Subject to Completion
Preliminary Term Sheet dated March 29, 2019
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Filed Pursuant to Rule 433
Registration Statement No. 333-227001 (To Prospectus dated September 7, 2018, Prospectus Supplement dated September 7, 2018 and
Product Supplement EQUITY INDICES LIRN-1 dated
September 25, 2018)
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Units
$10 principal amount per unit
CUSIP No.
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Pricing Date*
Settlement Date*
Maturity Date*
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April , 2019
May , 2019
April , 2021
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*Subject to change based on the actual date the notes are priced for initial sale to the public (the “pricing date”)
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Capped Leveraged Index Return Notes® Linked to the MSCI Emerging Markets Index
§ Maturity of approximately two years
§ 2-to-1 upside exposure to increases in the Index, subject to a capped return of [18% to 22%]
§ 1-to-1 downside exposure to decreases in the Index beyond a 10.00% decline, with up to 90.00% of your principal at risk
§ All payments occur at maturity and are subject to the credit risk of Royal Bank of Canada
§ No periodic interest payments
§ In addition to the underwriting discount set forth below, the notes include a hedging-related charge of $0.075 per unit.
See “Structuring the Notes”
§ Limited secondary market liquidity, with no exchange listing
§ The notes are unsecured debt securities and are not savings accounts or insured deposits of a bank. The notes are
not insured or guaranteed by the Canada Deposit Insurance Corporation, the U.S. Federal Deposit Insurance Corporation, or any other governmental agency of Canada or the United States
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Per Unit
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Total
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Public offering price(1)
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$10.00
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$
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Underwriting discount(1)
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$0.20
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$
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Proceeds, before expenses, to RBC
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$9.80
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$
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(1) |
For any purchase of 500,000 units or more in a single transaction by an individual investor or in combined transactions with the investor's household in this offering, the public
offering price and the underwriting discount will be $9.95 per unit and $0.15 per unit, respectively. See “Supplement to the Plan of Distribution” below.
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Are Not FDIC Insured
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Are Not Bank Guaranteed
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May Lose Value
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Issuer:
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Royal Bank of Canada (“RBC”)
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Principal Amount:
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$10.00 per unit
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Term:
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Approximately two years
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Market Measure:
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The MSCI Emerging Markets Index (Bloomberg symbol: “MXEF”), a price return index.
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Starting Value:
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The closing level of the Market Measure on the pricing date
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Ending Value:
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The average of the closing levels of the Market Measure on each calculation day occurring during the Maturity
Valuation Period. The scheduled calculation days are subject to postponement in the event of Market Disruption Events, as described beginning on page PS-18 of product supplement EQUITY INDICES LIRN-1.
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Threshold Value:
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90% of the Starting Value, rounded to two decimal places.
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Participation Rate:
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200%
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Capped Value:
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[$11.80 to $12.20] per unit, which represents a return of [18% to 22%] over the principal amount. The actual
Capped Value will be determined on the pricing date.
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Maturity Valuation
Period:
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Five scheduled calculation days shortly before the maturity date.
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Fees and
Charges:
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The underwriting discount of $0.20 per unit listed on the cover page and the hedging related charge of $0.075 per
unit described in “Structuring the Notes” on page TS-12.
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Calculation Agent:
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Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”).
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Redemption Amount Determination
On the maturity date, you will receive a cash payment per unit determined as follows:
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
§ |
Product supplement EQUITY INDICES LIRN-1 dated September 25, 2018:
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§ |
Series H MTN prospectus supplement dated September 7, 2018:
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Prospectus dated September 7, 2018:
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You anticipate that the Index will increase moderately from the Starting Value to the Ending Value.
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You are willing to risk a loss of principal and return if the Index decreases from the Starting Value to an Ending Value that is below the Threshold Value.
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You accept that the return on the notes will be capped.
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You are willing to forgo the interest payments that are paid on conventional interest bearing debt securities.
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You are willing to forgo dividends or other benefits of owning the stocks included in the Index.
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You are willing to accept a limited or no market for sales prior to maturity, and understand that the market prices for the notes, if any, will be affected by various factors,
including our actual and perceived creditworthiness, our internal funding rate and fees and charges on the notes.
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§
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You are willing to assume our credit risk, as issuer of the notes, for all payments under the notes, including the Redemption Amount.
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You believe that the Index will decrease from the Starting Value to the Ending Value or that it will not increase sufficiently over the term of the notes to provide you with your
desired return.
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You seek 100% principal repayment or preservation of capital.
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You seek an uncapped return on your investment.
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You seek interest payments or other current income on your investment.
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You want to receive dividends or other distributions paid on the stocks included in the Index.
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You seek an investment for which there will be a liquid secondary market.
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§
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You are unwilling or are unable to take market risk on the notes or to take our credit risk as issuer of the notes.
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Ending Value
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Percentage Change from the
Starting Value to the Ending
Value
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Redemption Amount per Unit
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Total Rate of Return on the
Notes
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0.00
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-100.00%
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$1.00
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-90.00%
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50.00
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-50.00%
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$6.00
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-40.00%
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80.00
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-20.00%
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$9.00
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-10.00%
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90.00(1)
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-10.00%
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$10.00
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0.00%
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94.00
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-6.00%
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$10.00
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0.00%
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95.00
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-5.00%
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$10.00
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0.00%
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97.00
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-3.00%
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$10.00
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0.00%
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100.00(2)
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0.00%
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$10.00
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0.00%
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102.00
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2.00%
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$10.40
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4.00%
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104.00
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4.00%
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$10.80
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8.00%
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105.00
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5.00%
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$11.00
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10.00%
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110.00
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10.00%
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$12.00(3)
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20.00%
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120.00
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20.00%
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$12.00
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20.00%
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130.00
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30.00%
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$12.00
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20.00%
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140.00
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40.00%
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$12.00
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20.00%
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150.00
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50.00%
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$12.00
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20.00%
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160.00
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60.00%
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$12.00
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20.00%
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(1) |
This is the hypothetical Threshold Value.
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(2) |
The hypothetical Starting Value of 100 used in these examples has been chosen for illustrative purposes
only, and does not represent a likely actual Starting Value for the Market Measure.
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(3) |
The Redemption Amount per unit cannot exceed the hypothetical Capped Value.
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Example 1
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The Ending Value is 80.00, or 80.00% of the Starting Value:
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Starting Value:
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100.00 |
Threshold Value:
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90.00 |
Ending Value:
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80.00 |
Redemption Amount per unit
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Example 2
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The Ending Value is 95.00, or 95.00% of the Starting Value:
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Starting Value:
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100.00 |
Threshold Value:
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90.00 |
Ending Value:
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95.00 |
Redemption Amount (per unit) = $10.00, the principal amount, since
the Ending Value is less than the Starting Value but equal to or greater than the Threshold Value.
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Example 3
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The Ending Value is 104.00, or 104.00% of the Starting Value:
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Starting Value:
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100.00 |
Ending Value:
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104.00 |
= $10.80 Redemption Amount per unit
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Example 4
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The Ending Value is 130.00, or 130.00% of the Starting Value:
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Starting Value:
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100.00 |
Ending Value:
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130.00 |
= $16.00, however, because the Redemption Amount for the notes cannot exceed the Capped Value, the Redemption Amount will be
$12.00 per unit
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
§ |
Depending on the performance of the Index as measured shortly before the maturity date, your investment may result in a loss; there is no guaranteed return of principal.
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§ |
Your return on the notes may be less than the yield you could earn by owning a conventional fixed or floating rate debt security of comparable maturity.
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§ |
Payments on the notes are subject to our credit risk, and actual or perceived changes in our creditworthiness are expected to affect the value of the notes. If we become insolvent or
are unable to pay our obligations, you may lose your entire investment.
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Your investment return is limited to the return represented by the Capped Value and may be less than a comparable investment directly in the stocks included in the Index.
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The initial estimated value of the notes is an estimate only, determined as of a particular point in time by reference to our and our affiliates’ pricing models. These pricing models
consider certain assumptions and variables, including our credit spreads, our internal funding rate on the pricing date, mid-market terms on hedging transactions, expectations on interest rates and volatility, price-sensitivity
analysis, and the expected term of the notes. These pricing models rely in part on certain forecasts about future events, which may prove to be incorrect.
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The public offering price you pay for the notes will exceed the initial estimated value. If you attempt to sell the notes prior to maturity, their market value may be lower than the
price you paid for them and lower than the initial estimated value. This is due to, among other things, changes in the level of the Index, our internal funding rate, and the inclusion in the public offering price of the underwriting
discount and the hedging related charge, all as further described in “Structuring the Notes” on page TS-12. These factors, together with various credit, market and economic factors over the term of the notes, are expected to reduce
the price at which you may be able to sell the notes in any secondary market and will affect the value of the notes in complex and unpredictable ways.
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The initial estimated value does not represent a minimum or maximum price at which we, MLPF&S or any of our affiliates would be willing to purchase your notes in any secondary
market (if any exists) at any time. The value of your notes at any time after issuance will vary based on many factors that cannot be predicted with accuracy, including the performance of the Index, our creditworthiness and changes in
market conditions.
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A trading market is not expected to develop for the notes. Neither we nor MLPF&S is obligated to make a market for, or to repurchase, the notes. There is no assurance that any
party will be willing to purchase your notes at any price in any secondary market.
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Our business, hedging and trading activities, and those of MLPF&S and our respective affiliates (including trades in shares of companies included in the Index), and any hedging
and trading activities we, MLPF&S or our respective affiliates engage in for our clients’ accounts, may affect the market value and return of the notes and may create conflicts of interest with you.
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The Index sponsor may adjust the Index in a way that affects its level, and has no obligation to consider your interests.
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You will have no rights of a holder of the securities represented by the Index, and you will not be entitled to receive securities or dividends or other distributions by the issuers
of those securities.
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Your return on the notes and the value of the notes may be affected by exchange rate movements and factors affecting the international securities markets, specifically changes in the
countries represented by the Index.
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While we, MLPF&S or our respective affiliates may from time to time own securities of companies included in the Index, we, MLPF&S and our respective affiliates do not control
any company included in the Index, and have not verified any disclosure made by any other company.
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§ |
There may be potential conflicts of interest involving the calculation agent, which is MLPF&S. We have the right to appoint and remove the calculation agent.
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The U.S. federal income tax consequences of the notes are uncertain, and may be adverse to a holder of the notes. See “Summary of U.S. Federal Income Tax Consequences” below and
“U.S. Federal Income Tax Summary” beginning on page PS-30 of product supplement EQUITY INDICES LIRN-1. For a discussion of the Canadian federal income tax consequences of investing in the notes, see “Tax Consequences—Canadian
Taxation” in the prospectus dated September 7, 2018.
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
§ |
defining the equity universe;
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§ |
determining the market investable equity universe for each market;
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determining market capitalization size segments for each market;
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applying index continuity rules for the MSCI Standard Index;
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creating style segments within each size segment within each market; and
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classifying securities under the Global Industry Classification Standard (the “GICS”).
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Identifying Eligible Equity Securities: the equity universe initially looks at securities listed in any of the countries in the MSCI Global Index Series, which will be classified as
either Developed Markets (“DM”) or Emerging Markets (“EM”). All listed equity securities, including Real Estate Investment Trusts and certain income trusts in Canada, are eligible for inclusion in the equity universe. Conversely,
mutual funds, ETFs, equity derivatives, and most investment trusts, are not eligible for inclusion, are eligible for inclusion in the equity universe. Conversely, mutual funds, ETFs, equity derivatives, and most investment trusts, are
not.
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Classifying Eligible Securities into the Appropriate Country: each company and its securities (i.e., share classes) are classified in only one country.
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
§ |
The security is classified in a country that meets the Foreign Listing Materiality Requirement, and
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§ |
The security’s foreign listing is traded on an eligible stock exchange of: a DM country if the security is classified in a DM country, a DM or an EM country if the security is
classified in an EM country, or a DM or an EM or a FM country if the security is classified in a FM country. Securities in that country may not be represented by a foreign listing in the global investable equity universe if a country
does not meet the requirement.
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§ |
Equity Universe Minimum Size Requirement: this investability screen is applied at the company level. In
order to be included in a market investable equity universe, a company must have the required minimum full market capitalization. The size requirement also applies to companies in all developed and emerging markets.
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Equity Universe Minimum Free Float-Adjusted Market Capitalization Requirement: this investability screen
is applied at the individual security level. To be eligible for inclusion in a market investable equity universe, a security must have a free float-adjusted market capitalization equal to or higher than 50% of the equity universe
minimum size requirement.
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DM and EM Minimum Liquidity Requirement: this investability screen is applied at the individual security
level. To be eligible for inclusion in a market investable equity universe, a security must have adequate liquidity. The twelve-month and three-month Annual Traded Value Ratio (“ATVR”), a measure that screens out extreme daily trading
volumes and takes into account the free float-adjusted market capitalization size of securities, together with the three-month frequency of trading are used to measure liquidity. A minimum liquidity level of 20% of three- and
twelve-month ATVR and 90% of three-month frequency of trading over the last four consecutive quarters are required for inclusion of a security in a market investable equity universe of a DM, and a minimum liquidity level of 15% of
three- and twelve-month ATVR and 80% of three-month frequency of trading over the last four consecutive quarters are required for inclusion of a security in a market investable equity universe of an EM.
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§ |
Global Minimum Foreign Inclusion Factor Requirement: this investability screen is applied at the
individual security level. To be eligible for inclusion in a market investable equity universe, a security’s Foreign Inclusion Factor (“FIF”) must reach a certain threshold. The FIF of a security is defined as the proportion of shares
outstanding that is available for purchase in the public equity markets by international investors. This proportion accounts for the available free float of and/or the foreign ownership limits applicable to a specific security (or
company). In general, a security must have an FIF equal to or larger than 0.15 to be eligible for inclusion in a market investable equity universe.
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Minimum Length of Trading Requirement: this investability screen is applied at the individual security
level. For an initial public offering (“IPO”) to be eligible for inclusion in a market investable equity universe, the new issue must have started trading at least three months before the implementation of a semi-annual index review
(as described below). This requirement is applicable to small new issues in all markets. Large IPOs are not subject to the minimum length of trading requirement and may be included in a market investable equity universe and the
Standard Index outside of a Quarterly or Semi-Annual Index Review.
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Minimum Foreign Room Requirement: this investability screen is applied at the individual security level.
For a security that is subject to a foreign ownership limit to be eligible for inclusion in a market investable equity universe, the proportion of shares still available to foreign investors relative to the maximum allowed (referred
to as “foreign room”) must be at least 15%.
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Investable Market Index (Large + Mid + Small);
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§ |
Standard Index (Large + Mid);
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Large Cap Index;
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Mid Cap Index; or
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Small Cap Index.
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§ |
defining the market coverage target range for each size segment;
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§ |
determining the global minimum size range for each size segment;
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§ |
determining the market size-segment cutoffs and associated segment number of companies;
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§ |
assigning companies to the size segments; and
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§ |
applying final size-segment investability requirements.
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
§ |
updating the indices on the basis of a fully refreshed equity universe;
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§ |
taking buffer rules into consideration for migration of securities across size and style segments; and
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§ |
updating FIFs and Number of Shares (“NOS”).
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§ |
including significant new eligible securities (such as IPOs that were not eligible for earlier inclusion) in the Index;
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§ |
allowing for significant moves of companies within the Size Segment Indices, using wider buffers than in the SAIR; and
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§ |
reflecting the impact of significant market events on FIFs and updating NOS.
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Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
· |
the investor’s spouse (including a domestic partner), siblings, parents, grandparents, spouse’s parents, children and grandchildren, but excluding accounts held
by aunts, uncles, cousins, nieces, nephews or any other family relationship not directly above or below the individual investor;
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· |
a family investment vehicle, including foundations, limited partnerships and personal holding companies, but only if the beneficial owners of the vehicle consist
solely of the investor or members of the investor’s household as described above; and
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· |
a trust where the grantors and/or beneficiaries of the trust consist solely of the investor or members of the investor’s household as described above; provided
that, purchases of the notes by a trust generally cannot be aggregated together with any purchases made by a trustee’s personal account.
|
Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
Capped Leveraged Index Return Notes®
Linked to the MSCI Emerging Markets Index, due April , 2021 |
§ |
There is no statutory, judicial, or administrative authority directly addressing the characterization of the notes.
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§ |
You agree with us (in the absence of a statutory, regulatory, administrative, or judicial ruling to the contrary) to characterize and treat the notes for all tax purposes as pre-paid
derivative contracts in respect of the Index.
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§ |
Under this characterization and tax treatment of the notes, a U.S. holder (as defined on page 41 of the prospectus) generally will recognize capital gain or loss upon the sale or
maturity of the notes. This capital gain or loss generally will be long-term capital gain or loss if you held the notes for more than one year.
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§ |
No assurance can be given that the Internal Revenue Service or any court will agree with this characterization and tax treatment.
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§ |
Under current Internal Revenue Service guidance, withholding on “dividend equivalent” payments (as discussed in the product supplement), if any, will not apply to notes that are
issued as of the date of this pricing supplement unless such notes are “delta-one” instruments.
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§ |
The accompanying product supplement notes that FATCA withholding on payments of gross proceeds from a sale or redemption of the notes will only apply to payments made after December
31, 2018. That discussion is modified to reflect regulations proposed by the U.S. Treasury Department in December 2018 indicating an intent to eliminate the requirement under FATCA of withholding on gross proceeds of the disposition
of financial instruments. The U.S. Treasury Department has indicated that taxpayers may rely on these proposed regulations pending their finalization. Prospective investors are urged to consult with their own tax advisors regarding
the possible implications of FATCA on their investment in the notes.
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