11 (b) (c) (d) (e) (f) (g) you or BNZ fail to make a payment or breach any other obligation under the agreement; you or BNZ become insolvent; you or BNZ fail to make a payment or comply with obligations under another derivative transaction or in respect of borrowed money; you or BNZ fail to comply with obligations under a credit support document specified in the ISDA Master Agreement (these are security or guarantee documents); a representation made by you or BNZ in connection with the agreement or any derivative is incorrect or misleading in any material respect; performance under a derivative becomes illegal; you or BNZ amalgamate or merge with a second entity, or transfer all or substantially all of the relevant party's assets to a second entity and: (i) (ii) the creditworthiness of the second entity is materially weaker than the relevant party or the second entity does not assume all of the relevant party's obligations under the agreement; or as a result, either you or BNZ will be required to pay more, or will receive less, under an Interest Rate Swap; (h) (i) (j) a "force majeure event" occurs, which is an event or act of a government that is beyond your or BNZ's control that makes it impossible or impracticable for you or BNZ to comply with your obligations under the agreement, including making or receiving payments; a "tax event" occurs, which means that there is a change in tax law or an action taken by a taxing authority or brought in a court which will, or is likely to, result in either you or BNZ being required to pay more, or receive less, under an Interest Rate Swap; and any other event, which you and BNZ agree or is specified in your Confirmation as an event of default or termination event, occurs. If there are any "Credit Support Providers" (for example, a guarantor) specified or other persons named as "Specified Entities" (for example, your subsidiaries) in relation to you or

15 BNZ, some of these events also apply in relation to those Credit Support Providers or Specified Entities. Information that applies to both Master Agreements The information below applies whether your relationship with BNZ is governed by a Derivatives Master Agreement or an ISDA Master Agreement. In addition to the termination rights described above that apply to your relationship with BNZ, you and BNZ may agree that optional early termination is to apply to an Interest Rate Swap. In that case, the relevant party has the right (but not the obligation) to terminate that Interest Rate Swap on the date or dates agreed. You may want to do this if, for example, you intend to pay off a related loan early. 2.8 Amounts payable on termination If a derivative is terminated early, the value of the terminated derivative will be determined as at the termination date. The value of the terminated derivative is usually determined by BNZ, and will include a calculation of a break cost or benefit based on the "mark-to-market" value of the specific Interest Rate Swap as described in section 3.1 of this PDS (Product risks) and 4 of this PDS (Fees). The rates that BNZ applies to determine that value may include a margin as described in section 4 of this PDS (Fees). If more than one derivative is being terminated under your Master Agreement, these termination amounts may be aggregated and, if applicable, this will result in a net amount payable either by you to BNZ or by BNZ to you. This is known as close-out or termination netting. The amounts payable on termination, whether or not they are netted, may be significant. The information set out above is only a summary of the principal circumstances in which derivatives may be terminated and the amounts payable on termination. You should refer to your agreement for full details of all default and termination events and the consequences of those events. You can request an estimate of the termination value from us at any time RISKS OF THESE DERIVATIVES 3.1 Product risks Set out below are the significant risks of entering into an Interest Rate Swap. Independent contract An Interest Rate Swap is completely independent of any underlying financial arrangement, such as a loan or a bond. For the Interest Rate Swap to create an effective hedge, the terms of the Interest Rate Swap (such as the notional amount, floating interest rate (if you are hedging a floating rate exposure), term and settlement dates) should exactly match the terms of your underlying financial arrangement (such as the principal amount, base rate used to determine your interest rate, term and interest payment dates). If, for example, the base rate on your loan is reset by reference to a different floating rate or on different reset dates than the floating rate on your Interest Rate Swap, a hedging mismatch will occur and the hedge may not be fully effective. By entering into an Interest Rate Swap you are exposed to movements in wholesale market interest rates. For example, if you enter an Interest Rate Swap where you:

16 13 (b) (c) are a borrower and make fixed rate payments (and receive floating) to hedge your interest costs on a floating rate loan you will generally not benefit from a fall in wholesale floating interest rates for the amount of your loan that has been hedged by the Interest Rate Swap; or are a borrower and make floating rate payments (and receive fixed) to offset your interest payment on a fixed rate loan you will generally benefit from a fall in wholesale floating interest rates for the amount of your loan that has been hedged by the Interest Rate Swap. However, if floating interest rates rise above the fixed rate on your Interest Rate Swap (or the fixed rate on your loan, if it is higher) your overall costs will be greater than if you had not entered into the Interest Rate Swap; or are an investor and make fixed rate payments (and receive floating) to hedge your interest income on a fixed rate bond you will generally benefit from a rise in wholesale floating interest rates. However, if floating rates fall below the fixed rate on your bond, your overall income would be lower than if you had not entered into the Interest Rate Swap. You are locked into the Interest Rate Swap Once you have entered into an Interest Rate Swap, you are locked in for the term of the Interest Rate Swap whether or not the Interest Rate Swap is favourable to you in the future. For example, interest rates may move in a way that means you would have been better off if you had not entered into an Interest Rate Swap. Altering or terminating an Interest Rate Swap may be expensive If you want to alter or terminate an Interest Rate Swap, (for example, if the financial arrangements you are hedging with the Interest Rate Swap change) there may be a cost to you, known as a break cost, depending on then current wholesale market interest rates. Break costs may also be payable by you if we exercise our right to terminate the Interest Rate Swap and/or your Master Agreement with us in any of the other circumstances set out in the applicable Master Agreement (for example, if you default in your obligation to make required payments to us). See section 2.7 of this PDS (Terminating an Interest Rate Swap) for details on when we can terminate and sections 2.8 of this PDS (Amounts payable on termination) and 4 of this PDS (Fees) for details on how we calculate break costs. 3.2 Issuer risks You are exposed to the risk that BNZ becomes insolvent and is unable to meet its obligations under the derivatives. Information that can assist you to assess BNZ's creditworthiness is set out or referred to below. Disclosure Statements As a registered bank under the Reserve Bank of New Zealand Act 1989 BNZ is required to prepare disclosure statements. BNZ's disclosure statements are available at:

17 14 Credit Ratings The Interest Rate Swaps described in this PDS have not been rated by any credit rating agency. However, BNZ has the following credit ratings as at the date of this PDS for its long-term senior unsecured obligations payable in New Zealand, in NZ dollars: Rating Agency Current Credit Rating Qualification Standard & Poor's (Australia) Pty Limited AA- Outlook Stable Moody's Investors Service Pty Limited Aa3 Outlook Stable Fitch Australia Pty Limited AA- Outlook Stable During the two-year period prior to the date of this PDS, there was no change to BNZ's Standard & Poor's, Moody's Investors Service or Fitch Ratings issuer credit ratings.

18 The following is a summary of the major rating categories for long-term obligations and shows the placement of BNZ's credit ratings. 15 Standard & Poor's Moody's Investors Service Fitch Ratings Description of Grade Default probability ** AAA Aaa AAA Ability to repay principal and interest is extremely strong. This is the highest investment category. 1 in 600 BNZ's credit ratings (Outlook Stable) Speculative grade Investment grade AA Aa AA A A A BBB Baa BBB BB Ba BB B B B CCC Caa CCC Very strong ability to repay principal and interest. Strong ability to repay principal and interest although somewhat susceptible to adverse changes in financial conditions. Adequate ability to repay principal and interest. More vulnerable to adverse changes. Significant uncertainties exist which could affect the payment of principal and interest on a timely basis. Greater vulnerability and therefore greater likelihood of default. Likelihood of default considered high. Timely repayment of principal and interest is dependent on favourable financial conditions. 1 in in in 30 1 in 10 1 in 5 1 in 2 CC to C Ca to C* CC to C Highest risk of default. D - RD & D Obligations currently in default. * If a rating of "C" is given by Moody's Investors Service, the issuer is typically in default. ** The approximate median likelihood that an investor will not receive repayment on a five-year investment on time and in full based upon historical default rates published by each agency, as at 2008 (source: Reserve Bank of New Zealand publication "Explaining Credit Ratings", dated November 2008). Credit ratings by Standard & Poor's and Fitch Ratings may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories. Moody's Investors Service apply numeric modifiers 1, 2 and 3 to show relative standing within the rating categories with 1 being the highest and 3 the lowest. A credit rating is an independent opinion of the capability and willingness of an entity to meet its financial obligations (in other words, its creditworthiness). It is not a guarantee that the issuer will be able to meet its obligations under derivatives.

19 Risks when entering or settling the derivatives The terms of an Interest Rate Swap are usually agreed verbally over the telephone or by as described in section 2.5 of this PDS (Entering into an Interest Rate Swap). You and BNZ are bound by the terms as soon as they are agreed. Where the terms of an Interest Rate Swap are agreed by , the rates quoted in our s to you will be indicative only. This is because there may be delays in sending and/or receiving s and wholesale market interest rates may change during that time. In these circumstances, an Interest Rate Swap will not be treated as being agreed until we acknowledge your acceptance of our final quote, typically by return . From time to time disputes may arise about the terms of an Interest Rate Swap that has been agreed verbally or by . We record conversations with our dealing room and retain s. If there is a dispute between you and BNZ regarding the terms of a particular Interest Rate Swap that has been agreed verbally or by we can review the recorded conversations or retained s to confirm the details of the transaction. 4. FEES The payments due under an Interest Rate Swap are as described in section 2.3 of this PDS (How payments under an Interest Rate Swap are calculated). You are not required to pay BNZ any fees on the trade date in order to enter into an Interest Rate Swap. BNZ covers its costs and derives its profit on Interest Rate Swaps by adjusting the fixed rate specified in an Interest Rate Swap by a margin. If you are the floating rate payer, BNZ will apply a margin adjustment to the floating rate instead. The margin is determined when BNZ agrees the fixed rate (or, if applicable, the floating rate) with you when entering into the Interest Rate Swap. You effectively pay the margin when you make the required payments under the Interest Rate Swap. The margin covers BNZ's internal transaction costs, compensation for market, credit and operational risk, regulatory capital costs and profit margin. The calculation of the margin varies from customer to customer and, in some cases, from transaction to transaction and is influenced by a number of factors, comprising: (b) (c) the terms of the Interest Rate Swap, including the size, duration and complexity of the transaction; market volatility and liquidity; and the creditworthiness of the customer. For example, an Interest Rate Swap with a duration of 2 years entered into at a time of high market volatility will likely have a higher margin than an Interest Rate Swap of 6 months entered into at the same time. Similarly, an Interest Rate Swap for an illiquid or very small notional amount or which has complex or unusual terms (as agreed by you and BNZ), is likely to have a higher margin than an Interest Rate Swap for a different notional amount and/or less complex or unusual terms. Also, the adjustment to the margin to take account of creditworthiness for a very creditworthy customer will likely be less than the margin adjustment applicable to a customer who is less creditworthy.

20 As part of its business, BNZ regularly trades for its own account and the accounts of other wholesale and retail customers in the financial markets, including to manage its own interest rate risk. These activities may affect the market interest rates to which the margin is applied. Alteration of Interest Rate Swaps If you ask us to alter the terms of your Interest Rate Swap we are likely to recalculate the margin incorporated in the rate applied to determine amounts you pay under the Interest Rate Swap. The recalculated margin may increase the cost of the Interest Rate Swap to you. The same factors will impact the recalculation of the margin that influence our calculation of the original margin when we agree to enter into an Interest Rate Swap. We will not agree to alter the Interest Rate Swap unless you have accepted the applicable rates (including the recalculated margin). If you accept the new terms we will send you a revised Confirmation. Early termination of Interest Rate Swaps If an Interest Rate Swap is terminated early, voluntarily or not, you may be required to pay BNZ a break cost, as described in sections 2.8 (Amounts payable on termination) and 3.1 of this PDS (Product risks). This amount can be significant. Calculation of mark-to-market values In simple terms, a break cost or benefit for an Interest Rate Swap is BNZ's determination of a market value of the Interest Rate Swap at the time it is calculated (on the termination date). This is also known as the "mark-to-market" value of the Interest Rate Swap, which is determined by valuing the Interest Rate Swap on the termination date. This value reflects the discounted expected value of the Interest Rate Swap, based on the current wholesale market interest rates HOW BNZ TREATS FUNDS AND PROPERTY RECEIVED FROM YOU Typically no payments are made upfront (that is, on the trade date) in relation to an Interest Rate Swap. Payments are made on each settlement date as described in section 2.3 of this PDS (How payments under an Interest Rate Swap are calculated). Payments you are required to make must be made directly to BNZ, to the account specified in your Confirmation. All payments are treated as being received by us when cleared funds are received in our account and become our property upon payment. BNZ does not currently require margin or collateral in relation to Interest Rate Swaps offered under this PDS, but reserves the right to request security for your obligations as part of our assessment of your creditworthiness. 6. ABOUT BNZ BNZ is a registered bank under the Reserve Bank of New Zealand Act Since its establishment in 1861, BNZ has been carrying on the business of providing banking and financial services in New Zealand. BNZ provides a comprehensive range of banking and financial services, including deposit taking, credit and debit cards, corporate, domestic and multi-currency lending, dealing in interest rate and foreign exchange products and other derivatives, trade finance, the distribution of life and general insurance, managed funds, KiwiSaver and superannuation products, and the provision of investment advice. The ultimate parent bank of BNZ is National Australia Bank Limited. National Australia Bank

21 Limited does not guarantee the obligations of BNZ in relation to derivatives, including the Interest Rate Swaps. BNZ's contact details are: BNZ Private Bag Wellington Mail Centre Lower Hutt 5045 Telephone HOW TO COMPLAIN If you have a complaint about an Interest Rate Swap offered under this PDS, the first step is to raise your concern with the person you dealt with initially. This will likely be your Markets Salesperson or BNZ Partner. They should be able to resolve the majority of problems and will listen to and investigate your concern. If that person is unable to resolve your problem, they will follow it up and keep you informed about action being taken on your behalf. If the issue remains unresolved, contact the Head of Specialist Solutions on In the event the problem is still not resolved to your satisfaction, you should refer your complaint to: BNZ Resolve Attention: Manager, Complaint Resolution, Bank of New Zealand PO Box 995, Shortland Street, Auckland 1140 Telephone Any complaint which reaches this level will receive the personal attention of a member of BNZ's Complaint Resolutions team. BNZ subscribes to the Code of Banking Practice (Code) which sets out the minimum standards for resolving complaints. The Code requires disputes to be resolved as quickly and equitably as possible and provides that banks will be held accountable to the Code. If, after raising the matter with BNZ, you are still not satisfied, you may contact the Banking Ombudsman. The Banking Ombudsman has been appointed by all the banks subscribing to the Code and is an approved dispute resolution scheme under the Financial Service Providers (Registration and Dispute Resolution) Act The Banking Ombudsman may be able to help reach resolution if this cannot be achieved through BNZ's own complaints procedures. The Banking Ombudsman will not charge you a fee to investigate or resolve your complaint. The telephone number of the Banking Ombudsman is Any correspondence should be addressed to: The Office of the Banking Ombudsman Freepost PO Box Featherston St Wellington 6146 help@bankomb.org.nz

22 Complaints may also be made to the Financial Markets Authority through its website or at: Financial Markets Authority DX Box CX10033 PO Box Auckland 1143 Telephone WHERE YOU CAN FIND MORE INFORMATION Further information relating to BNZ and the Interest Rate Swaps offered under this PDS is available from the offer register at A copy of the information on the offer register is available on request from the Registrar of Financial Service Providers. For example, on the offer register, there is a link to BNZ's disclosure statements published under section 81 of the Reserve Bank of New Zealand Act 1989, including the financial statements contained in those disclosure statements. A copy of BNZ's most recent disclosure statement can also be obtained free of charge from BNZ's website ( any BNZ store or agency of BNZ. BNZ's annual disclosure statements and other documents relating to BNZ are filed on a public register at the Companies Office of the Ministry of Business, Innovation and Employment and are available for public inspection through the Companies Office or on the Companies Office website ( Additional information about BNZ and Interest Rate Swaps is also available at Further information about BNZ will also be available on the website of any licensed market, or other securities exchange, on which BNZ's financial products may be quoted from time to time. You may also request information about Interest Rate Swaps, as well as the most recent copy of this PDS, free of charge, by contacting your Markets Salesperson or BNZ Partner or by contacting BNZ using the details set out in section 6 of this PDS (About BNZ). Alternatively, call (Auckland), (Wellington) or (Christchurch) to arrange for one of our Markets Salespersons to call you. 9. HOW TO ENTER INTO CLIENT AGREEMENT Before entering into a client agreement with you, BNZ will consider your financial position and understanding of Interest Rate Swaps as described in section 2.5 of this PDS (Entering into an Interest Rate Swap). If your application is successful, BNZ will advise you which of the standard documents described in section 2.5 of this PDS (Entering into an Interest Rate Swap) you will be required to enter into. This will be your client agreement. You should ensure you understand this agreement before entering into it. You can start this process by contacting your Markets Salesperson or BNZ Partner. In addition, you will only be able to enter into an Interest Rate Swap with BNZ if you have been given a copy of this PDS.