Term sheet
To prospectus dated November 14, 2011,
prospectus supplement dated November 14, 2011
product supplement no. 4a-I dated October 30, 2014 and
underlying supplement no. 23-III dated April 25, 2014
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Term Sheet to
Product Supplement No. 4a-I
Registration Statement No. 333-177923
Dated October 30, 2014; Rule 433
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Structured
Investments
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$
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1) due December 31, 2015
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The notes are designed for investors who seek exposure to the J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1). Investors should be willing to forgo interest payments and, if, between the Pricing Date and the Observation Date, the level of the Index (which reflects the deductions described below) decreases, be willing to lose some or all of their principal.
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The Index is subject to a total of three types of fees and deductions:
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Daily index fee: on each day, the calculation of the Index reflects the deduction of an adjustment factor of 0.75% per annum (the “Daily Index Fee”);
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Call deduction and put deduction: on a monthly or quarterly basis, as applicable, when the Index’s synthetic short call or long put exposure, as applicable, is rolled into a new option contract on the S&P 500® Index (the “Price Return Equity Index”), a call deduction or put deduction, as applicable, is subtracted in the calculation of the Index. The call deduction or put deduction is calculated by multiplying (a) the applicable volatility spread (which is between 0.30% and 3.00%) by (b) the vega of the applicable option contract, subject to certain minimum and maximum amounts. The applicable volatility spread depends on the level of the CBOE Volatility Index (the “Volatility Index”) on the relevant date of determination. Unlike the Daily Index Fee, the call deduction and the put deduction are not per annum percentage deductions; and
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Delta deduction: on each day the delta hedge (as described below) is implemented, 0.03% of any increase or decrease in the Index’s exposure to the futures contracts on the Price Return Equity Index is deducted in the calculation of the Index. Unlike the Daily Index Fee, the delta deduction is not a per annum percentage deduction.
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The notes are not suitable for all investors. The notes should be purchased only by investors who understand that their investment is exposed to the performance of synthetic positions (including synthetic short positions) in option contracts whose value is determined in part based on equity volatility levels and synthetic positions in futures contracts, which can be volatile and move dramatically over short periods of time.
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Unsecured and unsubordinated obligations of JPMorgan Chase & Co. Any payment on the notes is subject to the credit risk of JPMorgan Chase & Co.
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The notes will be sold in minimum denominations of $1,000 and integral multiples thereof.
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Index:
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The J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1) (Bloomberg ticker symbol “JPUSLEDO”). For more information about the Index, please see “The J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1)” in this term sheet.
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Pricing Date:
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On or about November 24, 2014
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Original Issue Date (Settlement Date):
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On or about November 28, 2014
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Observation Date†:
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December 28, 2015
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Maturity Date†:
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December 31, 2015
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Payment at Maturity:
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For each $1,000 principal amount note, you will receive at maturity a cash payment equal to:
$1,000 × (1 + Index Return)
The return on your principal amount at maturity will reflect the deduction of three types of fees and deductions from the level of the Index. Because the Index closing level reflects these fees and deductions, the level of the Index will decrease if the performance of the Total Return Equity Index and the option contracts and futures contracts on the Price Return Equity Index included in the Index, in aggregate, is not sufficient to offset these fees and deductions. In addition, you will lose some or all of your principal amount at maturity if between the Pricing Date and the Observation Date, the level of the Index decreases.
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Additional Key Terms:
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See “Additional Key Terms” on page TS-1 of this term sheet
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†
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Subject to postponement in the event of certain market disruption events and as described under “General Terms of Notes — Postponement of a Determination Date — Notes Linked to a Single Underlying” and “General Terms of Notes — Postponement of a Payment Date” in the accompanying product supplement no. 4a-I.
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Price to Public (1)
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Fees and Commissions (2)
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Proceeds to Issuer
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Per note
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$1,000
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$—
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$1,000
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Total
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$
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$—
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$
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(1)
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See “Supplemental Use of Proceeds” in this term sheet for information about the components of the price to public of the notes.
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(2)
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J.P. Morgan Securities LLC, which we refer to as JPMS, acting as agent for JPMorgan Chase & Co., will receive the aggregate profits generated from the deduction of the Daily Index Fee of 0.75% per annum from the level of the Index to cover ongoing payments as a structuring fee for developing the notes. A portion of the Daily Index Fee will be used to pay selling commissions to other affiliated or unaffiliated dealers. In no event will the portion of the Daily Index Fee used to pay selling commissions exceed $2.50 per $1,000 principal amount note. See “Selected Purchase Considerations — Return Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1)” in this term sheet and “Plan of Distribution (Conflicts of Interest)” beginning on page PS-87 of the accompanying product supplement no. 4a-I.
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Product supplement no. 4a-I dated October 30, 2014:
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Underlying supplement no. 23-III dated April 25, 2014:
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Prospectus supplement dated November 14, 2011:
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Prospectus dated November 14, 2011:
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Index Return: | The Index Return is equal to: |
(Ending Index Level – Initial Index Level)
Initial Index Level
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Initial Index Level:
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The Index closing level on the Pricing Date
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Ending Index Level:
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The Index closing level on the Observation Date
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Note Calculation Agent:
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J.P. Morgan Securities LLC (“JPMS”), an affiliate of ours
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Index Calculation Agent:
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J.P. Morgan Securities plc (“JPMS plc”), an affiliate of ours
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-1
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-2
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UNCAPPED APPRECIATION POTENTIAL — The notes provide the opportunity to obtain an uncapped return at maturity linked to the Index (which will reflect three types of fees and deductions described under “The J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1) — Fees and Deductions” in this term sheet). The notes are not subject to a predetermined maximum return and, accordingly, any return will be based on the performance of the Index (which will reflect the fees and deductions referred to above). Because the notes are our unsecured and unsubordinated obligations, payment of any amount on the notes is subject to our ability to pay our obligations as they become due.
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RETURN LINKED TO THE J.P. MORGAN U.S. LONG EQUITY DYNAMIC OVERLAY 80 INDEX (SERIES 1) —The return on the notes is linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1), which is designed to provide a synthetic long position in the Total Return Equity Index, and limited downside protection against adverse movements of the Total Return Equity Index through a synthetic collar strategy as an overlay to the synthetic long position in the Price Return Equity Index. The Index is subject to a total of three types of fees and deductions. For additional information, see “The J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1)” above and in the accompanying underlying supplement no. 23-III.
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CAPITAL GAINS TAX TREATMENT — You should review carefully the section entitled “Material U.S. Federal Income Tax Consequences” in the accompanying product supplement no. 4a-I. The following discussion, when read in combination with that section, constitutes the full opinion of our special tax counsel, Davis Polk & Wardwell LLP, regarding the material U.S. federal income tax consequences of owning and disposing of notes.
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-3
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Selected Risk Considerations
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YOUR INVESTMENT IN THE NOTES MAY RESULT IN A LOSS — The return on your principal amount at maturity will reflect the deduction of three types of fees and deductions from the level of the Index. Please see “— You May Receive Less Than Your Principal Amount Due to the Fees and Deductions Deducted from the Level of the Index” below for more information. You will lose some or all of your principal amount at maturity if, between the Pricing Date and the Observation Date, the level of the Index decreases.
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CREDIT RISK OF JPMORGAN CHASE & CO. — The notes are subject to the credit risk of JPMorgan Chase & Co., and our credit ratings and credit spreads may adversely affect the market value of the notes. Investors are dependent on JPMorgan Chase & Co.’s ability to pay all amounts due on the notes. Any actual or potential change in our creditworthiness or credit spreads, as determined by the market for taking our credit risk, is likely to adversely affect the value of the notes. If we were to default on our payment obligations, you may not receive any amounts owed to you under the notes and you could lose your entire investment.
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YOU MAY RECEIVE LESS THAN YOUR PRINCIPAL AMOUNT DUE TO THE FEES AND DEDUCTIONS DEDUCTED FROM THE LEVEL OF THE INDEX — Because the Index closing level will reflect three types of fees and deductions, as described under “The J.P. Morgan U.S. Long Equity Dynamic Overlay 80 Index (Series 1) — Fees and Deductions” in this term sheet, the level of the Index will decrease if the performance of the Total Return Equity Index and the option contracts and futures contracts on the Price Return Equity Index included in the Index, in aggregate, is not sufficient to offset these fees and deductions. In particular, please see “— Risks Relating to the Option Component — The Call Deduction and Put Deduction charged at Each Call Rebalancing or Put Rebalancing Will Have a Substantial Adverse Effect on the Level of the Index Over Time” and “— Risks Relating to the Futures Component — The Delta Deduction is Likely to Have a Substantial Adverse Effect on the Level of the Index over Time.” below for more information. If the level of the Index decreases (due to these fees and deductions or otherwise) between the Pricing Date and the Observation Date, you will lose some or all of your principal amount at maturity or upon early repurchase.
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POTENTIAL CONFLICTS — We and our affiliates play a variety of roles in connection with the issuance of the notes, including acting as the Note Calculation Agent, the Index Calculation Agent and the sponsor of the Index, and as agent of the offering of the notes, hedging our obligations under the notes and making the assumptions used to determine the pricing of the notes and the estimated value of the notes when the terms of the notes are set, which we refer to as JPMS’s estimated value. In performing these duties, our economic interests and the economic interests of the Note Calculation Agent, the Index Calculation Agent, the sponsor of the Index, the agent for the offering of the notes and other affiliates of ours are potentially adverse to your interests as an investor in the notes. In addition, our business activities, including hedging and trading activities, could cause our economic interests to be adverse to yours and could adversely affect any payment on the notes and the value of the notes. It is possible that hedging or trading activities of ours or our affiliates in connection with the notes could result in substantial returns for us or our affiliates while the value of the notes declines. For example, in connection with the maintenance of the Index, JPMS may receive a portion of the aggregate profits, if any, that may be generated from time to time related to some portion of the deduction of the daily rebalancing adjustment amount from the level of the Index. Please refer to “Risk Factors — Risks Relating to Conflicts of Interest” in the accompanying product supplement no. 4a-I for additional information about these risks.
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JPMS AND ITS AFFILIATES MAY HAVE PUBLISHED RESEARCH, EXPRESSED OPINIONS OR PROVIDED RECOMMENDATIONS THAT ARE INCONSISTENT WITH INVESTING IN OR HOLDING THE NOTES. ANY SUCH RESEARCH, OPINIONS OR RECOMMENDATIONS COULD AFFECT THE MARKET VALUE OF THE NOTES — JPMS and its affiliates publish research from time to time on equity markets and other matters that may influence the value of the notes, or express opinions or provide recommendations that are inconsistent with purchasing or holding the notes. JPMS and its affiliates may have published research or other opinions that call into question the investment view implicit in an investment in the notes. Any research, opinions or recommendations
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-4
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JPMS’S ESTIMATED VALUE OF THE NOTES WILL BE LOWER THAN THE ORIGINAL ISSUE PRICE (PRICE TO PUBLIC) OF THE NOTES — JPMS’s estimated value is only an estimate using several factors. The original issue price of the notes will exceed JPMS’s estimated value because costs associated with selling, structuring and hedging the notes are included in the original issue price of the notes. These costs include the Daily Index Fee that will accrue on a daily basis over the term of the notes (which is used, in part, to pay selling commissions to other affiliated or unaffiliated dealers). See “JPMS’s Estimated Value of the Notes” in this term sheet.
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JPMS’S ESTIMATED VALUE DOES NOT REPRESENT FUTURE VALUES OF THE NOTES AND MAY DIFFER FROM OTHERS’ ESTIMATES — JPMS’s estimated value of the notes is determined by reference to JPMS’s internal pricing models when the terms of the notes are set. This estimated value is based on market conditions and other relevant factors existing at that time and JPMS’s assumptions about market parameters, which can include volatility, interest rates, the Daily Index Fee and other factors. Different pricing models and assumptions could provide valuations for notes that are greater than or less than JPMS’s estimated value. In addition, market conditions and other relevant factors in the future may change, and any assumptions may prove to be incorrect. On future dates, the value of the notes could change significantly based on, among other things, changes in market conditions, our creditworthiness, interest rate movements and other relevant factors, which may impact the price, if any, at which JPMS would be willing to buy notes from you in secondary market transactions. See “JPMS’s Estimated Value of the Notes” in this term sheet.
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JPMS’S ESTIMATED VALUE IS NOT DETERMINED BY REFERENCE TO CREDIT SPREADS FOR OUR CONVENTIONAL FIXED-RATE DEBT — The internal funding rate used in the determination of JPMS’s estimated value generally represents a discount from the credit spreads for our conventional fixed-rate debt. The discount is based on, among other things, our view of the funding value of the notes as well as the higher issuance, operational and ongoing liability management costs of the notes in comparison to those costs for our conventional fixed–rate debt. If JPMS were to use the interest rate implied by our conventional fixed-rate credit spreads, we would expect the economic terms of the notes to be more favorable to you. Consequently, our use of an internal funding rate would have an adverse effect on the terms of the notes and any secondary market prices of the notes. See “JPMS’s Estimated Value of the Notes” in this term sheet.
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THE VALUE OF THE NOTES AS PUBLISHED BY JPMS (AND WHICH MAY BE REFLECTED ON CUSTOMER ACCOUNT STATEMENTS) MAY BE HIGHER THAN JPMS’S THEN-CURRENT ESTIMATED VALUE OF THE NOTES — We generally expect that the portion of the Daily Index Fee that has not yet accrued will be paid back to you in connection with any repurchases of your notes by JPMS over the term of the notes. See “Secondary Market Prices of the Notes” in this term sheet for additional information. Accordingly, the estimated value of your notes during this initial period may be lower than the value of the notes as published by JPMS (and which may be shown on your customer account statements).
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SECONDARY MARKET PRICES OF THE NOTES WILL LIKELY BE LOWER THAN THE ORIGINAL ISSUE PRICE OF THE NOTES — Any secondary market prices of the notes will likely be lower than the original issue price of the notes because, among other things, secondary market prices take into account our secondary market credit spreads for structured debt issuances. As a result, the price, if any, at which JPMS will be willing to buy notes from you in secondary market transactions, if at all, is likely to be lower than the original issue price. Any sale by you prior to the maturity date could result in a substantial loss to you. See the immediately following risk consideration for information about additional factors that will impact any secondary market prices of the notes.
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SECONDARY MARKET PRICES OF THE NOTES WILL BE IMPACTED BY MANY ECONOMIC AND MARKET FACTORS — The secondary market price of the notes during their term will be impacted by a number of economic and market factors, which may either offset or magnify each other, aside from the portion of the Daily Index Fee that has not yet accrued and the level of the Index, including:
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any actual or potential change in our creditworthiness or credit spreads;
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customary bid-ask spreads for similarly sized trades;
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secondary market credit spreads for structured debt issuances;
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prevailing market prices and forward volatility levels of the U.S. stock markets and the equity securities included in the S&P 500® Index;
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prevailing market prices, volatility and liquidity of any option or futures contracts relating to the Index and the S&P 500® Index, and the equity securities included in the S&P 500® Index;
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the volatility, frequency and magnitude of changes in the levels of the Index and in the prices of the option contracts and futures contracts included in the Index;
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the liquidity of option contracts and futures contracts included in the Index;
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the time to maturity of the notes;
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interest and yield rates in the market generally;
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supply and demand in the listed and over-the-counter equity derivative markets; and
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a variety of other economic, financial, political, regulatory and judicial events.
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-5
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NO INTEREST PAYMENTS — As a holder of the notes, you will not receive any interest payments.
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LACK OF LIQUIDITY — The notes will not be listed on any securities exchange. JPMS intends to offer to purchase the notes in the secondary market but is not required to do so. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the notes easily. Because other dealers are not likely to make a secondary market for the notes, the price at which you may be able to trade your notes is likely to depend on the price, if any, at which JPMS is willing to buy the notes.
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THE FINAL TERMS AND VALUATION OF THE NOTES WILL BE PROVIDED IN THE PRICING SUPPLEMENT — The final terms of the notes will be based on relevant market conditions when the terms of the notes are set and will be provided in the pricing supplement. In particular, JPMS’s estimated value will be provided in the pricing supplement and may be as low as the minimum for JPMS’s estimated value set forth on the cover of this term sheet. Accordingly, you should consider your potential investment in the notes based on the minimum for JPMS’s estimated value.
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OUR AFFILIATE, JPMS PLC, IS THE INDEX CALCULATION AGENT AND THE INDEX SPONSOR AND MAY ADJUST THE INDEX IN A WAY THAT AFFECTS ITS LEVEL — JPMS plc, one of our affiliates, acts as the Index Sponsor and the Index Calculation Agent and is responsible for calculating and publishing the official closing levels of the Index, maintaining the Index and developing the guidelines and policies governing its composition and calculation. The rules governing the Index may be amended at any time by JPMS plc, in its sole discretion, and the rules also permit the use of discretion by JPMS plc in relation to the Index in specific instances, including but not limited to the selection of a successor or substitute to, or the exclusion of, a constituent of the Index and other adjustments to the Index upon the occurrence of certain extraordinary events and the interpretation of the rules governing the Index. Unlike other indices, the maintenance of the Index is not governed by an independent committee. Although judgments, policies and determinations concerning the Index are made by JPMS plc, JPMorgan Chase & Co., as the parent company of JPMS plc, ultimately controls JPMS plc.
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THE REPORTED LEVEL OF THE INDEX WILL BE CALCULATED NET OF FEES AND DEDUCTIONS — One way in which the Index may differ from other indices is that its reported levels include fees and deductions. As a result of these deductions, the value of the Index will trail the value of a hypothetical identically constituted synthetic portfolio that is not subject to these fees and deductions. The Index is subject to a total of three types of fees and deductions:
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Daily index fee: on each day, the calculation of the Index reflects the deduction of an adjustment factor of 0.75% per annum;
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Call deduction and put deduction: on a monthly or quarterly basis, as applicable, when the Index’s synthetic short call or long put exposure, as applicable, is rolled into a new option contract on the Price Return Equity Index, a call deduction or put deduction, as applicable, is subtracted in the calculation of the Index, once with respect to the establishment of a new short call position and twice (once in connection with the synthetic sale of the soon-to-expire put option contract and once in connection with the synthetic purchase of a replacement put option contract) with respect to the establishment of a new long put position. The call deduction or put deduction is calculated by multiplying (a) the applicable volatility spread (which is between 0.30% and 3.00%) by (b) the vega of the applicable option contract, subject to certain minimum and maximum amounts. The applicable volatility spread depends on the level of the Volatility Index on the relevant date of determination. The call deduction or put deduction is designed to approximate the transaction costs of rolling the Index’s synthetic short call or long put positions on the Price Return Equity Index, including bid-ask spreads and slippage costs that would be experienced by a professional investor seeking to replicate the hypothetical portfolio contemplated by the Index’s synthetic short call and long put positions at prices that approximate the official settlement prices (which are not generally tradable) of the relevant option contracts. The slippage costs that are approximated in the call deduction or put deduction are costs that arise from deviations between the actual official settlement price of an applicable option contract and the prices at which a hypothetical investor would expect to be able to execute trades in the market when seeking to match the expected official settlement price of that option contract. Unlike the Daily Index Fee, the call deduction and the put deduction are not per annum percentage deductions; and
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Delta deduction: on each day the delta hedge is implemented, 0.03% of any increase or decrease in the Index’s exposure to the futures contracts on the Price Return Equity Index is deducted in the calculation of the Index. The delta deduction reflects costs relating to the Index’s delta hedge (as described below) of its synthetic short call position. Unlike the Daily Index Fee, the delta deduction is not a per annum percentage deduction.
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THE INDEX MAY NOT BE SUCCESSFUL, AND MAY NOT OUTPERFORM ANY ALTERNATIVE STRATEGY THAT MIGHT BE EMPLOYED WITH RESPECT TO THE EQUITY INDEX AND THE OPTION CONTRACTS AND
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-6
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NOTES THAT PROVIDE EXPOSURE TO EQUITY OPTION CONTRACTS, EQUITY FUTURES CONTRACTS AND SHORT EQUITY POSITIONS, WITH EACH REBALANCED BASED ON THE EQUITY VOLATILITY LEVEL, ARE NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD ACTIVELY MANAGE YOUR INVESTMENT IN THE NOTES — Notes that provide exposure to equity option contracts, equity futures contracts and short equity positions, with each rebalanced based on the equity volatility level, are not suitable for all investors. The notes reflect the performance of the Index, which employs a synthetic collar strategy through the synthetic sale of call options and synthetic purchase of put options on the Price Return Equity Index. Furthermore, when the Index maintains a synthetic short call position, it may be delta-hedged through synthetic offsetting long positions in futures contracts on the Price Return Equity Index. The delta hedge mechanism is activated and deactivated based on the market expectation of the volatility levels of the Price Return Equity Index. As a consequence, investors in the notes should understand that their investment is exposed to the performance of synthetic positions (including synthetic short positions) in option contracts whose value is determined based on equity volatility levels and synthetic positions in futures contracts, which can be volatile and move dramatically over short periods of time. Because of the large and sudden value movements associated with option and futures contracts, the notes should be purchased only by sophisticated investors who understand risks associated with investments linked to option contracts, futures contracts, short positions and equity volatility and who intend to monitor and manage their investments actively. You should consider your investment horizon and objectives, financial resources and risk tolerance, as well as any potential trading costs, when evaluating an investment in the notes. Investors should regularly monitor their investment in the notes to ensure that it remains consistent with their investment objectives.
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THERE MAY BE SIGNIFICANT FLUCTUATIONS IN THE LEVEL OF THE INDEX, WHICH COULD AFFECT THE VALUE OF THE NOTES — The performance of the Index is dependent on the performance of the S&P 500® Total Return Index (the “Total Return Equity Index”), its synthetic positions in call option contracts and put option contracts on the Price Return Equity Index and its synthetic long position in futures contracts on the Price Return Equity Index, if any. As a consequence, investors in investment products linked to the Index should understand that their investment is exposed to the performance of synthetic positions (including a synthetic short position) in option contracts and synthetic positions in futures contracts on the Price Return Equity Index. The values of the synthetic positions in option contracts and futures contracts underlying the Index can be volatile and move dramatically over short periods of time. There can be no assurance that the relevant synthetic exposures will not result in substantial negative returns. Positive returns on the Index may therefore be reduced or eliminated entirely due to movements in market parameters.
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THE INDEX COMPRISES SYNTHETIC ASSETS — The exposure to the Total Return Equity Index, and option contracts and futures contracts on the Price Return Equity Index provided by the Index is purely synthetic and will exist solely in the records maintained by or on behalf of the Index Calculation Agent. There is no actual portfolio of assets to which any person is entitled or in which any person has any ownership interest. Consequently, you will not have any claim against any of the option contracts or futures contracts that the Index references.
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THE INDEX HAS A LIMITED OPERATING HISTORY AND MAY PERFORM IN UNANTICIPATED WAYS — The Index was created on September 17, 2013, and therefore has limited historical performance. Past performance should not be considered indicative of future performance.
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HYPOTHETICAL BACK-TESTED DATA RELATING TO THE INDEX DO NOT REPRESENT ACTUAL HISTORICAL DATA AND ARE SUBJECT TO INHERENT LIMITATIONS — The hypothetical back-tested performance of the Index set forth under “Hypothetical Back-tested Data and Historical Information” in this term sheet was calculated on materially the same basis as the performance of the Index is now calculated, but does not represent the actual historical performance of the Index and has not been verified by an independent third party. Alternative modeling techniques or assumptions may produce different hypothetical historical information that might prove to be more appropriate and that might differ significantly from the hypothetical historical information set forth under “Hypothetical Back-tested Data and Historical Information” in this term sheet. In addition, back-tested, hypothetical historical results have inherent limitations. These back-tested results are achieved by means of a retroactive application of a back-tested model designed with the benefit of hindsight. As with actual historical data, hypothetical back-tested data should not be taken as an indication of future performance.
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THE CONSTITUENTS OF THE INDEX MAY BE REMOVED OR REPLACED IN CERTAIN EXTRAORDINARY EVENTS — Following the occurrence of certain extraordinary events with respect to any constituent of the Index, the affected constituent may be removed or replaced by a successor or substitute constituent. You should realize that the removal, replacement or substitution of a constituent of the Index may affect the performance of the Index, and therefore, the return on the notes, as the applicable successor constituent may perform significantly better or worse than the affected constituent.
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-7
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THE SYNTHETIC COLLAR STRATEGY EMPLOYED BY THE INDEX MAY NOT PROTECT INVESTORS FROM ALL LOSSES — The Index employs a synthetic collar strategy as an overlay to its synthetic long position in the Total Return Equity Index that is designed to provide limited downside protection against adverse movements of the Total Return Equity Index. The synthetic collar strategy is implemented through the combination of the synthetic quarterly purchase of a put option on the Price Return Equity Index that is designed to be funded partially or fully, as the case may be, by the synthetic monthly sale of a call option on the Price Return Equity Index, although there may be circumstances where no put option will be purchased or where no call option will be sold on the relevant rebalancing day.
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SUDDEN MARKET MOVEMENTS MAY LEAVE THE INDEX WITH THE WRONG COMBINATION OF POSITION EXPOSURES, THUS LEADING TO INVESTOR LOSSES — During the time when the Index’s synthetic short call position is delta-hedged, the Index will be exposed to a total of four synthetic positions in the Equity Index: a synthetic long position in the Total Return Equity Index, a synthetic short call position in the call option contracts on the Price Return Equity Index, a synthetic long put position in the put option contracts on the Price Return Equity Index and a synthetic long position in the futures contracts on the Price Return Equity Index. The four positions are interrelated—the synthetic long put position is designed to provide downside protection to the Index’s synthetic long position in the Total Return Equity Index; the synthetic short call position has the effect of limiting the Index’s upside exposure to the Total Return Equity Index; and the synthetic long position in the futures contracts on the Price Return Equity Index is designed to mitigate that limiting effect of the synthetic short call position.
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THERE IS A MISMATCH BETWEEN THE UNDERLYING EQUITY INDEX THAT THE INDEX TRACKS AND THE UNDERLYING EQUITY INDEX FOR THE OPTION CONTRACTS REFERENCED BY THE INDEX’S SYNTHETIC SHORT CALL AND LONG PUT POSITIONS — The Index tracks the performance of the Total Return Equity Index while the option contracts referenced by the Index’s synthetic collar strategy are options on the Price Return Equity Index. The Total Return Equity Index is the “total return” version, and the Price Return Equity Index is the “price return” version, of the same equity index. A price return version of an equity index is an equity index that measures in aggregate the performance of its component securities by tracking their price movements only. A total return version of an equity index is an equity index that reflects the price return of its component securities with dividends reinvested in the index as a whole. Since the Index’s synthetic collar strategy is designed to provide downside protection for the Index’s long position in the Total Return Equity Index, this mismatch of the underlying equity indices for the two parts of the Index’s investment strategy would mean that the downside protection provided by the Index’s synthetic collar strategy, specifically, its synthetic long put position, will not be exactly at the level represented by the strike price of the synthetic put position. Accordingly, investors in notes linked to the Index may still be exposed to losses, which may be significant, when the Total Return Equity Index depreciates.
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THE SYNTHETIC SHORT CALL POSITION MAINTAINED BY THE INDEX PRESENTS SPECIAL RISKS — Compared with a long position, a short position presents special risks. The holder of a short position expects that the underlying asset will depreciate in value; therefore, if the underlying asset appreciates in value, the holder of the short position will be exposed to losses. Specifically, if the underlying asset of the short position appreciates above the strike price of the short position, the holder of the short position is obligated to pay the difference between the
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-8
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THE TIMING MISMATCH BETWEEN THE EXPIRY OF THE PUT OPTIONS REFERENCED BY THE INDEX’S SYNTHETIC LONG PUT POSITION AND THE TIME WHEN DOWNSIDE PROTECTION ON THE TOTAL RETURN EQUITY INDEX IS NEEDED MAY NOT BE ENTIRELY RESOLVED BY CALCULATING THE DAILY MARKED-TO-MARKET VALUE OF THE PUT OPTION CONTRACTS — The synthetic long put position in the Index’s synthetic collar strategy references quarterly rolled European-style put options with an 11-month expiry (at the time each applicable put option contract is synthetically purchased), which can only be exercised at the time of the option contracts’ expiry. Thus, these put position contracts only offer point-to-point protection to the Index at the time of the expiry of each put option contract. As a result, if the Total Return Equity Index suffers a sudden drop at a time when no put option can be exercised, the Index would suffer a loss that may not be fully remediated by exercising the applicable put option at a later time. To mitigate this risk, the Index (i) references up to three put option contracts with staggered time-to-expiry, thus reducing the potential gap from 11 months to 3 months (i.e., through the quarterly rebalancings, which reset the strike price of the synthetic long put position every three months), and (ii) marking to market the value of the put option contracts referenced by the Index to take into account the daily fluctuations of the Equity Index. However, there is no guarantee that calculating the daily marked-to-market value of the put options will have an identical effect as making the put options exercisable on any day the Index needs downside protection. To the extent that they would produce different results, the Index’s synthetic long put position may not offer as effective a downside protection as an alternative arrangement that allows the Index to exercise its synthetic put option on each day.
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THE INDEX’S LONG PUT POSITION IN THE PRICE RETURN EQUITY INDEX IS A SYNTHETIC POSITION, AND AS A RESULT, THE DOWNSIDE PROTECTION PROVIDED BY THAT LONG PUT POSITION WILL NOT BE IN THE FORM OF EXERCISING AN ACTUAL PUT OPTION — Because the Index’s long put position is a synthetic position, which means that the Index did not actually purchase, and as a result, does not actually hold, a put option contract, it cannot benefit from the downside protection offered by its long put position by exercising an actual put option. Therefore, the downside protection provided by the Index’s synthetic long put position may not be as effective as downside protection provided by the holding of an actual put option contract. Furthermore, even though put option contracts on the Price Return Equity Index are generally expected to appreciate in value, if the Price Return Equity Index depreciates, the increase in the marked-to-market value of the put option contracts might not be sufficient to offset any depreciation of the Total Return Equity Index.
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UNDER CERTAIN EXTREME CIRCUMSTANCES, THE INDEX MAY NOT BE ABLE TO MAINTAIN ITS SYNTHETIC LONG PUT POSITION — The Index maintains its synthetic long put position by referencing three put option contracts of an 11-month expiry (at the time each applicable put option contract is synthetically purchased ) on the Price Return Equity Index. Two months prior to each put option contract’s expiry, at the applicable quarterly rebalancing, the soon-to-expire put option contract will be removed from the Index and a replacement contract of the same maturity will be added to the Index, subject to certain conditions described below. (The rolling of the three put option contracts is staggered so that the put option contracts are rolled at 3-month intervals.) Each replacement put option contract selected at a quarterly rebalancing has to meet certain condition regarding its strike price. If, at any quarterly rebalancing, there is no put option contract available that has the right strike price, then no replacement contract will be selected at that rebalancing and the Index will reference less than three put option contracts. Furthermore, if the Index will not be able to maintain fully, partially, or at all its synthetic put position, the Index will not be able to implement its synthetic collar strategy as a result. Under these circumstances, the Index’s strategy may be effectively turned into an uncovered synthetic long investment in the Total Return Equity Index, with full downside exposure and potentially capped upside exposure, and the value of the Index may be adversely affected.
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THE CALL DEDUCTION AND PUT DEDUCTION CHARGED AT EACH CALL REBALANCING OR PUT REBALANCING WILL HAVE A SUBSTANTIAL ADVERSE EFFECT ON THE LEVEL OF THE INDEX OVER TIME — At each rebalancing of the Index’s synthetic short call position or synthetic long put position, a call deduction or a put deduction, as applicable, will be deducted in the calculation of the Index, as described above under “The reported level of the Index will be calculated net of fees and deductions,” and these deductions are likely to have a substantial adverse effect on the level of the Index over time.
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THE SETTLEMENT PRICE OF THE OPTION CONTRACTS MAY NOT BE READILY AVAILABLE — The official settlement price of the option contracts on the Price Return Equity Index are calculated and published by the Chicago Board Options Exchange (“CBOE”). The official settlement price of the relevant option contracts are used to calculate the level of the Index. Any disruption in trading of the relevant option contracts could delay the release or availability of the official settlement price. This may delay or prevent the calculation of the Index.
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-9
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THE DELTA DEDUCTION IS LIKELY TO HAVE A SUBSTANTIAL ADVERSE EFFECT ON THE LEVEL OF THE INDEX OVER TIME — On each day, the delta deduction in connection with rebalancing the futures contracts referenced by the Index’s delta hedge, when the delta hedge is switched on, is deducted in the calculation of the Index, as described above under “The reported level of the Index will be calculated net of fees and deductions,” and this deduction is likely to have a substantial adverse effect on the level of the Index over time.
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THE DELTA HEDGE MAY NOT BE SUCCESSFUL IN SERVING ITS INTENDED PURPOSES — The delta hedge is designed to mitigate the impact of the Index’s synthetic short call position in the Price Return Equity Index. When it is activated, the delta hedge maintains an offsetting synthetic long investment in futures contracts on the Price Return Equity Index. The delta hedge is implemented gradually based on the applicable level of the Volatility Index compared with its 5-year or 6-month moving averages. The delta hedge will be switched on when the applicable level of the Volatility Index is less than 100% of its historical moving averages, and will be fully implemented when the applicable level of the Volatility Index is less than 80% of its historical moving averages. More specifically, the delta hedge, once implemented, is designed to mitigate the impact of the cap on the Index’s upside exposure to the Total Return Equity Index that is effectively imposed by the Index’s synthetic short call position. During the time the delta hedge is switched off or is not fully implemented, the Index’s synthetic short call position will prevent the Index from benefiting, or benefitting fully, from any upside movement of the Total Return Equity Index above the level corresponding to the strike price of the call position.
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THE DELTA HEDGE MAY NOT ELIMINATE THE IMPACT OF THE SYNTHETIC SHORT CALL POSITION — The change in the marked-to-market value of the Index’s synthetic short call position may not be completely offset by the change in the marked-to-market value of the synthetic delta hedge position, if any. Delta hedging aims to mitigate the effects of the sensitivity of the synthetic short call position to movements of the Price Return Equity Index and generally works best for small changes in the value of the Price Return Equity Index. Consequently, discrepancies may arise between the return of the Price Return Equity Index and the exposure generated by the delta hedge’s synthetic long position in the futures contracts on the Price Return Equity Index.
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THE INDEX MAY IN THE FUTURE INCLUDE CONTRACTS THAT ARE NOT TRADED ON REGULATED FUTURES EXCHANGES — The Index currently has a synthetic long position in futures contracts traded on regulated futures exchanges (referred to in the United States as “designated contract markets”). If these exchange-traded futures cease to exist, the Index may in the future include over-the-counter contracts (such as swaps and forward contracts) traded on trading facilities that are subject to lesser degrees of regulation or, in some cases, no substantive regulation. As a result, trading in those contracts, and the manner in which prices and volumes are reported by the relevant trading facilities, may not be subject to the provisions of, and the protections afforded by, the Commodity Exchange Act, or other applicable statutes and related regulations that govern trading on regulated U.S. futures exchanges. In addition, many electronic trading facilities have only recently initiated trading and do not have significant trading histories. As a result, the trading of contracts on those facilities, and the inclusion of those contracts in the Index, may be subject to certain risks not presented by U.S. exchange-traded futures contracts, including risks related to the liquidity and price histories of the relevant contracts.
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DAILY REBALANCING OF THE DELTA HEDGE MAY AFFECT TRADING IN THE RELEVANT FUTURES CONTRACTS — The daily rebalancing of the futures contracts on the Price Return Equity Index used for the delta hedge, when the delta hedge is activated, may cause us, our affiliates or third parties with whom we transact to adjust our or their hedges accordingly, and to do so frequently during periods of high volatility in the U.S. equity market. The trading activity associated with these hedging transactions will contribute to the trading volume of the futures contracts included in the Index and may affect the market price of these futures contracts and, in turn, adversely affect the level of the Index.
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FUTURES CONTRACTS INVOLVE SIGNIFICANT RISKS — When the delta hedge for the Index’s synthetic short call position is activated, the Index will have a synthetic long investment in futures contracts on the Price Return Equity Index. The price of a futures contract depends not only on the price of the underlying asset referenced by the futures contract, but also on a range of other factors, including but not limited to changing supply and demand relationships, interest rates, governmental and regulatory policies and the policies of the exchanges on which the futures contracts trade. In addition, the futures markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators and government regulation and intervention. These factors and others can cause the prices of futures contracts to be volatile.
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-10
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SUSPENSION OR DISRUPTIONS OF MARKET TRADING IN FUTURES CONTRACTS MAY ADVERSELY AFFECT THE VALUE OF YOUR NOTES — Futures markets like the Chicago Mercantile Exchange (“CME”), the market for the futures contracts in which the Index synthetically invests, are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity in the markets, the participation of speculators, and government regulation and intervention. In addition, futures exchanges have regulations that limit the amount of fluctuation in some futures contract prices that may occur during a single day. These limits are generally referred to as “daily price fluctuation limits” and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a “limit price.” Once the limit price has been reached in a particular contract, no trades may be made at a price beyond the limit, or trading may be limited for a set period of time. Limit prices have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at potentially disadvantageous times or prices. These circumstances could affect the level of the Index and therefore could affect adversely the value of your notes.
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THE SETTLEMENT PRICE OF THE FUTURES CONTRACTS MAY NOT BE READILY AVAILABLE — The official settlement price of the futures contracts on the Price Return Equity Index are calculated and published by CME. The official settlement price of the relevant futures contracts are used to calculate the level of the Index. Any disruption in trading of the relevant futures contracts could delay the release or availability of the official settlement price. This may delay or prevent the calculation of the Index.
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THE NOTES ARE NOT REGULATED BY THE COMMODITY FUTURES TRADING COMMISSION — The net proceeds to be received by us from the sale of the notes will not be used to purchase or sell any futures contracts or options on futures contracts for your benefit. An investment in the notes thus neither constitutes an investment in futures contracts, options on futures contracts nor a collective investment vehicle that trades in these futures contracts (i.e., the notes will not constitute a direct or indirect investment by you in the futures contracts), and you will not benefit from the regulatory protections of the Commodity Futures Trading Commission, commonly referred to as the “CFTC.” Among other things, this means that we are not registered with the CFTC as a futures commission merchant and you will not benefit from the CFTC’s or any other non-U.S. regulatory authority’s regulatory protections afforded to persons who trade in futures contracts on a regulated futures exchange through a registered futures commission merchant. For example, the price you pay to purchase notes will be used by us for our own purposes and will not be subject to customer funds segregation requirements provided to customers that trade futures on an exchange regulated by the CFTC.
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
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TS-11
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Ending Index Level
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Index Return*
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At Maturity
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Payment at Maturity
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Total Return
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||
432.00
|
80.00%
|
$1,800.00
|
80.00%
|
408.00
|
70.00%
|
$1,700.00
|
70.00%
|
384.00
|
60.00%
|
$1,600.00
|
60.00%
|
360.00
|
50.00%
|
$1,500.00
|
50.00%
|
336.00
|
40.00%
|
$1,400.00
|
40.00%
|
312.00
|
30.00%
|
$1,300.00
|
30.00%
|
288.00
|
20.00%
|
$1,200.00
|
20.00%
|
264.00
|
10.00%
|
$1,100.00
|
10.00%
|
252.00
|
5.00%
|
$1,050.00
|
5.00%
|
241.20
|
0.50%
|
$1,005.00
|
0.50%
|
240.00
|
0.00%
|
$1,000.00
|
0.00%
|
216.00
|
-10.00%
|
$900.00
|
-10.00%
|
192.00
|
-20.00%
|
$800.00
|
-20.00%
|
168.00
|
-30.00%
|
$700.00
|
-30.00%
|
144.00
|
-40.00%
|
$600.00
|
-40.00%
|
120.00
|
-50.00%
|
$500.00
|
-50.00%
|
96.00
|
-60.00%
|
$400.00
|
-60.00%
|
72.00
|
-70.00%
|
$300.00
|
-70.00%
|
48.00
|
-80.00%
|
$200.00
|
-80.00%
|
24.00
|
-90.00%
|
$100.00
|
-90.00%
|
0.00
|
-100.00%
|
$0.00
|
-100.00%
|
JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
|
TS-12
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JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
|
TS-13
|
JPMorgan Structured Investments —
Return Notes Linked to the J.P. Morgan U.S. Long Equity Dynamic Overlay Index (Series 1)
|
TS-14
|