1 Information Memorandum Option Enhanced Investment Loan.
2 IMPORTANT NOTICES This document is an Information Memorandum (IM) dated 7 March 2011 and relates to the issue of Option Enhanced Investment Loans (OEILs). An OEIL is comprised of a Loan component and an Exchange Traded Option (ETO) component. BT Securities Limited (ABN ) (AFSL ) (BT Securities) is the issuer of this IM and the provider of the Loan. Westpac Securities Limited (ABN ) (AFSL ) (Westpac Securities) is the Arranger of your Loan and all ETO transactions in connection with your Loan. An offer of OEILs under this IM is only open to Australian residents who are "wholesale" clients under section 761G of the Corporations Act 2001 (Cth) (Corporations Act). Each recipient of this IM represents and warrants that it is and at all times will remain a "wholesale" client for the purposes of the Corporations Act. This IM is not a product disclosure statement under the Corporations Act. The fundraising disclosure requirements of the Corporations Act do not apply to the offer of OEILs under this IM. Updating of information in this IM The information in this IM is current as at the date of this IM but may change from time to time. BT Securities may update the information by posting you a Supplementary Information Memorandum (SIM), or by placing that SIM on Westpac s website No representation other than in this IM To the best knowledge and belief of BT Securities (who has taken all reasonable care to ensure that such is the case), the information contained in this IM is in accordance with the facts and does not omit anything likely to affect the accuracy of such information. To the extent permitted by law, BT Securities, its Related Bodies Corporate and associates disclaim all liability that may otherwise arise due to any information contained in this IM (and any SIM) being inaccurate, or due to information being omitted from this IM (and any SIM) whether by way of negligence or otherwise. However, nothing in this IM (or any SIM) excludes, restricts or modifies the operation of section 12ED of the Australian Securities and Investments Commission Act. Any information given or representation made by any dealer, salesperson or other person and not contained in this IM (or any SIM) should be regarded as unauthorised and accordingly should not be relied upon. Neither the delivery of this IM nor the offer, issue or sale of OEILs shall, under any circumstances, constitute a representation that the information contained in this IM (and any SIM) is correct at any time subsequent to the date of this IM and any SIM. Securities and Listed Entities References in this IM or any SIM to a Security are included solely for the purpose of identifying the Securities to which an OEIL relates, and references in this IM or any SIM to a Listed Entity are included solely for the purpose of identifying the issuer of those Securities. Such references are not an express or implied endorsement of OEILs by any Listed Entity, and no Listed Entity has authorised or been involved in the preparation of this IM or any SIM. ETOs are not investments in Westpac Banking Corporation An investment in ETOs is not an investment in or deposit with any member of the Westpac Group. Neither Westpac Banking Corporation nor any associate of Westpac Banking Corporation in any way guarantee the capital value or performance of ETOs. This is not investment advice You should seek your own financial advice in relation to any decision to enter into an OEIL and to invest in ETOs. The information in this IM is general information only and does not take into account your own investment objectives, personal circumstances, financial situation or needs. You should read the whole of this IM and consider all of the risk factors and other information concerning OEILs and ETOs before deciding to invest. If you have any questions, you should obtain your own independent legal, taxation and financial advice. AUSIEX Australian Investment Exchange Limited (ABN ) (AFSL ) (AUSIEX) is the Default Broker for the OEILs. AUSIEX's role in relation to OEILs is limited to the provision of broking services under the Client Agreement Terms. AUSIEX has not authorised or caused the issue of this IM, does not make (or purport to make) any statement in this IM (or any statement on which a statement in this IM is based) and takes no responsibility for any part of this IM. Offering restrictions None of the OEILs, the ETOs or this IM have been or will be lodged or registered under the securities laws of any other jurisdiction outside Australia. Further, the distribution of this IM in jurisdictions outside Australia may be restricted by law, and therefore persons into whose possession this IM comes should seek advice on and observe any such restrictions. Failure to comply with relevant legislation may violate those laws. This IM is not an offer or invitation in relation to OEILs or ETOs in any place in which, or to any person to whom, it would not be lawful to make such an offer or invitation. Neither OEILs, ETOs nor this IM have been or will be lodged or registered under the United States Securities Act of 1933 (as amended) (Securities Act) and may not be offered or sold directly or indirectly in the United States or to or for the account or benefit of U.S. Persons (as defined in Regulation S under the Securities Act), except in transactions exempt from the registration requirements of the Securities Act. Neither OEILs nor ETOs will be admitted for trading by the United States Securities and Exchange Commission, any State Securities Commission, the Commodity Futures Trading Commission under the United States Commodity Exchange Act or any other regulatory authority. No cooling-off rights apply No cooling-off rights apply to the provision of OEILs or the issue of ETOs. This means that you cannot withdraw your Application once it has been made. Applications Applications must be made on the Application Forms accompanying this IM. Printed copies of the IM and Application Forms are available free of charge to persons in Australia by contacting the OEILs sales team. Glossary Capitalised terms used in this IM are defined in Section 9.
3 Table of Contents Investment Overview 4 Section 1 Key Features 7 1. Key Features What is an OEIL? What is an ETO? Which Securities can be purchased under an OEIL? How does the Loan component work? Rolling up and rolling down a position Minimum Loan Amount Mortgage Corporate Actions Term Early termination Maturity of the Loan Dividends Call ETOs Example Role of BT Securities Role of Westpac Securities Role of AUSIEX Broker as issuer Who can apply? 9 Section 2 Trading ETOs Further information on ETOs Key Features of ETOs How are ETOs valued? ASX Clear Westpac Securities and AUSIEX Sources of educational information 11 Section 3 Significant Benefits of OEILs Significant Benefits of OEILs Significant leverage The Loan is fully protected at all times Benefit from Dividends and related franking credits Generate income from Premiums if you write Call ETOs Increased decision-making time Reduced counterparty risk Portfolio diversification 12 Section 4 Significant Risks Explained Significant Risks Explained Financial risks Full recourse for some obligations Fixed Interest Break Costs Risks of trading ETOs Corporate actions Default under the Terms and Conditions Tax considerations Superannuation entities cannot apply 14 Section 5 Fees and Charges Fees and Charges 15 Section 6 Tax Opinion 16 Section 7 Summary of Terms and Conditions Summary of Terms and Conditions Loan Agreement Terms Mortgage Terms Client Agreement Terms 33 Section 8 Additional Information Additional Information Sponsorship Potential conflicts of interest involving the Westpac Group Potential conflicts of interest involving AUSIEX National Guarantee Fund Acknowledgement of Deed of Priority Substantial holders, takeovers and associations Foreign holders Shareholding limits or restrictions Information about the Listed Entities and the Securities Anti-money laundering regulations Dispute resolution procedure No cooling-off period Ethical considerations Privacy and confidentiality compliance 37 Section 9 Glossary Glossary 38 Section 10 Terms and Conditions Terms and Conditions 40 OPTION ENHANCED INVESTMENT LOAN INFORMATION MEMORANDUM 3
4 Investment Overview The following table provides an overview of OEILs. References are made to various sections of this IM where information is provided in more detail. You should read this IM and any SIM in full, including the Terms and Conditions, and seek your own independent legal, taxation and financial advice before making any decision to invest. Lender and Controlling Participant Summary BT Securities Limited (ABN and AFSL ) (BT Securities) Level 5, 275 Kent Street Sydney NSW 2000 More info SECTION 1.15 Arranger Westpac Securities Limited (ABN and AFSL ) (Westpac Securities) Level 5, 275 Kent Street Sydney NSW 2000 SECTION 1.16 Broker The Default Broker or another Broker acceptable to BT Securities. SECTIONS 1.16, 1.17 and 1.18 Default Broker Australian Investment Exchange Limited (ABN and AFSL ) ( AUSIEX ) SECTIONS 1.16, 1.17 and 1.18 What is an OEIL? What is an ETO? How does the Securities Loan component work? The OEIL is a loan facility that allows you to purchase or refinance Securities and to protect your loan position via the ETO market. Exchange traded options (ETOs) are financial derivatives that trade on the ASX and are registered and cleared by ASX Clear. A Put ETO gives the purchaser the right, but not the obligation to sell a standard parcel of Securities to the seller of the Put ETO at a predetermined price on or before a predetermined date. A Call ETO gives the purchaser the right, but not the obligation to buy a standard parcel of Securities from the seller of the Call ETO at a predetermined price on or before a predetermined date. BT Securities will provide a loan for the purchase or the refinance of Securities up to an amount equivalent to the number of the Securities multiplied by the Exercise Price of the Put ETOs (a Securities Loan). Each Securities Loan must be used to purchase or refinance the Securities in your name. Westpac Securities will instruct the Broker to purchase Put ETOs over those Securities that will also be held in your name. When purchasing Securities you will be required to contribute the difference between the Exercise Price of the Put ETOs and the net purchase price of the Securities (the Equity Component), the premium payable for the Put ETOs (the Premium), the interest on the Securities Loan in advance and associated brokerage, fees and other charges. You are required to take out a separate Securities Loan in respect of each parcel of Securities of an entity you wish to acquire. On the Expiry Date of a Put ETO, if the market price of the Security relating to that Put ETO is below the Exercise Price of the Put ETO, the Put ETO will be exercised, giving you the funds to repay the Securities Loan in full at that time. On maturity of the Securities Loan, you will have a number of options, including selling the Securities to repay the Securities Loan (see Maturity of the Securities Loan below). SECTION 1.1 SECTION 1.2 SECTIONS 1.4 and INFORMATION MEMORANDUM OPTION ENHANCED INVESTMENT LOAN
5 Investment Overview What are the key benefits of OEILs? What are the key risks of OEILs? Fees and charges Mortgage Term Summary The key benefits of investing with an OEIL are: ownership of Securities with a considerably lower initial outlay than purchasing the Securities solely with your own funds; obtaining all the economic benefits of owning the Securities, including Dividends and related franking credits (subject to any deduction for Tax and eligibility); the Securities Loan Amount is fully protected by the Put ETOs over the Securities; flexibility to adjust your position at any time in response to market movements, subject to paying any brokerage, fees, other charges and Fixed Interest Break Costs; you will receive regular statements showing all Securities and ETOs held by you or on your behalf; and the ability to receive further income by writing Call ETOs over your Securities. There are risks associated with OEILs that you should carefully consider before entering into an OEIL. These include: financial risks: if you write Call ETOs over the Securities and the Call ETO is exercised, you will need to deliver the Securities at the Call ETO s Exercise Price, irrespective of whether you would receive a higher price on market; Corporate Actions: while the Securities will be held in your name, if a Corporate Action occurs, BT Securities has broad rights designed to protect the value of the Securities mortgaged to it, which include directing the sale of the Securities or rights that are created or affected as a result of the Corporate Action; full recourse: your obligations to pay interest on your Loan and to pay fees and any Fixed Interest Break Costs or to repay the Loan following certain events of default or Corporate Actions are all full recourse, which means that BT Securities has the right to payment from you for the full amount owing; Fixed Interest Break Costs: Fixed Interest Break Costs apply if you terminate your Securities Loan early; default: if you default under the Terms and Conditions, your Loan will become immediately payable on a full recourse basis and BT Securities and Westpac Securities and/or your Broker may exercise any rights conferred by, or perform any other obligation arising under, the ASX Market Rules or the Terms and Conditions. You contribute: the difference between the Exercise Price of the Put ETOs and the net purchase price of the Securities; the Premium payable for the Put ETO; the interest on the Securities Loan in advance and interest on the Collateral Loan on demand; and associated brokerage, fees and other charges. Your obligation to repay the Loan Amount will be secured by a mortgage granted to BT Securities over the Securities, the Put ETOs and Premiums obtained from writing Call ETOs over your Securities as well as any entitlements associated with your Securities. Each Securities Loan is for a term commencing on the date funds are drawn down and ending on the 3rd Business Day following the Expiry Date of the Put ETOs, unless a shorter term has been agreed. The minimum term of each Securities Loan is one month. More info SECTION 3 SECTION 4 SECTIONS 1.4 and 5 SECTION 1.7 SECTION 1.9 OPTION ENHANCED INVESTMENT LOAN INFORMATION MEMORANDUM 5
6 Investment Overview Maturity of the Securities Loan Tax considerations Applications Summary On maturity of the Securities Loan, you can: do nothing, in which case Westpac Securities will arrange for the Securities to be sold on your behalf by the Broker (either on the ASX or through the exercise of the Put ETOs), the proceeds will be used to pay off the Securities Loan; rollover the Loan by entering into a new OEIL (if available); repay the Securities Loan out of your own funds; or refinance the Securities Loan via an approved Westpac loan facility (if available). A general summary of the likely tax treatment of OEILs is provided in Section 6. You should seek your own tax advice before investing in OEILs. Applications can be made by completing the relevant Application Forms accompanying this IM. The minimum Securities Loan Amount for which you can apply in respect of a Security is $100,000. More info SECTION 1.11 SECTION 6 SECTION INFORMATION MEMORANDUM OPTION ENHANCED INVESTMENT LOAN
7 SECTION 1 Key Features 1. Key Features This Section provides a brief description of the key features of OEILs. You should read this IM and any SIM in full, including the Terms and Conditions, and seek your own independent legal, taxation and financial advice before making any decision to invest. 1.1 What is an OEIL? The OEIL is a loan facility that allows you to purchase or refinance Securities and to manage your loan position by purchasing exchange traded put options (Put ETOs) over those Securities. This means that each Securities Loan is covered at all times. As you are the legal owner of the Securities, you are entitled to receive Dividends and related franking credits (subject to any deduction for Tax and eligibility). You can also receive further income by writing Call ETOs over the Securities. 1.2 What is an ETO? Exchange traded options (ETOs) are an alternative way of trading interests in Securities. They are derivative products that are traded on the ASX Options Market and are registered and cleared by ASX Clear Pty Limited (ASX Clear). ETOs allow investors to enter into a standard form contract for the right to acquire or dispose of a parcel of Securities at a predetermined price (an Exercise Price) on or before a predetermined date (an Expiry Date). To acquire this right, the buyer of the ETO must pay an amount to the seller of the ETO called the Premium. The following information will give you a brief introduction to ETOs. (a) Writers and Takers Every ETO has both a writer and a taker. A Writer of an ETO sells the right to acquire or dispose of a standard parcel of Securities at a predetermined price on or before a predetermined date. They are known as writers because they underwrite the obligation to deliver or accept the Securities covered by the ETO. A Taker of an ETO buys the right to acquire or dispose of a parcel of Securities at a predetermined price on or before a predetermined date. They are known as takers as they can take up the right to purchase or sell the Securities covered by the ETO. (b) Puts and Calls ETOs can be either puts or calls. A Put ETO gives the Taker the right, but not the obligation, to sell a standard parcel of Securities at a predetermined Exercise Price on or before a predetermined Expiry Date. If the Taker of the Put ETO exercises their right to sell, the Writer must buy that standard parcel of Securities at the Exercise Price from the Taker. A Call ETO gives the Taker the right, but not the obligation, to buy a standard parcel of Securities at a predetermined Exercise Price on or before a predetermined Expiry Date. If the Taker of the Call ETO exercises their right to buy, the Writer must sell that standard parcel of Securities at the Exercise Price to the Taker. (c) Settlement method Upon expiry, most ETOs are deliverable, which means that one party to the ETO must physically deliver the standard parcel of Securities to the other party. Further information on trading ETOs is set out in Section Which Securities can be purchased under an OEIL? ETOs are only available to be traded in respect of Securities selected by ASX Clear according to specified guidelines. For OEILs, the Securities must also be approved by BT Securities. For a list setting out the Securities approved by BT Securities for the purpose of the OEILs, please contact the OEILs sales team. 1.4 How does the Securities Loan component work? BT Securities will provide a loan for the purchase or the refinance of Securities up to an amount equivalent to the number of the Securities multiplied by the Exercise Price of the Put ETOs (a Securities Loan). Each Securities Loan must be used to purchase or refinance the Securities in your name. Westpac Securities will instruct the Broker to purchase Put ETOs over those Securities that will also be held in your name. When purchasing Securities you will be required to contribute the difference between the Exercise Price of the Put ETOs and the net purchase price of the Securities (the Equity Component), the premium payable for the Put ETOs (the Premium), the interest on the Securities Loan in advance and associated brokerage, fees and other charges. See Section 5 for further details on the fees and costs associated with OEILs. The Securities held must be covered by at least the equivalent number of Put ETOs. Each parcel of Securities is subject to a separate Securities Loan. Each Securities Loan is subject to the Loan Agreement Terms. In the event of a Corporate Action, BT Securities may require you to take such action as BT Securities considers appropriate to preserve the value of its Security Interest. This may include the transfer of any Securities or other securities obtained as a result of a Corporation Action out of your OEIL, or the purchase of additional Put ETOs in relation to those Securities or other securities. You are required to take out a separate Securities Loan in respect of each parcel of Securities in an entity you wish to acquire. For example, if you wish to purchase 100 shares in Company X and 100 shares in Company Y, you would need to take out one Securities Loan in respect of the shares in Company X and another Securities Loan in respect of the shares in Company Y. BT Securities may make a Securities Loan in its absolute discretion and subject to the Loan Agreement Terms. 1.5 Rolling up and rolling down a position OEILs offer you the flexibility to roll up the position of your Securities to lock in rises in stock price, and to roll down a position if there is a significant fall. If the stock price of a Security rises, profits or gains can be locked in by rolling up the Put ETO over the Security. Rolling up a position involves selling the Put ETO and purchasing a Put ETO over the Security with a higher Exercise Price. If you have sold any Call OPTION ENHANCED INVESTMENT LOAN INFORMATION MEMORANDUM 7
8 SECTION 1 Key Features ETOs over that Security, they can be repurchased and you can sell a Call ETO with a higher Exercise Price. If on the other hand the stock price of a Security falls, you can roll down the position by selling the existing Put ETO over that Security and buying a Put ETO with a lower Exercise Price. If you have sold any Call ETOs over that Security, they can be repurchased and you can sell a Call ETO with a lower Exercise Price. The Exercise Price at which you do not suffer any gain or loss over that Security will therefore be reduced. Rolling up or rolling down a position may affect the maximum amount BT Securities may lend to you and may incur transaction costs including associated brokerage, fees, other charges and any Fixed Interest Break Costs. 1.6 Minimum Loan Amount The minimum Loan Amount for which you can apply for a parcel of Securities is $100, Mortgage Your obligation to repay the Loan Amount will be secured by a mortgage granted to BT Securities over the Securities, the Put ETOs, premiums obtained from writing Call ETOs over your Securities and any other entitlements from the Securities. 1.8 Corporate Actions While the Securities will be held in your name, if a Corporate Action occurs, BT Securities has broad rights designed to protect the value of the Securities mortgaged to it, which include directing the sale of the Securities or rights that are created or affected as a result of the Corporate Action. 1.9 Term Each Securities Loan will be for a term commencing on the date funds are drawn down and ending on the 3rd Business Day following the Expiry Date of the Put ETOs over the Securities for that Securities Loan, unless a shorter term is agreed. The minimum term of each Loan is one month Early termination You can terminate a Securities Loan early with the approval of BT Securities. If approval is given, you must repurchase any Call ETOs sold over the Securities in respect of the Securities Loan, sell or exercise the Put ETOs in respect of the Securities Loan and use the proceeds from the sale of the Securities to repay the Securities Loan. You would also be required to pay associated Fixed Interest Break Costs, as well as any brokerage, fees or other charges. See Section 5 for more information Maturity of the Securities Loan On maturity of the Securities Loan, you must elect one of the following options: do nothing, in which case the Securities will be sold (either on the ASX or through the exercise of the Put ETOs) and the proceeds used to pay off the Securities Loan; rollover the Securities Loan by entering into a new OEIL (if available); repay the Securities Loan; or refinance the Securities Loan using a Westpac loan facility approved by BT Securities (if available). On the Expiry Date of a Put ETO, if the market price of the Security relating to that Put ETO is below the Exercise Price of the Put ETO, the Put ETO will be exercised, giving you the funds to repay the Loan Amount in full at that time Dividends During the term of your OEIL, all Dividends paid on the Security will be paid to you either in cash or, where there is a dividend reinvestment plan in place and you have elected to participate in it, with the delivery of additional Securities (subject to any deduction for Tax). You should be entitled to receive the benefit of any franking credits attached to the Dividend (subject to eligibility) Call ETOs You may (with BT Securities consent) sell Call ETOs over Securities which are subject to an OEIL, provided that the total number of Securities covered by the sold Call ETOs does not exceed the number of Securities for that Securities Loan. The Call ETO Exercise Price must be greater than or equal to the Exercise Price of the Put ETO over that Security and must have an Expiry Date no later than the Expiry Date of the Put ETO. If you sell a Call ETO, you will be required to lodge the Securities over which the Call ETO is written with ASX Clear as collateral to cover the risk of financial loss due to an adverse market movement. The Controlling Participant will transfer the Securities to ASX Clear on your behalf. To allow the Controlling Participant to do this, you are required to sign the Registered Holder Collateral Cover Authorisation contained in the Application Form. If you sell a Call ETO prior to lodgement of the Securities with ASX Clear, you may need to fund a cash margin which is required to be lodged with ASX Clear in the period between the date of purchase of the Call ETO over the Securities and the date of lodgement of these Securities with ASX Clear. BT Securities may provide you with a loan under the Facility to fund this cash margin (each, a Collateral Loan). Interest payable on each Collateral Loan will be determined by BT Securities and is payable on request. During the term of the OEIL you can, at any time, repurchase the Call ETOs and sell new Call ETOs, or leave the Security uncapped (provided call selling rules are adhered to). If you decide to terminate your Securities Loan early, you must repurchase any Call ETOs that you have sold Example This example is for illustrative purposes only. You would like to purchase shares in Company A because you think that the stock will rise over the next 6 months. You also wish to be protected if there is a significant fall in the share price. The current market price for stock in Company A is $ You also wish to obtain additional income from shares in Company A because you think that the stock price will not significantly increase above $ You decide to enter into a 6-month OEIL, which allows you to buy: 100,000 shares in Company A at $26.76 per share; and 8 INFORMATION MEMORANDUM OPTION ENHANCED INVESTMENT LOAN
9 SECTION 1 Key Features 100 Put ETOs over the stock with an Exercise Price of $ The Loan Amount would be $2,500,000. The Equity Component that you would pay would be $176,000. You would also need to contribute the Premium for the Put ETOs and associated brokerage, fees and other charges. To help offset these costs, you sell Call ETOs over the stock with an Exercise Price of $ During the term of the OEIL, you will receive the Dividends payable on the stock and any related franking credits (subject to eligibility). You will also receive the Premium from selling the Call ETOs. Depending on the price movements in the share price in Company A, one of the following would occur: If the share price in Company A does not rise above $32.00 during the term of the OEIL, you can wait until the Loan matures and rollover the Loan (if available), refinance the Loan or repay the Loan, either from your own funds or by allowing the Put ETOs to be exercised (which you would only do if the share price is at or less than the Exercise Price of the Put ETOs). If the share price in Company A is at $25.00 or below upon expiry, the Put ETOs would be exercised, the stock would be sold to the holder of the Put ETOs and the proceeds from the sale of the stock would be applied to repay the Loan. If the share price in Company A rises to $32.00 or above during the term of the OEIL, the Call ETOs may be exercised by the holder of the Call ETOs. If the Call ETOs is exercised, the stock would be sold to the Taker of the Call ETOs and the proceeds would be applied to repay the Loan. If you wish to take your profits early, you can terminate the OEIL early by repurchasing any sold Call ETOs, selling or exercising the Put ETOs, and using the proceeds from the sale of the stock to repay the Loan. Depending on which outcome occurs, you may also need to pay Fixed Interest Break Costs, brokerage, fees and other charges. See Section 5 for more information Who can apply? To make an application for an OEIL, you must: read and understand this IM and any SIM in full, including the attached Terms and Conditions; complete the relevant Application Forms, and thereby agree to the Terms and Conditions; and if required, complete any additional assessment your Broker may require before trading certain types of ETOs. Each applicant must be a wholesale client under Chapter 7 of the Corporations Act, and may need to provide a qualified accountant s certificate as evidence of their wholesale client status. See the Application Forms at the back of this document for further information on how to apply Role of BT Securities BT Securities is the provider of your Loan and the Controlling Participant for CHESS Role of Westpac Securities Westpac Securities is the Arranger of your Loan and all ETO transactions in connection with your Loan. As the Arranger, Westpac Securities will be your contact point for your OEILs and will arrange for your trading instructions to be executed by the Broker Role of AUSIEX AUSIEX is the Default Broker. You may appoint another Broker in relation to your OEILs, provided that BT Securities has arrangements in place to deal with them and that they are otherwise acceptable to BT Securities Broker as issuer Under the Corporations Act, the Broker is taken to be the issuer of the ETOs taken or written by you or on your behalf in connection with OEILs. OPTION ENHANCED INVESTMENT LOAN INFORMATION MEMORANDUM 9
10 SECTION 2 Trading ETOs 2. Further information on ETOs This Section provides you with further information on how ETOs work. 2.1 Key Features of ETOs (a) The contract size The standard parcel of Securities for an ETO is currently 1000 shares, although this may be adjusted following certain events. For more information about these ASX adjustments, refer to Section 2.1(e) of this IM. (b) The Expiry Date ETOs have a limited life span and expire on standardised days set by ASX Clear. The Expiry Date is the last day of trading for all unexercised ETOs in a particular series, and is generally the Thursday before the last Friday in the month (so long as both the Thursday and Friday are business days). Expiry Date information is available on the ASX website at asx.com.au. (c) The Exercise Price The Exercise Price is the price at which the Taker of an ETO can acquire or dispose of the Securities. Usually there are a range of Exercise Prices for ETOs in a series which have the same Security and the same Expiry Date. (d) The Premium The Premium is the price of the ETO agreed upon by the Taker and the Writer. It is not a standardised feature of an ETO, but is negotiated between parties trading on the ASX options market. (e) ASX adjustments Apart from the Premium, most of the features of an ETO are standardised by the ASX. However, the ASX may make adjustments to these features in response to certain corporate events that affect the value of the Security, such as a bonus issue, share split or rights issue. In these situations, the ASX will endeavour to preserve the open position of Takers and Writers at the time of the adjustment. Information about ASX adjustments is in the ASX booklet Explanatory Note for ASX Option Adjustments, which can be downloaded at asx.com.au. 2.2 How are ETOs valued? The value of an ETO, known as the Premium, is specific to each ETO and determined by market forces. The Taker pays a Premium to the Writer to purchase the ETO and the Writer keeps this Premium whether the ETO is exercised or not. The Premium for an ETO is quoted on a cents per share basis. To calculate the dollar amount to be paid for an ETO, you multiply the value of the Premium by the number of Securities per ETO 1,000 is the standard number of Securities covered. For example, a Call ETO with a Premium quoted at 25c per share can be purchased for $250 (being 25c times 1,000 shares). The Premium of an ETO is influenced by both the intrinsic value and the time value of the ETO. The intrinsic value is the difference between the Exercise Price of the ETO and the market price of the Security at any given time. An ETO with positive intrinsic value is referred to as being in the money. The terminology used to describe the intrinsic value of an ETO is summarised below: Call ETO Exercise Price > share price Out of the money Exercise Price < share price In the money Put ETO In the money Out of the money Exercise Price = share price At the money At the money Time value represents the amount an investor is prepared to pay for the possibility that the intrinsic value of an ETO might move in the investor s favour during the life of the ETO, allowing the investor to profit. Time value is influenced by the following factors: Time to expiry Market volatility Interest rates Dividend payments Market expectations Most ETO pricing uses a mathematical formula which includes calculating the intrinsic and time value of the particular ETO. The section titled Option pricing fundamentals in the ASX Booklet Understanding Options Trading has more information regarding the fundamentals of pricing ETOs and can be downloaded from asx.com.au. ASX also provides a pricing calculator on the ASX website asx.com.au. The Premium will fluctuate during the life of an ETO depending on a range of factors including the price and volatility of the Securities, the time remaining to the Expiry Date, interest rates, dividends and general risks of particular markets. ETO investors will be able to obtain current price information by calling the OEILs sales team. 10 INFORMATION MEMORANDUM OPTION ENHANCED INVESTMENT LOAN
11 SECTION 2 Trading ETOs 2.3 ASX Clear ETOs are traded on the ASX trading platform and cleared through ASX Clear. ASX Clear stands between all buying and selling brokers and guarantees performance to each of them. ASX Clear does not have an obligation to you, but to the Broker, even though the Broker may have registered the ETO on your instructions. Each ETO registered with ASX Clear comprises two contracts, and ASX Clear is a party to both: one with the Broker, acting on your instructions; and one with the broker for the other party to the ETO. When placing an order that is opposite to your position, the Broker will effectively close out your position. Closing out your position means to cancel your original position by placing an order equal and opposite in effect to the original order. Closing out is achieved without reference to the original party to the trade because ASX Clear can substitute a new buyer as the contract party when you close their position (this is referred to as novation ). You should also be aware that the ASX and ASX Clear operating rules prescribe a number of matters relating to the trading of ETOs, including the standardisation of certain ETO terms, adjustments and termination provisions, the provision of margins, and settlement. Details of ETO specifications are published by the ASX on their website at asx.com.au. 2.5 Sources of educational information ETOs have been traded in Australia on the ASX Options Market since Over this time, ASX has prepared a number of educational booklets relating to ETOs which are available to you via the ASX website: asx.com.au. You can visit this page to access more information, including different types of options, margins and trading strategies. You should also consider the ASX booklet entitled Understanding Options Trading when you sign the Application Form. This booklet can be found at Full details of all ETOs listed on the ASX and Expiry Date information can be found on the ASX website at asx.com.au or alternatively through information vendors or newspapers. A list of current ETO codes and delayed price information is available on the ASX website at asx.com.au. Details of the previous day s trading are generally published in summary form in the financial pages of the major Australian daily papers. If you have any questions on any aspect of the booklets, you should consult your financial adviser before making any investment decisions. 2.4 AUSIEX Your Default Broker is AUSIEX. However, you may nominate another Broker to provide services to you in relation to the OEILs with BT Securities consent. The Default Broker has been admitted: as a market participant by ASX to trade Securities and ETOs and must comply with the operating rules of the ASX; as a participant by ASX Clear to clear ETOs and must also comply with the operating rules of ASX Clear. Representatives of Westpac Securities (in its capacity as Arranger) will give instructions on your behalf to the Default Broker and the Default Broker will not take instructions directly from you. Before your Default Broker executes an instruction from Westpac Securities (on your behalf) in relation to ETOs, you must agree to be bound by the Client Agreement Terms by signing the Application Form. Once your Application Form is accepted, your Default Broker will activate your trading account, which will enable you to trade ETOs in accordance with the Client Agreement Terms and the relevant operating rules of ASX and ASX Clear and this IM. OPTION ENHANCED INVESTMENT LOAN INFORMATION MEMORANDUM 11
12 SECTION 3 Significant Benefits of OEILs 3. Significant Benefits of OEILs This Section describes some of the benefits associated with an investment in OEILs. 3.1 Significant leverage OEILs give you exposure to particular Securities for a considerably lower initial outlay than the market price of the Securities. 3.2 The Securities Loan is fully protected at all times At all times, the Securities that you hold must be covered by at least an equivalent number of Put ETOs. If upon expiry of the Put ETO, the market price of those Securities is equal to or less than the level of the Exercise Price of the Put ETO, the Put ETO will be exercised. This gives you protection against a fall in the price of those Securities. 3.3 Benefit from Dividends and related franking credits If you successfully apply for an OEIL, Westpac Securities will arrange for the purchase of Securities in your name, and you will be entitled to receive all the economic benefits of the Security including, if any, through Dividends and related franking credits (subject to any deduction for Tax and eligibility). 3.4 Generate income from Premiums if you write Call ETOs You can earn income from Premiums by writing Call ETOs. These Premiums are yours whether or not the Call ETOs are exercised. 3.5 Increased decision-making time The Put ETO provides you with increased time to consider whether or not to sell the Securities. 3.6 Reduced counterparty risk ETOs benefit from reduced counterparty default risk as a result of standardisation and registration with ASX Clear. Since an ETO position can be closed out without reference to the original counterparty, the risk of counterparty default is transferred to ASX Clear. 3.7 Portfolio diversification Given the lower initial outlay required for an OEIL, you can diversify your portfolio and gain a broader market exposure over a range of Securities. 12 INFORMATION MEMORANDUM OPTION ENHANCED INVESTMENT LOAN
13 SECTION 4 Significant Risks Explained 4. Significant Risks Explained It is important that you carefully consider whether OEILs are appropriate for you in light of your investment objectives and financial circumstances. You should only enter into an OEIL if you understand the nature of the product and the extent of your exposure to risks and have the financial resources to manage those risks. Before entering into an OEIL, you should obtain independent financial advice and make sure that you understand the legal, tax and accounting implications of your investment. 4.1 Financial risks Your potential losses in respect of the Put ETOs over the Securities are fixed if your Put ETO expires out of the money, you will only lose the amount you paid for the ETO (ie. the Premium) plus any brokerage, fees and other charges. If you write Call ETOs over the Securities, your potential losses are also fixed as you are the owner of the Securities. The Securities are required under the Terms and Conditions to be lodged with ASX Clear as security for the cash margin. If your Call ETO is exercised, you will need to deliver the Securities to the Taker of the Call ETO at the Exercise Price. 4.2 Full recourse for some obligations The non-repayment of the Loan at the end of its term where you are not in default of any other obligation will not entitle BT Securities to have recourse against you or your assets (other than the Mortgaged Property). This is known as limited recourse. This contrasts with full recourse which means BT Securities can recover amounts owed by you without limitation, you are fully liable and if there is any shortfall, you can be sued for the shortfall. Except in the limited recourse circumstance described above, all other payment obligations are full recourse. These include obligations to: pay interest on your Loan; and pay brokerage, fees, other charges and any Fixed Interest Break Costs. In the following circumstances your obligations to repay the principal amount of your Loan are also full recourse: voluntary early repayment of the Loan; certain default and other termination events such as nonpayment of interest, insolvency, fraud and change in law; and Corporate Actions that trigger an early repayment of the Loan. 4.3 Fixed Interest Break Costs Fixed Interest Break Costs are calculated to compensate Westpac for the economic impact of terminating your Securities Loan early. Fixed Interest Break Costs may be significant. Accordingly, you should not enter into an OEIL for the term selected if you intend to repay the Securities Loan early. Fixed Interest Break Costs are also payable where you roll up or roll down an ETO position over Securities (see Section 1.5). Please seek independent professional financial and tax advice on the potential impact of Fixed Interest Break Costs. Westpac will calculate Fixed Interest Break Costs as follows: A = (B*C*D) Where: A = the Fixed Interest Break Cost payable; B = the amount of your Securities Loan; C = the remaining fixed term of your Securities Loan; D = any fall in the wholesale cost of funds for BT Securities from that applicable on the commencement date of the fixed rate period for the total fixed term of the Securities Loan and that applicable for the remaining fixed term as at the date of early termination (expressed as a percentage). 4.4 Risks of trading ETOs You should be aware of the risks that arise as a result of the way ETOs are traded on the ASX options market. These risks include: the ETOs may fall in price or become worthless on or before expiry. Changes in the price of the underlying Securities may result in changes to the price of the ETO, but the change can sometimes be in a different direction or of a different magnitude to the change in the price of the underlying Securities; ETOs have an expiry date and therefore a limited life. An ETO s time value erodes over the course of its life and this accelerates as an ETO nears expiry. It is important to assess whether the ETOs you have selected have sufficient time to expiry for your view to be realised; any Call ETOs that you may write can be exercised at any time if the market price of the underlying Securities reaches the Exercise Price, in which case you would need to deliver the Securities to the Taker of the Call ETO. If this occurs, you would not receive any Dividends or other entitlements that would have been payable to you if you still held the Securities; the discretionary power of ASX and ASX Clear to ensure fair and orderly markets are maintained. This power includes the ability to suspend the ASX options market s operation, to restrict the exercise of ETOs, to terminate an ETO position or to substitute Securities; if the Broker is AUSIEX, the power of AUSIEX to, at any time, refuse to deal in, or limit dealings in, ETOs for you, as stated in the applicable Terms and Conditions and in accordance with the ASX Operating Rules; all ETO transactions on ASX are subject to the rules, procedures and practices of ASX and ASX Clear. Under the ASX Operating Rules, certain trading disputes between market participants (for example, errors involving traded prices that do not bear a relationship to fair market or intrinsic value) may lead to ASX cancelling or amending a trade without your consent; the potential for failure or temporary disruption of the electronic trading platforms used by ASX and ASX Clear. If this occurs, the Broker will have difficulties in executing all or part of your order and you may not be able to instruct the Broker at all. You do not have a right to recover losses arising from these circumstances; that bid and offer prices in the market may not reflect fair value of the ETOs (although you can always contact the OEILs sales team and ask for updated ETO bid and offer prices); and OPTION ENHANCED INVESTMENT LOAN INFORMATION MEMORANDUM 13
14 SECTION 4 Significant Risks Explained the effect of Corporate Actions and ASX adjustments on the value of your ETOs. 4.5 Corporate actions Companies and trusts may undertake Corporate Actions that impact on the structure of the company s capital or the trust s assets and the rights attached to their securities. Typical Corporate Actions include takeovers, returns of capital, bonus issues, rights issues and special dividends or distributions. In the event that a Security you hold is affected by a Corporate Action, BT Securities has broad rights designed to protect the value of the Security mortgaged to it. These rights include directing the sale of the Securities or rights that are created or affected as a result of the Corporate Action. Any proceeds received from such a sale may be required by BT Securities to be deposited as security or used to purchase Securities in addition to the existing Securities when the Corporate Action occurs, or the proposal to undertake the Corporate Action is announced to the ASX. See clause 18 of the Loan Agreement Terms for more information. Some Corporate Actions may affect your tax position as well. 4.7 Tax considerations Australian tax law is complex and the impact of that law on you, in relation to your OEILs, may vary according to your individual personal circumstances. Further, tax law and practice may vary over time, possibly with retrospective application. The tax considerations summarised in Section 6 of this IM provide only a general guide to the relevant tax implications for you. Accordingly, you should seek your own specific independent taxation advice in relation to your OEILs to determine whether Australian tax law may adversely affect your investment. 4.8 Superannuation entities cannot apply Due to the operation of the Superannuation Industry Supervision Act 1993 (Cth), superannuation entities may not apply for OEILs. 4.6 Default under the Terms and Conditions In accordance with the Terms and Conditions and the ASX Clear Operating Rules, you agree that if: (a) you fail to pay or provide security for amounts payable to your Broker, or fail to perform any obligation arising pursuant to the exercise or settlement of an ETO; (b) a guarantee or other security provided by you to your Broker is withdrawn or becomes ineffective and other replacement security acceptable to your Broker is not provided; or (c) any other event occurs which, as set out in the Terms and Conditions, entitles BT Securities, Westpac Securities or your Broker to take action, then your Broker may, in addition to any other rights which it may have against you, and without giving you any prior notice, take any action, or refrain from taking any action, which it considers reasonable in the circumstances in connection with your ETOs. Without limitation, your Broker may: (d) enter into transactions to close out one or more of your ETO positions in accordance with the ASX Operating Rules; (e) exercise one or more ETOs in accordance with the ASX Operating Rules; or (f) exercise any other rights conferred by, or perform any other obligation arising under, the ASX Operating Rules or the Terms and Conditions in respect of your ETOs, and you must account to your Broker as if those actions were taken on your instructions. Without limitation, you will be liable for any deficiency or entitled to any surplus which may result from the actions taken by your Broker. 14 INFORMATION MEMORANDUM OPTION ENHANCED INVESTMENT LOAN