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MORGAN STANLEY — Capital/Financing Update 2021
Nov 2, 2021
29766_prs_2021-11-02_b1dca07f-0cae-42f6-bf34-0942f5a73a29.zip
Capital/Financing Update
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CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities Offered | Maximum Aggregate Offering Price | Amount of Registration Fee |
|---|---|---|
| Auto-Callable Securities with Contingent Downside due 2025 | $2,658,000 | $246.40 |
October 2021
Pricing Supplement No. 2,657
Registration Statement Nos. 333-250103; 333-250103-01
Dated October 29, 2021
Filed pursuant to Rule 424(b)(2)
M organ S tanley F inance LLC
Structured Investments
Opportunities in International Equities
Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
Fully and Unconditionally Guaranteed by Morgan Stanley
§ Linked to the KraneShares CSI China Internet ETF (the “underlying”)
§ The securities are unsecured obligations of Morgan Stanley Finance LLC (“MSFL”) and are fully and unconditionally guaranteed by Morgan Stanley. Unlike ordinary debt securities, the securities do not pay interest, do not guarantee the repayment of principal and are subject to potential automatic call prior to the maturity date upon the terms described below. The securities have the terms described in the accompanying product supplement for auto-callable securities and prospectus, as supplemented or modified by this document.
§ Automatic Call. The securities will be automatically called if the closing price of the underlying on any of the determination dates is greater than or equal to the starting price for a call payment equal to the face amount plus a call premium. The call premium applicable to each determination date will be a percentage of the face amount that increases for each determination date based on a simple (non-compounding) return of 12.25% per annum. No further payments will be made on the securities once they have been called.
§ Maturity Payment Amount. If the securities are not automatically called, you will receive at maturity a cash payment per security as follows:
§ If the ending price of the underlying is less than the starting price, but greater than or equal to 90% of the starting price, which we refer to as the threshold price, you will receive a maturity payment amount of $1,000 per $1,000 security.
§ If the ending price of the underlying is less than the threshold price, investors will be exposed to the decline in the underlying beyond 10%, and investors will lose some or a significant portion of their initial investment.
§ The maturity payment amount may be significantly less than the face amount, and you could lose up to 90% of your investment.
§ The securities are for investors who are willing to forgo current income and participation in the appreciation of the underlying in exchange for the possibility of receiving a call payment if the underlying closes at or above the starting price on a determination date or the final determination date, respectively.
§ Investors will not participate in any appreciation of the underlying.
§ The securities are notes issued as part of MSFL’s Series A Global Medium-Term Notes program
§ All payments are subject to our credit risk. If we default on our obligations, you could lose some or all of your investment
§ These securities are not secured obligations and you will not have any security interest in, or otherwise have any access to, any securities included in the underlying.
The current estimated value of the securities is $944.50 per security. The estimated value of the securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the underlying, instruments based on the underlying, volatility and other factors including current and expected interest rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest rate at which our conventional fixed rate debt trades in the secondary market. See “Estimated Value of the Securities” on page 4.
The securities have complex features and investing in the securities involves risks not associated with an investment in ordinary debt securities. See “Risk Factors” beginning on page 9. All payments on the securities are subject to our credit risk.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this document or the accompanying product supplement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The securities are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality, nor are they obligations of, or guaranteed by, a bank.
You should read this document together with the related product supplement for auto-callable securities and prospectus, each of which can be accessed via the hyperlinks below. Please also see “Additional Terms of the Securities” and “Additional Information About the Securities” at the end of this document.
As used in this document, “we,” “us” and “our” refer to Morgan Stanley or MSFL, or Morgan Stanley and MSFL collectively, as the context requires.
| Commissions
and offering price: | Price
to public | Agent’s
commissions (1)(2) | Proceeds
to us (3) |
| --- | --- | --- | --- |
| Per
security | $1,000 | $28.25 | $971.75 |
| Total | $2,658,000 | $
75,088.50 | $2,582,911.50 |
(1) Wells Fargo Securities, LLC, an agent for this offering, will receive a commission of up to $28.25 for each security it sells. Dealers, including Wells Fargo Advis ors (“WFA”), may receive a selling concession of up to $17.50 per security, and WFA will receive a distribution expense fee of $0.75 for each security sold by WFA. See “Supplemental information concerning plan of distribution; conflicts of interest.”
(2) In respect of certain securities sold in this offering, we may pay a fee of up to $1.00 per security to selected securities dealers in consideration for marketing and other services in connection with the distribution of the securities to other securities dealers.
(3) See “Use of proceeds and hedging” on page 23.
Product Supplement for Auto-Callable Securities dated November 16, 2020 Prospectus dated November 16, 2020
Morgan Stanley Wells Fargo Securities
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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Final Terms
| Issuer: | Morgan Stanley Finance LLC |
|---|---|
| Guarantor: | Morgan Stanley |
| Maturity | |
| date: | November 3, 2025, subject to postponement if the final determination date is postponed |
| Underlying: | KraneShares CSI China Internet ETF |
| Aggregate | |
| face amount: | $2,658,000 |
| Automatic | |
| call : | If, on any determination date, beginning on November 3, |
| 2022, the closing price of the underlying is greater than or equal to the starting price, the securities will be automatically called | |
| for the applicable call payment on the related call settlement date. The last determination date is the final determination date, and | |
| any payment upon an automatic call on the final determination date, if applicable, will be made on the maturity date. The securities will not be automatically called on | |
| any call settlement date if the closing price of the underlying is below the starting price on the related determination date. Any positive return on the securities will be | |
| limited to the applicable call premium, even if the closing price of the underlying on the applicable determination date significantly | |
| exceeds its starting price. You will not participate in any appreciation of the underlying. | |
| Call | |
| payment: | The call payment will be an amount in cash per face amount corresponding to |
| a return at a per-annum rate set forth on the cover of this document, as follows: · 1 st determination date: $1,122.50, which corresponds to a call premium of 12.25% · 2 nd determination date: $1,245.00, which corresponds to a call premium of 24.50% · 3 rd determination date: $1,367.50, which corresponds to a call premium of 36.75% · Final | |
| determination date: $1,490.00, which corresponds to a call premium of 49.00% No further payments will be made on the securities once they have been | |
| called. | |
| Determination | |
| dates: | Annually, as follows: · 1 st determination date: November 3, 2022 · 2 nd determination date: November 3, 2023 · 3 rd determination date: November 4, 2024 · Final |
| determination date: October 27, 2025 The determination dates are subject to postponement | |
| for non-trading days and certain market disruption events. | |
| Call | |
| settlement date: | Five business days after the applicable determination date (as each such determination date may be postponed pursuant to “—Postponement of the determination dates” below, if applicable); provided that the call settlement date for the final determination date is the maturity date. If a determination date is postponed, the related call settlement date will be five business days after the determination date as postponed. |
| Maturity payment amount: | If the securities are not automatically called, you will |
| be entitled to receive on the maturity date a cash payment per security as follows: § if | |
| the ending price is less than the starting price but greater than or equal to the threshold price: $1,000; or § if | |
| the ending price is less than the threshold price: Under these circumstances, you will receive less, and up to 90% less, | |
| than the face amount of your securities at maturity. | |
| Closing | |
| price: | The “closing price” for one share of the underlying (or one unit of any other security for which a closing price must be determined) on any trading day means the product of (i) the official closing price on such day published by the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which the underlying (or any such other security) is listed or admitted to trading, and (ii) the adjustment factor on such trading day. |
| Starting | |
| price: | $47.74, which is the closing price on the pricing date. |
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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| Ending
price: | The closing price on the final determination date. |
| --- | --- |
| Threshold
price: | $42.966, which is equal to 90% of the starting price. |
| Face
amount: | $1,000 per security. References in this document to a “security” are to a security with a face amount of $1,000. |
| Pricing
date: | October 29, 2021 |
| Original
issue date: | November 3, 2021 (3 business days after the pricing date) |
| Adjustment
factor: | 1.0, subject to adjustment in the event of certain events affecting the underlying. See “Additional Terms of the Securities—Anti-dilution Adjustments; Alternate Calculation” below. |
| CUSIP
/ ISIN: | 61773FU43 / US61773FU435 |
| Listing: | The securities will not be listed on any securities exchange. |
| Agents: | Morgan Stanley & Co. LLC (“MS & Co.”), an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley, and Wells Fargo Securities, LLC (“WFS”). See “Supplemental information regarding plan of distribution; conflicts of interest.” |
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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Estimated Value of the Securities
The face amount of each security is $1,000. This price includes costs associated with issuing, selling, structuring and hedging the securities, which are borne by you, and, consequently, the estimated value of the securities on the pricing date is less than $1,000 per security. We estimate that the value of each security on the pricing date is $944.50.
What goes into the estimated value on the pricing date?
In valuing the securities on the pricing date, we take into account that the securities comprise both a debt component and a performance-based component linked to the underlying. The estimated value of the securities is determined using our own pricing and valuation models, market inputs and assumptions relating to the underlying, instruments based on the underlying, volatility and other factors including current and expected interest rates, as well as an interest rate related to our secondary market credit spread, which is the implied interest rate at which our conventional fixed rate debt trades in the secondary market.
What determines the economic terms of the securities?
In determining the economic terms of the securities, including the call payment amounts and the threshold price, we use an internal funding rate which is likely to be lower than our secondary market credit spreads and therefore advantageous to us. If the issuing, selling, structuring and hedging costs borne by you were lower or if the internal funding rate were higher, one or more of the economic terms of the securities would be more favorable to you.
What is the relationship between the estimated value on the pricing date and the secondary market price of the securities?
The price at which MS & Co. purchases the securities in the secondary market, absent changes in market conditions, including those related to the underlying, may vary from, and be lower than, the estimated value on the pricing date, because the secondary market price takes into account our secondary market credit spread as well as the bid-offer spread that MS & Co. would charge in a secondary market transaction of this type and other factors. However, because the costs associated with issuing, selling, structuring and hedging the securities are not fully deducted upon issuance, for a period of up to 4 months following the issue date, to the extent that MS & Co. may buy or sell the securities in the secondary market, absent changes in market conditions, including those related to the underlying, and to our secondary market credit spreads, it would do so based on values higher than the estimated value. We expect that those higher values will also be reflected in your brokerage account statements.
MS & Co. may, but is not obligated to, make a market in the securities and, if it once chooses to make a market, may cease doing so at any time.
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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Investor Considerations
The Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025 (the “securities”) may be appropriate for investors who:
§ Believe that the closing price of the underlying will be greater than or equal to the starting price on one of the determination dates;
§ Seek the potential for a fixed return if the underlying has appreciated at all as of any of the determination dates in lieu of full participation in any potential appreciation of the underlying;
§ Understand that if the closing price of the underlying is less than the starting price on each determination date, they will not receive any positive return on their investment in the securities, and that if the closing price of the underlying on the final determination date has declined by more than 10% from the starting price, they will receive less, and possibly 90% less, than the face amount per security at maturity;
§ Understand that the term of the securities may be as short as approximately one year, and that they will not receive a higher call payment with respect to a later determination date if the securities are called on an earlier determination date;
§ Are willing to forgo interest payments on the securities and dividends on the underlying; and
§ Are willing to hold the securities until maturity.
The securities are not designed for, and may not be an appropriate investment for, investors who:
§ Seek a liquid investment or are unable or unwilling to hold the securities to maturity;
§ Require full payment of the face amount of the securities at maturity;
§ Believe that the closing price of the underlying will be less than the starting price on each determination date;
§ Seek a security with a fixed term;
§ Are unwilling to accept the risk that, if the closing price of the underlying is less than the starting price on each determination date, they will not receive any positive return on their investment in the securities;
§ Are unwilling to accept the risk that the closing price of the underlying on the final determination date may decline by more than 10% from the starting price to the ending price, in which case they will receive less, and possibly 90% less, than the face amount per security at maturity;
§ Seek current income;
§ Are unwilling to accept the risk of exposure to the underlying;
§ Seek exposure to the upside performance of the underlying beyond the applicable call premiums;
§ Are unwilling to accept our credit risk; or
§ Prefer the lower risk of fixed income investments with comparable maturities issued by companies with comparable credit ratings.
The considerations identified above are not exhaustive. Whether or not the securities are an appropriate investment for you will depend on your individual circumstances, and you should reach an investment decision only after you and your investment, legal, tax, accounting and other advisors have carefully considered the appropriateness of an investment in the securities in light of your particular circumstances. You should also review carefully the “Risk Factors” herein and in the accompanying product supplement for risks related to an investment in the securities. For more information about the underlying, please see the section titled “KraneShares CSI China Internet ETF Overview” below.
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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Determining Timing and Amount of Payment on the Securities
The timing and amount of the payment you will receive will be determined as follows:
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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Scenario Analysis and Examples of Hypothetical Payments on the Securities
The following scenario analysis and examples are provided for illustrative purposes only and are hypothetical. Whether the securities are called will be determined by reference to the closing price of the underlying on the determination dates, and the maturity payment amount, if any, will be determined by reference to the closing price of the underlying on the final determination date. The actual call payment with respect to each applicable determination date, starting price and threshold price are set forth under “Terms” above. Some numbers appearing in the examples below have been rounded for ease of analysis. All payments on the securities are subject to our credit risk. The below examples are based on the following terms*:
| Investment term: | 4 years |
|---|---|
| Hypothetical call payments: | The hypothetical call payment will be an amount in cash per face amount for each determination date as follows: |
| Call Payment |
|---|
| · 1 st determination date: $1,122.50 · 2 nd determination date: $1,245.00 · 3 rd determination date: $1,367.50 · Final |
| determination date: $1,490.00 |
| Hypothetical starting price: | $100.00 |
|---|---|
| Hypothetical threshold price: | $90.00, which is 90% of the hypothetical starting price |
- The hypothetical starting price of $100 for the underlying has been chosen for illustrative purposes only and does not represent the actual starting price of the underlying. The actual starting price and threshold price are set forth on the cover of this pricing supplement. For historical data regarding the actual closing prices of the underlying, see the historical information set forth herein.
Automatic Call:
Example 1 — the securities are called following the second determination date
| Date | Closing Price | Payment (per Security) |
|---|---|---|
| 1 st Determination Date | $80.00 ( below the starting price) | -- |
| 2 nd Determination Date | $135.00 ( at or above the starting price) | $1,245.00 |
In this example, on the first determination date, the closing price of the underlying is below the starting price. Therefore, the securities are not called. On the second determination date, the closing price of the underlying is at or above the starting price. Therefore, the securities are automatically called on the second call settlement date. Investors will receive a payment of $1,245.00 per security on the related call settlement date. No further payments will be made on the securities once they have been called, and investors do not participate in the appreciation in the underlying.
How to calculate the payment investors will receive at maturity:
In the following examples, the closing price of the underlying is below the starting price on each of the determination dates, and, consequently, the securities are not automatically called.
Example 1 — the ending price is below the starting price but at or above the threshold price
| Date | Closing Price | Payment (per Security) |
|---|---|---|
| 1 st Determination Date | $80.00 (below the starting price, securities are not called) | -- |
| 2 nd Determination Date | $86.00 (below the starting price, securities are not called) | -- |
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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| 3 rd Determination Date | $60.00 (below the starting price, securities are not called) | -- |
|---|---|---|
| Final Determination Date | $92.00 (below the starting price but above the threshold price) | $1,000.00 |
In this example, the closing price of the underlying is below the starting price on each of the determination dates, and therefore the securities are not called. On the final determination date, the ending price is below the starting price but at or above the threshold price, and accordingly, investors receive a maturity payment amount equal to the face amount of $1,000 per security, representing a 0% return over the 4-year term of the securities.
Example 2 — the ending price is below the threshold price
| Date | Closing Price | Payment (per Security) |
|---|---|---|
| 1 st Determination Date | $67.00 (below the starting price, securities are not called) | -- |
| 2 nd Determination Date | $60.00 (below the starting price, securities are not called) | -- |
| 3 rd Determination Date | $88.00 (below the starting price, securities are not called) | -- |
| Final Determination Date | $40.00 (below the threshold price) | ● |
In this example, the closing price of the underlying is below the starting price on each of the determination dates, and therefore the securities are not called. On the final determination date, the ending price is below the threshold price, and accordingly, investors are exposed to the negative performance of the underlying beyond 10% and will receive a maturity payment amount that is less than the face amount of the securities. The maturity payment amount is $500.00 per security, representing a loss of 50% on your investment over the 4-year term of the securities.
If the securities are not called prior to maturity and the ending price is below the threshold price on the final determination date, the securities will be exposed to any decline in the closing price of the underlying beyond 10%. You may lose up to 90% of the face amount of your securities at maturity.
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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Risk Factors
This section describes the material risks relating to the securities. For further discussion of these and other risks, you should read the section entitled “Risk Factors” in the accompanying product supplement for auto-callable securities and prospectus. We also urge you to consult your investment, legal, tax, accounting and other advisers in connection with your investment in the securities.
Risks Relating to an Investment in the Securities
§ The securities do not pay interest or guarantee the return of the face amount of your securities at maturity. The terms of the securities differ from those of ordinary debt securities in that they do not pay interest or guarantee the return of the face amount of your securities at maturity. If the securities have not been automatically called and if the ending price of the underlying is less than the threshold price, you will receive less, and up to 90% less, than the face amount of your securities at maturity.
§ The appreciation potential of the securities is limited by the call payment specified for each determination date. The appreciation potential of the securities is limited to the call payment specified for each determination date if the underlying closes at or above the starting price on any determination date. In all cases, you will not participate in any appreciation of the underlying, which could be significant.
§ The market price will be influenced by many unpredictable factors. Several factors, many of which are beyond our control, will influence the value of the securities in the secondary market and the price at which MS & Co. may be willing to purchase or sell the securities in the secondary market. We expect that generally the level of interest rates available in the market and the value of the underlying on any day, including in relation to the starting price and threshold price, will affect the value of the securities more than any other factors. Other factors that may influence the value of the securities include:
o the trading price and volatility (frequency and magnitude of changes in value) of the underlying,
o geopolitical conditions and economic, financial, political, regulatory or judicial events that affect the underlying or the securities markets generally and which may affect the price of the underlying,
o dividend rates on the underlying or the stocks composing the CSI Overseas China Internet Index (the “share underlying index”),
o the time remaining until the securities mature,
o interest and yield rates in the market,
o the availability of comparable instruments,
o the occurrence of certain events affecting the underlying that may or may not require an adjustment to the adjustment factor, and
o any actual or anticipated changes in our credit ratings or credit spreads.
Generally, the longer the time remaining to maturity, the more the market price of the securities will be affected by the other factors described above. Some or all of these factors will influence the price that you will receive if you sell your securities prior to maturity . For example, you may have to sell your securities at a substantial discount from the face amount of $1,000 per security if the price of the underlying at the time of sale is near or below its threshold price or if market interest rates rise.
You cannot predict the future performance of the underlying based on its historical performance. If the securities are not called and the ending price is less than the threshold price, you will be exposed on a 1-to-1 basis to any decline in the ending price in excess of 10%. See “ KraneShares CSI China Internet ETF Overview” below .
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Market Linked Securities— Auto-Callable with Fixed Percentage Buffered Downside
Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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§ The securities are subject to our credit risk, and any actual or anticipated changes to our credit ratings or credit spreads may adversely affect the market value of the securities. You are dependent on our ability to pay all amounts due on the securities upon an automatic call or at maturity, and therefore you are subject to our credit risk. If we default on our obligations under the securities, your investment would be at risk and you could lose some or all of your investment. As a result, the market value of the securities prior to maturity will be affected by changes in the market’s view of our creditworthiness. Any actual or anticipated decline in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk is likely to adversely affect the market value of the securities.
§ As a finance subsidiary, MSFL has no independent operations and will have no independent assets. As a finance subsidiary, MSFL has no independent operations beyond the issuance and administration of its securities and will have no independent assets available for distributions to holders of MSFL securities if they make claims in respect of such securities in a bankruptcy, resolution or similar proceeding. Accordingly, any recoveries by such holders will be limited to those available under the related guarantee by Morgan Stanley and that guarantee will rank pari passu with all other unsecured, unsubordinated obligations of Morgan Stanley. Holders will have recourse only to a single claim against Morgan Stanley and its assets under the guarantee. Holders of securities issued by MSFL should accordingly assume that in any such proceedings they would not have any priority over and should be treated pari passu with the claims of other unsecured, unsubordinated creditors of Morgan Stanley, including holders of Morgan Stanley-issued securities.
§ Investing in the securities is not equivalent to investing in the underlying or the stocks composing the share underlying index. Investing in the securities is not equivalent to investing in the underlying, the share underlying index or the stocks that constitute the share underlying index. Investors in the securities will not participate in any positive performance of the underlying, and will not have voting rights or rights to receive dividends or other distributions or any other rights with respect to the underlying or the stocks that constitute the share underlying index.
§ Reinvestment risk. The term of your investment in the securities may be shortened due to the automatic call feature of the securities. If the securities are called prior to maturity, you will receive no further payments on the securities and may be forced to invest in a lower interest rate environment and may not be able to reinvest at comparable terms or returns.
§ The rate we are willing to pay for securities of this type, maturity and issuance size is likely to be lower than the rate implied by our secondary market credit spreads and advantageous to us. Both the lower rate and the inclusion of costs associated with issuing, selling, structuring and hedging the securities in the face amount reduce the economic terms of the securities, cause the estimated value of the securities to be less than the face amount and will adversely affect secondary market prices. Assuming no change in market conditions or any other relevant factors, the prices, if any, at which dealers, including MS & Co., may be willing to purchase the securities in secondary market transactions will likely be significantly lower than the face amount, because secondary market prices will exclude the issuing, selling, structuring and hedging-related costs that are included in the face amount and borne by you and because the secondary market prices will reflect our secondary market credit spreads and the bid-offer spread that any dealer would charge in a secondary market transaction of this type as well as other factors.
The inclusion of the costs of issuing, selling, structuring and hedging the securities in the face amount and the lower rate we are willing to pay as issuer make the economic terms of the securities less favorable to you than they otherwise would be.
However, because the costs associated with issuing, selling, structuring and hedging the securities are not fully deducted upon issuance, for a period of up to 4 months following the issue date, to the extent that MS & Co. may buy or sell the securities in the secondary market, absent changes in market conditions, including those related to the underlying, and to our secondary market credit spreads, it would do so based on values higher than the estimated value, and we expect that those higher values will also be reflected in your brokerage account statements.
§ The estimated value of the securities is determined by reference to our pricing and valuation models, which may differ from those of other dealers and is not a maximum or minimum secondary market price. These pricing and valuation models are proprietary and rely in part on subjective views of certain market inputs
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Principal at Risk Securities Linked to the KraneShares CSI China Internet ETF due November 3, 2025
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and certain assumptions about future events, which may prove to be incorrect. As a result, because there is no market-standard way to value these types of securities, our models may yield a higher estimated value of the securities than those generated by others, including other dealers in the market, if they attempted to value the securities. In addition, the estimated value on the pricing date does not represent a minimum or maximum price at which dealers, including MS & Co., would be willing to purchase your securities in the secondary market (if any exists) at any time. The value of your securities at any time after the date of this document will vary based on many factors that cannot be predicted with accuracy, including our creditworthiness and changes in market conditions. See also “The market price will be influenced by many unpredictable factors” above.
§ The securities will not be listed on any securities exchange and secondary trading may be limited. The securities will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the securities. MS & Co. and WFS may, but are not obligated to, make a market in the securities and, if either of them once chooses to make a market, may cease doing so at any time. When they do make a market, they will generally do so for transactions of routine secondary market size at prices based on their respective estimates of the current value of the securities, taking into account their respective bid/offer spreads, our credit spreads, market volatility, the notional size of the proposed sale, the cost of unwinding any related hedging positions, the time remaining to maturity and the likelihood that they will be able to resell the securities. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the securities easily. Since other broker-dealers may not participate significantly in the secondary market for the securities, the price at which you may be able to trade your securities is likely to depend on the price, if any, at which MS & Co. or WFS is willing to transact. If, at any time, MS & Co. and WFS were to cease making a market in the securities, it is likely that there would be no secondary market for the securities. Accordingly, you should be willing to hold your securities to maturity.
§ The calculation agent, which is a subsidiary of Morgan Stanley and an affiliate of MSFL, will make determinations with respect to the securities. As calculation agent, MS & Co. will determine the starting price, the threshold price and the ending price and will calculate the amount of cash you receive at maturity, if any. Moreover, certain determinations made by MS & Co., in its capacity as calculation agent, may require it to exercise discretion and make subjective judgments, such as with respect to the occurrence or non-occurrence of market disruption events and the selection of a successor index or calculation of the ending price in the event of a market disruption event or certain adjustments to the adjustment factor. These potentially subjective determinations may adversely affect the payout to you at maturity, if any. For further information regarding these types of determinations, see “Description of Auto-Callable Securities—Alternate Exchange Calculation in Case of an Event of Default,” “—Discontinuance of the Underlying Shares of an Exchange-Traded Fund and/or Share Underlying Index; Alteration of Method of Calculation” and “—Calculation Agent and Calculations” in the accompanying product supplement for auto-callable securities and “Additional Terms of the Securities” below. In addition, MS & Co. has determined the estimated value of the securities on the pricing date.
§ Hedging and trading activity by our affiliates could potentially adversely affect the value of the securities. One or more of our affiliates and/or third-party dealers expect to carry out hedging activities related to the securities (and possibly to other instruments linked to the underlying or the share underlying index), including trading in the underlying and in other instruments related to the underlying or share underlying index. As a result, these entities may be unwinding or adjusting hedge positions during the term of the securities, and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the final determination date approaches. Some of our affiliates also trade the underlying or the stocks that constitute the share underlying index and other financial instruments related to the share underlying index and other financial instruments related to the underlying on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging or trading activities on or prior to the pricing date could potentially affect the starting price, and, therefore, could increase (i) the price at or above which the underlying must close on the determination dates so that the securities are called for the call payment and (ii) the threshold price for the underlying, which is the price at or above which the underlying must close on the final determination date so that you do not suffer a loss on your initial investment in the securities. Additionally, such hedging or trading activities during the term of the securities could potentially affect the value of the underlying on the determination dates, and, accordingly, whether we call the securities prior to maturity and the amount of cash you will receive at maturity, if any.
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§ The maturity date may be postponed if the final determination date is postponed. If the scheduled final determination date is not a trading day or if a market disruption event occurs on that day so that the final determination date is postponed and falls less than two business days prior to the maturity date, the maturity date of the securities will be postponed to the second business day following that final determination date as postponed.
§ Potentially inconsistent research, opinions or recommendations by Morgan Stanley, MSFL, WFS or our or their respective affiliates. Morgan Stanley, MSFL, WFS and our or their respective affiliates may publish research from time to time on financial markets and other matters that may influence the value of the securities, or express opinions or provide recommendations that are inconsistent with purchasing or holding the securities. Any research, opinions or recommendations expressed by Morgan Stanley, MSFL, WFS or our or their respective affiliates may not be consistent with each other and may be modified from time to time without notice. Investors should make their own independent investigation of the merits of investing in the securities and the underlying to which the securities are linked.
§ The U.S. federal income tax consequences of an investment in the securities are uncertain. Please read the discussion under “Additional Information – Tax considerations” in this document and the discussion under “United States Federal Taxation” in the accompanying product supplement for auto-callable securities (together, the “Tax Disclosure Sections”) concerning the U.S. federal income tax consequences of an investment in the securities. If the Internal Revenue Service (the “IRS”) were successful in asserting an alternative treatment for the securities, the timing and character of income on the securities might differ significantly from the tax treatment described in the Tax Disclosure Sections. For example, under one possible treatment, the IRS could seek to recharacterize the securities as debt instruments. In that event, U.S. Holders would be required to accrue into income original issue discount on the securities every year at a “comparable yield” determined at the time of issuance and recognize all income and gain in respect of the securities as ordinary income. The risk that financial instruments providing for buffers, triggers or similar downside protection features, such as the securities, would be recharacterized as debt is greater than the risk of recharacterization for comparable financial instruments that do not have such features. We do not plan to request a ruling from the IRS regarding the tax treatment of the securities, and the IRS or a court may not agree with the tax treatment described in the Tax Disclosure Sections.
In 2007, the U.S. Treasury Department and the IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular on whether to require holders of these instruments to accrue income over the term of their investment. It also asks for comments on a number of related topics, including the character of income or loss with respect to these instruments; whether short-term instruments should be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments and the nature of the underlying property to which the instruments are linked; the degree, if any, to which income (including any mandated accruals) realized by non-U.S. investors should be subject to withholding tax; and whether these instruments are or should be subject to the “constructive ownership” rule, which very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose an interest charge. While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the securities, possibly with retroactive effect. Both U.S. and Non-U.S. Holders should consult their tax advisers regarding the U.S. federal income tax consequences of an investment in the securities, including possible alternative treatments, the issues presented by this notice and any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.
Risks Relating to the Underlying
§ The securities are subject to risks associated with the internet sector. All or substantially all of the equity securities constituting the underlying are issued by companies whose primary line of business is directly associated with the internet sector. As a result, the value of the securities may be subject to greater volatility and be more adversely affected by a single economic, political or regulatory occurrence affecting this sector than a different investment linked to securities of a more broadly diversified group of issuers. Investments in internet companies may be volatile. Internet companies are subject to intense competition, the risk of product obsolescence, changes in consumer preferences and legal, regulatory and political changes. They are also especially at risk of hacking and other cybersecurity events. In
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addition, it can be difficult to determine what qualifies as an internet company. These factors could affect the internet sector and could affect the value of the equity securities constituting the underlying and the price of one underlying share during the term of the securities, which may adversely affect the value of the securities.
§ There are risks associated with investments in securities linked to the value of foreign (and especially emerging markets) equity securities. The price of the underlying tracks the performance of the CSI Overseas China Internet Index, which measures the value of foreign (and especially emerging markets) equity securities. Investments in securities linked to the value of foreign equity securities involve risks associated with the securities markets in those countries, including risks of volatility in those markets, governmental intervention in those markets and cross-shareholdings in companies in certain countries. Also, there is generally less publicly available information about foreign companies than about U.S. companies that are subject to the reporting requirements of the Securities and Exchange Commission, and foreign companies are subject to accounting, auditing and financial reporting standards and requirements different from those applicable to U.S. reporting companies. The prices of securities issued in foreign markets may be affected by political, economic, financial and social factors in those countries, or global regions, including changes in government, economic and fiscal policies and currency exchange laws. In addition, the stocks that are included in the CSI Overseas China Internet Index and that are generally tracked by the underlying have been issued by companies in various emerging markets countries, which pose further risks in addition to the risks associated with investing in foreign equity markets generally. Countries with emerging markets may have relatively unstable governments, may present the risks of nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of holdings difficult or impossible at times. Moreover, the economies in such countries may differ unfavorably from the economy in the United States in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payment positions between countries.
§ The securities are subject to currency exchange risk. Because the price of the underlying tracks the performance of the CSI Overseas China Internet Index, holders of the securities will be exposed to currency exchange rate risk with respect to each of the currencies in which such component securities trade. Exchange rate movements for a particular currency are volatile and are the result of numerous factors including the supply of, and the demand for, those currencies, as well as relevant government policy, intervention or actions, but are also influenced significantly from time to time by political or economic developments, and by macroeconomic factors and speculative actions related to the relevant region. An investor’s net exposure will depend on the extent to which the currencies of the component securities strengthen or weaken against the U.S. dollar and the relative weight of each security. If, taking into account such weighting, the dollar strengthens against the currencies of the component securities represented in the underlying, the price of the underlying will be adversely affected and the payment at maturity on the securities may be reduced.
Of particular importance to potential currency exchange risk are:
o existing and expected rates of inflation;
o existing and expected interest rate levels;
o the balance of payments; and
o the extent of governmental surpluses or deficits in the countries represented in the CSI Overseas China Internet Index and the United States.
All of these factors are in turn sensitive to the monetary, fiscal and trade policies pursued by the governments of various countries represented in the CSI Overseas China Internet Index and the United States and other countries important to international trade and finance.
§ The performance and market price of the underlying, particularly during periods of market volatility, may not correlate with the performance of the share underlying index, the performance of the component securities of the share underlying index or the net asset value per share of the underlying. The underlying does not fully replicate the share underlying index and may hold securities that are different than those
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included in the share underlying index. In addition, the performance of the underlying will reflect additional transaction costs and fees that are not included in the calculation of the share underlying index. All of these factors may lead to a lack of correlation between the performance of the underlying and the share underlying index. In addition, corporate actions (such as mergers and spin-offs) with respect to the equity securities constituting the underlying may impact the variance between the performances of underlying and the share underlying index. Finally, because the shares of the underlying are traded on an exchange and are subject to market supply and investor demand, the market price of one share of the underlying may differ from the net asset value per share of the underlying.
In particular, during periods of market volatility, or unusual trading activity, trading in the securities constituting the underlying may be disrupted or limited, or such securities may be unavailable in the secondary market. Under these circumstances, the liquidity of the underlying may be adversely affected, market participants may be unable to calculate accurately the net asset value per share of the underlying, and their ability to create and redeem shares of the underlying may be disrupted. Under these circumstances, the market price of shares of the underlying may vary substantially from the net asset value per share of the underlying or the level of the share underlying index.
For all of the foregoing reasons, the performance of the underlying may not correlate with the performance of the share underlying index, the performance of the component securities of the share underlying index or the net asset value per share of the underlying. Any of these events could materially and adversely affect the price of the shares of the underlying and, therefore, the value of the securities. Additionally, if market volatility or these events were to occur on the final determination date, the calculation agent would maintain discretion to determine whether such market volatility or events have caused a market disruption event to occur, and such determination may affect the payment at maturity of the securities. If the calculation agent determines that no market disruption event has taken place, the payment at maturity would be based on the published closing price per share of the underlying on the final determination date, even if the underlying’s shares are underperforming the share underlying index or the component securities of the share underlying index and/or trading below the net asset value per share of the underlying.
§ Adjustments to the underlying or the share underlying index could adversely affect the value of the securities. The investment adviser to the underlying, Krane Funds Advisors, LLC (the “Investment Adviser”), seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the CSI Overseas China Internet Index. Pursuant to its investment strategy or otherwise, the Investment Adviser may add, delete or substitute the stocks composing the KraneShares CSI China Internet ETF. Any of these actions could adversely affect the price of the underlying and, consequently, the value of the securities. China Securities Index Company Limited (“CSI”) is responsible for calculating and maintaining the CSI Overseas China Internet Index. CSI may add, delete or substitute the stocks constituting the CSI Overseas China Internet Index or make other methodological changes that could change the value of the CSI Overseas China Internet Index. CSI may discontinue or suspend calculation or publication of the CSI Overseas China Internet Index at any time. In these circumstances, the calculation agent will have the sole discretion to substitute a successor index that is comparable to the discontinued CSI Overseas China Internet Index and is permitted to consider indices that are calculated and published by the calculation agent or any of its affiliates. Any of these actions could adversely affect the price of the CSI Overseas China Internet Index, and, consequently, the price of the underlying and the value of the securities.
§ The antidilution adjustments the calculation agent is required to make do not cover every event that could affect the shares of the underlying. MS & Co., as calculation agent, will adjust the adjustment factor for certain events affecting the underlying. However, the calculation agent will not make an adjustment for every event that could affect the underlying. If an event occurs that does not require the calculation agent to adjust the adjustment factor, the market price of the securities may be materially and adversely affected. The determination by the calculation agent to adjust, or not to adjust, the adjustment factor may materially and adversely affect the value of the securities.
§ Historical prices of the underlying should not be taken as an indication of the future performance of the underlying during the term of the securities. No assurance can be given as to the price of the underlying at any time, including on the final determination date, because historical prices of the underlying do not provide an indication of future performance of the underlying.
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KraneShares CSI China Internet ETF Overview
The KraneShares CSI China Internet ETF is an exchange-traded fund of KraneShares Trust (“KraneShares”), a registered investment company, that seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of a specific foreign equity securities index, which we refer to as the underlying index with respect to the KraneShares CSI China Internet ETF. The underlying index is currently the CSI Overseas China Internet Index. Information provided to or filed with the Securities and Exchange Commission (the “Commission”) by KraneShares pursuant to the Securities Act of 1933 and the Investment Company Act of 1940 can be located by reference to Commission file numbers 333-180870 and 811-22698, respectively, through the Commission’s website at www.sec.gov. In addition, information may be obtained from other publicly available sources. Neither the issuer nor the agent makes any representation that any such publicly available information regarding the KraneShares CSI China Internet ETF is accurate or complete.
The following graph sets forth the daily closing prices of the underlying for the period from January 1, 2016 through October 29, 2021. The closing price of the underlying on October 29, 2021 was $47.74. We obtained the information in the graph below from Bloomberg Financial Markets without independent verification. You should not take the historical prices of the underlying as an indication of its future performance, and no assurance can be given as to the closing price of the underlying at any time, including on the determination dates.
Shares of the Krane Shares CSI China Internet ETF Daily Closing Prices January 1, 2016 to October 29, 2021
This document relates only to the securities referenced hereby and does not relate to the underlying. We have derived all disclosures contained in this document regarding KraneShares from the publicly available documents described above. In connection with the offering of the securities, neither we nor the agent has participated in the preparation of such documents or made any due diligence inquiry with respect to KraneShares. Neither we nor the agent makes any representation that such publicly available documents or any other publicly available information regarding KraneShares is accurate or complete. Furthermore, we cannot give any assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or completeness of the publicly available documents described above) that would affect the trading price of the underlying (and therefore the price of the underlying at the time we priced the securities) have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning KraneShares could affect the value received with respect to the securities and therefore the value of the securities.
Neither the issuer nor any of its affiliates makes any representation to you as to the performance of the underlying.
We and/or our affiliates may presently or from time to time engage in business with KraneShares. In the course of such business, we and/or our affiliates may acquire non-public information with respect to KraneShares, and neither we nor any of our affiliates
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undertakes to disclose any such information to you. In addition, one or more of our affiliates may publish research reports with respect to the underlying. The statements in the preceding two sentences are not intended to affect the rights of investors in the securities under the securities laws. As a purchaser of the securities, you should undertake an independent investigation of KraneShares as in your judgment is appropriate to make an informed decision with respect to an investment linked to the underlying.
The CSI Overseas China Internet Index. The CSI Overseas China Internet Index is a modified free float-adjusted market capitalization-weighted index that is designed to measure the overall performance of overseas-listed Chinese Internet companies. For additional information, see “Annex A—The CSI Overseas China Internet Index.”
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Additional Terms of the Securities
Additional Terms
Please read this information in conjunction with the Final terms on the front cover of this document.
If the terms described herein are inconsistent with those described in the accompanying product supplement or prospectus, the terms described herein shall control.
Certain definitions
A “ trading day ” means a day, as determined by the calculation agent, on which the relevant stock exchange and each related futures or options exchange with respect to the underlying or any successor thereto, if applicable, are scheduled to be open for trading for their respective regular trading sessions.
The “ relevant stock exchange ” for the underlying means the primary exchange or quotation system on which shares (or other applicable securities) of the underlying are traded, as determined by the calculation agent.
The “ related futures or options exchange ” for the underlying means each exchange or quotation system where trading has a material effect (as determined by the calculation agent) on the overall market for futures or options contracts relating to the underlying.
Market disruption events
A “ market disruption event ” means any of the following events as determined by the calculation agent in its sole discretion:
(A) The occurrence or existence of a material suspension of or limitation imposed on trading by the relevant stock exchange or otherwise relating to the shares (or other applicable securities) of the underlying or any successor fund on the relevant stock exchange at any time during the one-hour period that ends at the close of trading on such day, whether by reason of movements in price exceeding limits permitted by such relevant stock exchange or otherwise.
(B) The occurrence or existence of a material suspension of or limitation imposed on trading by any related futures or options exchange or otherwise in futures or options contracts relating to the shares (or other applicable securities) of the underlying or any successor fund on any related futures or options exchange at any time during the one-hour period that ends at the close of trading on that day, whether by reason of movements in price exceeding limits permitted by the related futures or options exchange or otherwise.
(C) The occurrence or existence of any event, other than an early closure, that materially disrupts or impairs the ability of market participants in general to effect transactions in, or obtain market values for, shares (or other applicable securities) of the underlying or any successor fund on the relevant stock exchange at any time during the one-hour period that ends at the close of trading on that day.
(D) The occurrence or existence of any event, other than an early closure, that materially disrupts or impairs the ability of market participants in general to effect transactions in, or obtain market values for, futures or options contracts relating to shares (or other applicable securities) of the underlying or any successor fund on any related futures or options exchange at any time during the one-hour period that ends at the close of trading on that day.
(E) The closure of the relevant stock exchange or any related futures or options exchange with respect to the underlying or any successor fund prior to its scheduled closing time unless the earlier closing time is announced by the relevant stock exchange or related futures or options exchange, as applicable, at least one hour prior to the earlier of (1) the actual closing time for the regular trading session on such relevant stock exchange or related futures or options exchange, as applicable, and (2) the submission deadline for orders to be entered into the relevant stock exchange or related futures or options exchange, as applicable, system for execution at the close of trading on that day.
(F) The relevant stock exchange or any related futures or options exchange with respect to the underlying or any successor fund fails to open for trading during its regular trading session.
For purposes of determining whether a market disruption event has occurred:
(1) “ close of trading ” means the scheduled closing time of the relevant stock exchange with respect to the underlying or any successor fund; and
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(2) the “ scheduled closing time ” of the relevant stock exchange or any related futures or options exchange on any trading day for the underlying or any successor fund means the scheduled weekday closing time of such relevant stock exchange or related futures or options exchange on such trading day, without regard to after hours or any other trading outside the regular trading session hours.
Anti-dilution Adjustments; Alternate Calculation
Anti-dilution Adjustments
The calculation agent will adjust the adjustment factor as specified below if any of the events specified below occurs with respect to the underlying and the effective date or ex-dividend date, as applicable, for such event is after the pricing date and on or prior to the final determination date.
The adjustments specified below do not cover all events that could affect the underlying, and there may be other events that could affect the underlying for which the calculation agent will not make any such adjustments, including, without limitation, an ordinary cash dividend. Nevertheless, the calculation agent may, in its sole discretion, make additional adjustments to any terms of the securities upon the occurrence of other events that affect or could potentially affect the market price of, or shareholder rights in, the underlying, with a view to offsetting, to the extent practical, any such change, and preserving the relative investment risks of the securities. In addition, the calculation agent may, in its sole discretion, make adjustments or a series of adjustments that differ from those described herein if the calculation agent determines that such adjustments do not properly reflect the economic consequences of the events specified in this pricing supplement or would not preserve the relative investment risks of the securities. All determinations made by the calculation agent in making any adjustments to the terms of the securities, including adjustments that are in addition to, or that differ from, those described in this pricing supplement, will be made in good faith and a commercially reasonable manner, with the aim of ensuring an equitable result. In determining whether to make any adjustment to the terms of the securities, the calculation agent may consider any adjustment made by the Options Clearing Corporation or any other equity derivatives clearing organization on options contracts on the underlying.
For any event described below, the calculation agent will not be required to adjust the adjustment factor unless the adjustment would result in a change to the adjustment factor then in effect of at least 0.10%. The adjustment factor resulting from any adjustment will be rounded up or down, as appropriate, to the nearest one-hundred thousandth.
(A) Stock Splits and Reverse Stock Splits
If a stock split or reverse stock split has occurred, then once such split has become effective, the adjustment factor will be adjusted to equal the product of the prior adjustment factor and the number of securities which a holder of one share (or other applicable security) of the underlying before the effective date of such stock split or reverse stock split would have owned or been entitled to receive immediately following the applicable effective date.
(B) Stock Dividends
If a dividend or distribution of shares (or other applicable securities) to which the securities are linked has been made by the underlying ratably to all holders of record of such shares (or other applicable security), then the adjustment factor will be adjusted on the ex-dividend date to equal the prior adjustment factor plus the product of the prior adjustment factor and the number of shares (or other applicable security) of the underlying which a holder of one share (or other applicable security) of the underlying before the ex-dividend date would have owned or been entitled to receive immediately following that date; provided, however, that no adjustment will be made for a distribution for which the number of securities of the underlying paid or distributed is based on a fixed cash equivalent value.
(C) Extraordinary Dividends
If an extraordinary dividend (as defined below) has occurred, then the adjustment factor will be adjusted on the ex-dividend date to equal the product of the prior adjustment factor and a fraction, the numerator of which is the closing price per share (or other applicable security) of the underlying on the trading day preceding the ex-dividend date, and the denominator of which is the amount by which the closing price per share (or other applicable security) of the underlying on the trading day preceding the ex-dividend date exceeds the extraordinary dividend amount (as defined below).
For purposes of determining whether an extraordinary dividend has occurred:
(1) “ extraordinary dividend ” means any cash dividend or distribution (or portion thereof) that the calculation agent determines, in its sole discretion, is extraordinary or special; and
(2) “ extraordinary dividend amount ” with respect to an extraordinary dividend for the securities of the underlying will equal the amount per share (or other applicable security) of the underlying of the applicable
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cash dividend or distribution that is attributable to the extraordinary dividend, as determined by the calculation agent in its sole discretion.
A distribution on the securities of the underlying described below under the section entitled “—Reorganization Events” below that also constitutes an extraordinary dividend will only cause an adjustment pursuant to that “—Reorganization Events” section.
(D) Other Distributions
If the underlying declares or makes a distribution to all holders of the shares (or other applicable security) of the underlying of any non-cash assets, excluding dividends or distributions described under the section entitled “—Stock Dividends” above, then the calculation agent may, in its sole discretion, make such adjustment (if any) to the adjustment factor as it deems appropriate in the circumstances. If the calculation agent determines to make an adjustment pursuant to this paragraph, it will do so with a view to offsetting, to the extent practical, any change in the economic position of a holder of the securities that results solely from the applicable event.
(E) Reorganization Events
If the underlying, or any successor fund, is subject to a merger, combination, consolidation or statutory exchange of securities with another exchange traded fund, and the underlying is not the surviving entity (a “ reorganization event ”), then, on or after the date of such event, the calculation agent shall, in its sole discretion, make an adjustment to the adjustment factor or the method of determining the maturity payment amount, whether the securities are automatically called on any of the determination dates or any other terms of the securities as the calculation agent determines appropriate to account for the economic effect on the securities of such event, and determine the effective date of that adjustment. If the calculation agent determines that no adjustment that it could make will produce a commercially reasonable result, then the calculation agent may deem such event a liquidation event (as defined below).
Liquidation Events
If the underlying is de-listed, liquidated or otherwise terminated (a “ liquidation event ”), and a successor or substitute exchange traded fund exists that the calculation agent determines, in its sole discretion, to be comparable to the underlying, then, upon the calculation agent’s notification of that determination to the trustee and us, any subsequent closing price for the underlying will be determined by reference to the closing price of such successor or substitute exchange traded fund (such exchange traded fund being referred to herein as a “ successor fund ”), with such adjustments as the calculation agent determines are appropriate to account for the economic effect of such substitution on holders of the securities.
If the underlying undergoes a liquidation event prior to, and such liquidation event is continuing on, the date that any closing price of the underlying is to be determined and the calculation agent determines that no successor fund is available at such time, then the calculation agent will, in its discretion, calculate the closing price for the underlying on such date by a computation methodology that the calculation agent determines will as closely as reasonably possible replicate the underlying, provided that if the calculation agent determines in its discretion that it is not practicable to replicate the underlying (including but not limited to the instance in which the underlying index sponsor discontinues publication of the underlying index), then the calculation agent will calculate the closing price for the underlying in accordance with the formula last used to calculate such closing price before such liquidation event, but using only those securities that were held by the underlying immediately prior to such liquidation event without any rebalancing or substitution of such securities following such liquidation event.
If a successor fund is selected or the calculation agent calculates the closing price as a substitute for the underlying, such successor fund or closing price will be used as a substitute for the underlying for all purposes, including for purposes of determining whether a market disruption event exists. Notwithstanding these alternative arrangements, a liquidation event with respect to the underlying may adversely affect the value of the securities.
If any event is both a reorganization event and a liquidation event, such event will be treated as a reorganization event for purposes of the securities unless the calculation agent makes the determination referenced in the last sentence of the section entitled “—Anti-dilution Adjustments—Reorganization Events” above.
Alternate Calculation
If at any time the method of calculating the underlying or a successor fund is changed in a material respect, or if the underlying or a successor fund is in any other way modified so that the underlying does not, in the opinion of the calculation agent, fairly represent the price of the securities of the underlying or such successor fund had such changes or modifications not been made, then the calculation agent may, at the close of business in New York City on the date that any closing price is to be determined, make such calculations and adjustments as, in the good faith judgment of the calculation agent, may be necessary in order to arrive at a closing price of the underlying comparable to the underlying or such successor fund, as the case may be, as if such changes or modifications had not been made, and calculate the closing price and the maturity payment amount and determine whether the
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securities are automatically called on any call date with reference to such adjusted closing price of the underlying or such successor fund, as applicable.
Postponement of the determination dates
If a market disruption event occurs or is continuing on any determination date, then such determination date will be postponed to the first succeeding trading day on which a market disruption event has not occurred and is not continuing; however, if such first succeeding trading day has not occurred as of the eighth trading day after the originally scheduled determination date, that eighth trading day shall be deemed to be the determination date. If a determination date has been postponed eight trading days after the originally scheduled determination date and a market disruption event occurs or is continuing on such eighth trading day, the calculation agent will determine the closing price of the underlying on such eighth trading day based on its good faith estimate of the value of the shares (or other applicable securities) of the underlying as of the close of trading on such eighth trading day.
Postponement of maturity date
If the scheduled final determination date is not a trading day or if a market disruption event occurs on that day so that the final determination date as postponed falls less than two business days prior to the scheduled maturity date, the maturity date of the securities will be postponed to the second business day following that final determination date as postponed.
Share underlying index
The CSI Overseas China Internet Index
Share underlying index publisher
China Securities Index Company Limited (“CSI”), or any successor thereof
Interest
None
Denominations
$1,000 per security and integral multiples thereof
Trustee
The Bank of New York Mellon
Calculation agent
MS & Co.
Issuer notice to registered security holders, the trustee and the depositary
In the event that the call settlement date or the maturity date is postponed due to postponement of the relevant determination date, the issuer shall give notice of such postponement and, once it has been determined, of the date to which the call settlement date or the maturity date, as applicable, has been rescheduled (i) to the holder of the securities by mailing notice of such postponement by first class mail, postage prepaid, to the holder’s last address as it shall appear upon the registry books, (ii) to the trustee by facsimile confirmed by mailing such notice to the trustee by first class mail, postage prepaid, at its New York office and (iii) to The Depository Trust Company (the “depositary”) by telephone or facsimile confirmed by mailing such notice to the depositary by first class mail, postage prepaid. Any notice that is mailed to the holder of the securities in the manner herein provided shall be conclusively presumed to have been duly given to such holder, whether or not such holder receives the notice. The issuer shall give such notice as promptly as possible, and in no case later than (i) with respect to notice of postponement of the call settlement date or the maturity date, as applicable, the business day immediately preceding the scheduled call settlement date or maturity date, as applicable, and (ii) with respect to notice of the date to which the call settlement date or the maturity date, as applicable, has been rescheduled, the business day immediately following the relevant determination date as postponed.
In the event that the securities are subject to automatic call, the issuer shall, (i) on the business day following the applicable determination date, give notice of the automatic call of the securities and the applicable call payment, including specifying the payment date of the applicable amount due upon the automatic call, (x) to each holder of the securities by mailing notice of such automatic call by first class mail, postage prepaid, to such holder’s last address as it shall appear upon the registry books, (y) to the trustee by facsimile confirmed by mailing such notice to the trustee by first class mail, postage prepaid, at its New York office and (z) to the depositary by telephone or facsimile confirmed by mailing such notice to the depositary by first class mail, postage prepaid and (ii) on or prior to the call settlement date, deliver the aggregate cash amount due with
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respect to the securities to the trustee for delivery to the depositary, as holder of the securities. Any notice that is mailed to the holder of the securities in the manner herein provided shall be conclusively presumed to have been duly given to such holder, whether or not such holder receives the notice. This notice shall be given by the issuer or, at the issuer’s request, by the trustee in the name and at the expense of the issuer, with any such request to be accompanied by a copy of the notice to be given.
The issuer shall, or shall cause the calculation agent to, (i) provide written notice to the trustee, on which notice the trustee may conclusively rely, and to the depositary of the amount of cash, if any, to be delivered with respect to each face amount of the securities, on or prior to 10:30 a.m. (New York City time) on the business day preceding the maturity date, and (ii) deliver the aggregate cash amount due with respect to the securities, if any, to the trustee for delivery to the depositary, as holder of the securities, on the maturity date.
Underlying
The accompanying product supplement refers to the underlying as the “underlying asset.”
Face amount
The accompanying product supplement refers to the face amount as the “stated principal amount.”
Maturity payment amount
The accompanying product supplement refers to the maturity payment amount as the “ payment at maturity .”
Starting price
The accompanying product supplement refers to the starting price as the “initial share price.”
Ending price
The accompanying product supplement refers to the ending price as the “final share price.”
Call payment
The accompanying product supplement refers to the call payment as the “early redemption payment.”
Call settlement dates
The accompanying product supplement refers to the call settlement dates as the “early redemption dates.”
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Additional Information About the Securities
Minimum ticketing size
$1,000 / 1 security
Tax considerations
| Although there is uncertainty regarding the U.S. federal income tax consequences of an investment in the securities due to the lack of governing authority, in the opinion of our counsel, Davis Polk & Wardwell LLP, under current law, and based on current market conditions, a security should be treated as a single financial contract that is an “open transaction” for U.S. federal income tax purposes. |
| --- |
| Assuming this treatment of the securities is respected and subject to the discussion in “United States Federal Taxation” in the accompanying product supplement for auto-callable securities, the following U.S. federal income tax consequences should result based on current law: |
| § A U.S. Holder should not be required to recognize taxable income over the term of the securities prior to settlement, other than pursuant to a sale or exchange. |
| § Upon sale, exchange or settlement of the securities, a U.S. Holder should recognize gain or loss equal to the difference between the amount realized and the U.S. Holder’s tax basis in the securities. Such gain or loss should be long-term capital gain or loss if the investor has held the securities for more than one year, and short-term capital gain or loss otherwise. |
| In 2007, the U.S. Treasury
Department and the Internal Revenue Service (the “IRS”) released a notice requesting comments on the U.S. federal income tax
treatment of “prepaid forward contracts” and similar instruments. The notice focuses in particular on whether to
require holders of these instruments to accrue income over the term of their investment. It also asks for comments on a number
of related topics, including the character of income or loss with respect to these instruments; whether short-term instruments should
be subject to any such accrual regime; the relevance of factors such as the exchange-traded status of the instruments and the nature of
the underlying property to which the instruments are linked; the degree, if any, to which income (including any mandated accruals) realized
by non-U.S. investors should be subject to withholding tax; and whether these instruments are or should be subject to the “constructive
ownership” rule, which very generally can operate to recharacterize certain long-term capital gain as ordinary income and impose
an interest charge. While the notice requests comments on appropriate transition rules and effective dates, any Treasury regulations
or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment
in the securities, possibly with retroactive effect. As discussed in the
accompanying product supplement for auto-callable securities, Section 871(m) of the Internal Revenue Code of 1986, as amended, and Treasury
regulations promulgated thereunder (“Section 871(m)”) generally impose a 30% (or a lower applicable treaty rate) withholding
tax on dividend equivalents paid or deemed paid to Non-U.S. Holders with respect to certain financial instruments linked to U.S. equities
or indices that include U.S. equities (each, an “Underlying Security”). Subject to certain exceptions, Section
871(m) generally applies to securities that substantially replicate the economic performance of one or more Underlying Securities, as
determined based on tests set forth in the applicable Treasury regulations (a “Specified Security”). However, pursuant
to an IRS notice, Section 871(m) will not apply to securities issued before January 1, 2023 that do not have a delta of one with respect
to any Underlying Security. Based on our determination that the securities do not have a delta of one with respect to any Underlying
Security, our counsel is of the opinion that the securities should not be Specified Securities and, therefore, should not be subject to
Section 871(m). Our determination is
not binding on the IRS, and the IRS may disagree with this determination. Section 871(m) is complex and its application may
depend on your particular circumstances, including whether you enter into other transactions with respect to an Underlying Security. If
withholding is required, we will not be required to pay any additional amounts with respect to the amounts so withheld. You
should consult your tax adviser regarding the potential application of Section 871(m) to the securities. Both U.S. and non-U.S. investors considering
an investment in the securities should read the discussion under “Risk Factors” in this document and the discussion under
“United States Federal Taxation” in the accompanying product supplement for auto-callable securities and consult their tax
advisers regarding all aspects of the U.S. federal income tax consequences of an investment in the securities, including possible alternative
treatments, the issues presented by the aforementioned notice and any tax consequences arising under the laws of any state, local or non-U.S.
taxing jurisdiction. |
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The discussion in the preceding paragraphs under “Tax considerations” and the discussion contained in the section entitled “United States Federal Taxation” in the accompanying product supplement for auto-callable securities, insofar as they purport to describe provisions of U.S. federal income tax laws or legal conclusions with respect thereto, constitute the full opinion of Davis Polk & Wardwell LLP regarding the material U.S. federal tax consequences of an investment in the securities.
Use of proceeds and hedging
The proceeds from the sale of the securities will be used by us for general corporate purposes. We will receive, in aggregate, $1,000 per security issued, because, when we enter into hedging transactions in order to meet our obligations under the securities, our hedging counterparty will reimburse the cost of the agent’s commissions. The costs of the securities borne by you and described beginning on page 4 above comprise the agent’s commissions and the cost of issuing, structuring and hedging the securities.
On or prior to the pricing date, we will hedge our anticipated exposure in connection with the securities, by entering into hedging transactions with our affiliates and/or third party dealers. We expect our hedging counterparties to take positions in the underlying, futures and options contracts on the underlying and any component stocks of the share underlying index listed on major securities markets or positions in any other available securities or instruments that they may wish to use in connection with such hedging. Such purchase activity could increase the price of the underlying on the pricing date, and therefore increase (i) the price at or above which the underlying must close on the determination dates so that the securities are called for the call payment and (ii) the threshold price for the underlying, which is the price at or above which the underlying must close on the final determination date so that you do not suffer a loss on your initial investment in the securities. These entities may be unwinding or adjusting hedge positions during the term of the securities, and the hedging strategy may involve greater and more frequent dynamic adjustments to the hedge as the final determination date approaches. Additionally, our hedging activities, as well as our other trading activities, during the term of the securities could potentially affect the price of the underlying on the determination dates, and, accordingly, whether we call the securities prior to maturity and the amount of cash you will receive at maturity, if any. For further information on our use of proceeds and hedging, see “Use of Proceeds and Hedging” in the accompanying product supplement.
Additional considerations
Client accounts over which Morgan Stanley, Morgan Stanley Wealth Management or any of their respective subsidiaries have investment discretion are not permitted to purchase the securities, either directly or indirectly.
Supplemental information regarding plan of distribution; conflicts of interest
MS & Co. and WFS will act as the agents for this offering. WFS will receive a commission of up to $28.25 for each security it sells. WFS proposes to offer the securities in part directly to the public at the price to public set forth on the cover page of this document and in part to Wells Fargo Advisors (“WFA”) (the trade name of the retail brokerage business of WFS’s affiliates, Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC), an affiliate of WFS, or other securities dealers at such price less a selling concession of up to $17.50 per security. In addition to the selling concession allowed to WFA, WFS will pay $0.75 per security of the commission to WFA as a distribution expense fee for each security sold by WFA.
In addition, in respect of certain securities sold in this offering, we may pay a fee of up to $1.00 per security to selected securities dealers in consideration for marketing and other services in connection with the distribution of the securities to other securities dealers.
See “Plan of Distribution (Conflicts of Interest)” in the accompanying product supplement for auto-callable securities for information about the distribution arrangements for the securities. References therein to “agent” refer to each of MS & Co. and WFS, as agents for this offering, except that references to “agent” in the context of offers to certain Morgan Stanley dealers and compliance with FINRA Rule 5121 do not apply to WFS. MS & Co., WFS or their affiliates may enter into hedging transactions with us in connection with this offering.
MS & Co. is an affiliate of MSFL and a wholly owned subsidiary of Morgan Stanley, and it and other affiliates of ours expect to make a profit by selling, structuring and, when applicable, hedging the securities.
MS & Co. will conduct this offering in compliance with the requirements of FINRA Rule 5121 of the Financial Industry Regulatory Authority, Inc., which is commonly referred to as FINRA, regarding a FINRA member firm’s distribution of the securities of an affiliate and related conflicts of interest. MS & Co. or any of our other affiliates may not make sales in this offering to any discretionary account. See “Plan of Distribution (Conflicts of Interest)” and “Use of Proceeds and Hedging” in the accompanying product supplement.
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Validity of the securities:
In the opinion of Davis Polk & Wardwell LLP, as special counsel to MSFL and Morgan Stanley, when the securities offered by this pricing supplement have been executed and issued by MSFL, authenticated by the trustee pursuant to the MSFL Senior Debt Indenture (as defined in the accompanying prospectus) and delivered against payment as contemplated herein, such securities will be valid and binding obligations of MSFL and the related guarantee will be a valid and binding obligation of Morgan Stanley, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally, concepts of reasonableness and equitable principles of general applicability (including, without limitation, concepts of good faith, fair dealing and the lack of bad faith), provided that such counsel expresses no opinion as to (i) the effect of fraudulent conveyance, fraudulent transfer or similar provision of applicable law on the conclusions expressed above and (ii) any provision of the MSFL Senior Debt Indenture that purports to avoid the effect of fraudulent conveyance, fraudulent transfer or similar provision of applicable law by limiting the amount of Morgan Stanley’s obligation under the related guarantee. This opinion is given as of the date hereof and is limited to the laws of the State of New York, the General Corporation Law of the State of Delaware and the Delaware Limited Liability Company Act. In addition, this opinion is subject to customary assumptions about the trustee’s authorization, execution and delivery of the MSFL Senior Debt Indenture and its authentication of the securities and the validity, binding nature and enforceability of the MSFL Senior Debt Indenture with respect to the trustee, all as stated in the letter of such counsel dated November 16, 2020, which is Exhibit 5-a to the Registration Statement on Form S-3 filed by Morgan Stanley on November 16, 2020.
Where you can find more information
Morgan Stanley and MSFL have filed a registration statement (including a prospectus, as supplemented by the product supplement for auto-callable securities) with the Securities and Exchange Commission, or SEC, for the offering to which this communication relates. You should read the prospectus in that registration statement, the product supplement for auto-callable securities and any other documents relating to this offering that Morgan Stanley and MSFL have filed with the SEC for more complete information about Morgan Stanley, MSFL and this offering. You may get these documents without cost by visiting EDGAR on the SEC web site at . www.sec.gov. Alternatively, Morgan Stanley, MSFL, any underwriter or any dealer participating in the offering will arrange to send you the product supplement for auto-callable securities and prospectus if you so request by calling toll-free 1-(800)-584-6837.
You may access these documents on the SEC web site at . www.sec.gov as follows:
Product Supplement for Auto-Callable Securities dated November 16, 2020
Prospectus dated November 16, 2020
Terms used but not defined in this document are defined in the product supplement for auto-callable securities or in the prospectus.
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Annex A
The CSI Overseas China Internet Index
General
All information contained in this document regarding the CSI Overseas China Internet Index, including, without limitation, its make-up, performance, method of calculation and changes in its components, has been derived from publicly available sources, without independent verification. This information reflects the policies of and is subject to change by China Securities Index Company Limited (“CSI”). The CSI Overseas China Internet Index is calculated, maintained and published by CSI. CSI does not have any obligation to continue to publish, and may discontinue the publication of, the CSI Overseas China Internet Index.
The CSI Overseas China Internet Index is a modified free float-adjusted market capitalization-weighted index that is designed to measure the overall performance of overseas-listed Chinese Internet companies.
The CSI Overseas China Internet Index is reported by Bloomberg L.P. in U.S. dollars under the ticker symbol “H11137.”
Eligibility Criteria
Hong Kong listed securities should satisfy the following conditions:
· Primarily listed on the Hong Kong Stock Exchange (main exchange or the Growth Enterprise Market);
· Listed for more than 3 months unless the market value of its initial public offering (“IPO”) exceeds 3 billion USD; and
· Listed by a Chinese company that meets one of the following three criteria: (i) is incorporated in mainland China; (ii) has its operation center in mainland China; or (iii) derives at least 50% of its revenue from mainland China.
Hong Kong listed securities that meet any of the following conditions will be excluded from the eligible universe:
· Securities whose average daily closing price in the most recent year is less than 0.1 HKD;
· Securities whose average daily closing price in the most recent year is less than 0.5 HKD or earnings per share in the most recent annual report is negative; or
· Securities whose cumulative average daily market capitalization coverage in the most recent three months is beyond 90%, after having ranked the securities by the average daily turnover ratio (which is the daily trading value divided by total market capitalization) in descending order and calculated the cumulative average daily market capitalization coverage for each security.
Other markets listed securities should satisfy the following conditions:
· Listed for more than 3 months unless the market value of its IPO exceeds 3 billion USD; and
· Listed by a Chinese company that meets one of the following three criteria: (i) is incorporated in mainland China; (ii) has its operation center in mainland China; or (iii) derives at least 50% of its revenue from mainland China.
Constituent Selection
All securities whose average daily trading value in the past year is less than 3 million USD or average daily market capitalization in the past year is less than 2 billion USD are removed from the eligible universe.
From the remaining securities, securities are chosen for inclusion in the CSI Overseas China Internet Index if they are assigned to one of the following categories, as determined by CSI:
· Internet Software & Services (companies developing and marketing internet software and/or providing internet services);
· Home Entertainment Software (manufacturers of home entertainment software and educational software primarily for home use);
· Internet Retail (companies providing retail services primarily on the internet);
· Internet Service (companies providing commercial services primarily on the internet); or
· Mobile Internet (companies developing and marketing mobile internet software and/or providing mobile internet services).
Constituent Weightings
The constituents are ranked by adjusted USD market capitalization subject to a cap of 10%. The weight of constituents is determined according to the following methodology:
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Stage 1. Any constituent whose weight is greater than 10% is capped at 10% and the weights of all lower ranking constituents are increased as a result. The weights of the lower ranking constituents are then checked and if any exceed 10%, they are capped at 10% and the process is repeated until no constituent has a weight that exceeds 10%.
Stage 2. If the total weight of those constituents whose individual weights exceed 5% is greater than 40% in the aggregate, then the capping process continues with Stage 3 below. Otherwise, no further action is required.
Stage 3. If more than one security is capped at 10%, then the weights of all subsequent constituents previously capped at 10% are changed in accordance with the following rules:
a) If the weight of the second largest constituent is greater than 9%, the constituent’s weight is capped at 9% and the weights of the lower ranking constituents are increased accordingly. Following this step, if the total weight of those constituents whose individual weights exceed 5% is greater than 40%, then the procedure moves to the next step.
b) If the weight of the third largest constituent is greater than 8%, the constituent’s weight is capped at 8% and the weights of the lower ranking constituents are increased accordingly. Following this step, if the total weight of those constituents whose individual weights exceed 5% is greater than 40%, then the procedure moves to the next step.
c) If the weight of the fourth largest constituent greater than 7%, the constituent’s weight is capped at 7% and the weights of the lower ranking constituents are increased accordingly. Following this step, if the total weight of those constituents whose individual weights exceed 5% is greater than 40%, then the procedure moves to the next step.
d) If the weight of the fifth largest constituent greater than 6%, the constituent’s weight is capped at 6% and the weights of the lower ranking constituents are increased accordingly. Following this step, if the total weight of those constituents whose individual weights exceed 5% is greater than 40%, then the procedure moves to the next step.
e) If the weight of the sixth largest constituent and any lower ranking constituents is greater than 4% then those constituents’ weights are capped at 4% and the weights of the lower ranking constituents are increased accordingly.
Stage 4. Following the application of Stage 3, the weights of the constituents are checked. If the total weight of those constituents whose individual weights exceed 5% is greater than 40% in the aggregate, then further capping is required. The stages above are repeated if necessary.
Index Calculation
The CSI Overseas China Internet Index is a modified free float-adjusted market capitalization-weighted index. The CSI Overseas China Internet Index is calculated using the following formula:
Float Adjustment . CSI defines free-float of a constituent as the shares outstanding and tradable in the security market. The identification and calculation of free float by CSI is based on objective information including prospectuses and listing notices, periodic reports and temporary reports. CSI tracks the changes of free-float shares and adjusts free-float changes resulting from shareholder’s behavior every six months. All restricted shares subject to a lock-in period are deemed to be non-free float. Non-restricted shares will be deemed to be non-free float if (a) they fall into one of the following types of shares: (1) shares held by founders of the company or their families, and by senior executives, by directors, or by supervisors, etc.; (2) shares held by the government or its subsidiaries; (3) shares held by strategic investors for long-term strategic interest; or (4) shares held by employee share plans; and (b) the holdings by shareholders or shareholders acting in concert are 5% or greater; otherwise, they will be deemed to be free float. Restricted shares after the lock-in period are treated in the same way as non-restricted shares.
The weight factor is a value between 0 and 1 and is determined as described under “— Constituent Weightings” above.
Exchange Rate. The price of each component stock and the total market capitalization as of the base date are converted into USD equivalents using the relevant exchange rates as of the applicable dates. Exchange rates are sourced from the data providers as designated by CSI from time to time. The real-time calculation of the CSI Overseas China Internet Index is
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based on the real-time price date published by the stock exchanges during trading hours through their quotation system. The real-time exchange rate is used to calculate the real-time index; the exchange rate at the index closing time is used to calculate the index closing level.
Divisor . The purpose of the index divisor is to maintain the continuity of an index level following a change to the constituent list, a capital change in the index constituents or an index constituent’s market value changes due to non-trading factors. The new divisor is derived from the following formula:
The new divisor derived from this formula will be used for the future index calculation.
Index Review
The CSI Overseas China Internet Index is adjusted and rebalanced semi-annually during the last ten days of May and November of each year. The adjustment will be effective as of the next trading day after the second Friday in June and December.
A weight factor is assigned to each constituent at each rebalancing date. The effective date is the same as that of the constituent adjustment. The weight factor stays the same until the next rebalancing date.
Suspension. At the periodic index review, if an index constituent is suspended, CSI will determine its treatment as follows:
· Constituents that have been suspended for more than 25 trading days and have not resumed trading as of the deadline for data used for constituents’ eligibility review (April 30 th for the May review and October 31 st for the November review), if listed on the candidate deletion list, will be classified as priority deletion securities.
· CSI reports list of constituents that have been suspended close to 25 trading days as of the deadline for data used for constituents’ eligibility review to the index advisory committee. The committee discusses whether they should be classified as candidate deletion securities.
· If the deletion securities are under suspension and the reason for suspension is a significant negative event, then the constituent will be deleted from the index at the price of 0.00001 Yuan. In the event that such securities resume trading at least one trading day prior to the effective date, CSI will amend the deletion price to market price and publish an announcement. Under any other conditions, a suspended constituent will be deleted from the index at its closing market price before suspension.
For suspended companies that are not currently constituents of the CSI Overseas China Internet Index, CSI determines their treatment as follows:
· Securities that are under suspension and without a clear expectation of trading resumption on the date of the index advisory committee meeting will not be able to be selected as candidates for inclusion in the CSI Overseas China Internet Index.
· Securities that have been suspended for more than 25 trading days during the data period used for constituents’ review are eligible for inclusion in the index only if they have resumed trading for 3 months, except in special circumstances approved by the index advisory committee.
· For new additions suspended between the announcement date and the effective date of the periodic review, CSI will decide whether to adjust the addition or not.
Corporate Action Related Changes
In the case of exceptional corporate events, CSI will review the CSI Overseas China Internet Index and make necessary ongoing adjustments between index reviews in order to maintain the representativeness of the index and ensure it is investable. These corporate events include IPOs, mergers and acquisitions, spin-offs, suspensions, delistings, bankruptcies, cash or stock dividends, stock splits or reverse stock splits, rights issues and secondary offerings.
Base Date
The CSI Overseas China Internet Index has a base date of June 29, 2007, with a base value of 1,000 on that date.
Index Governance
CSI annually reviews the index calculation and maintenance methodology and other index policy documents to ensure that the CSI Overseas China Internet Index continues to achieve the stated objectives. After the regular review is completed, an annual review report is produced and presented to the index oversight committee.
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CSI may review index methodology documents outside the annual scheduled reviews based on, but not limited to, one of the following: underlying market environment review, market participant feedback, problems identified in index management or unusual corporate events treatment.
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