Pricing Supplement dated January 18, 2022 to the
Prospectus dated April 20, 2020,
the Prospectus Supplement dated May 27, 2021 and the Product Supplement dated June 18, 2021
* Rounded to two decimal places with respect to NDX and SPX and rounded
to three decimal places with respect to RTY.
On the date hereof, based on the terms set forth
above, the estimated initial value of the notes is $976.81 per $1,000 in principal amount. However, as discussed in more detail below,
the actual value of the notes at any time will reflect many factors and cannot be predicted with accuracy.
You should read this document together with the
product supplement dated June 18, 2021, the prospectus supplement dated May 27, 2021 and the prospectus dated April 20, 2020. This
document, together with the documents listed below, contains the terms of the notes and supersedes all other prior or contemporaneous
oral statements as well as any other written materials including preliminary or indicative pricing terms, correspondence, trade ideas,
structures for implementation, sample structures, fact sheets, brochures or other educational materials of ours or the agent. You
should carefully consider, among other things, the matters set forth in Additional Risk Factors Relating to the Notes in the product supplement,
as the notes involve risks not associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting
and other advisers before you invest in the notes.
You may access these documents on the SEC website
at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant date on the SEC website):
Our Central Index Key, or CIK, on the SEC website
is 927971. As used in this document, "we", "us" or "our" refers to Bank of Montreal.
An investment in the notes involves significant
risks. Investing in the notes is not equivalent to investing directly in the Reference Assets. These risks are explained in more detail
in the “Additional Risk Factors Relating to the Notes” section of the product supplement.
Additional Information Relating to the Estimated Initial Value of
the Notes
Our estimated initial value of the notes on the
date hereof that is set forth on the cover hereof, equals the sum of the values of the following hypothetical components:
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a fixed-income debt component with the same tenor as the notes, valued using our internal funding rate for structured notes; and
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one or more derivative transactions relating to the economic terms of the notes.
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The internal funding rate used in the determination
of the initial estimated value generally represents a discount from the credit spreads for our conventional fixed-rate debt. The value
of these derivative transactions is derived from our internal pricing models. These models are based on factors such as the traded market
prices of comparable derivative instruments and on other inputs, which include volatility, dividend rates, interest rates and other factors.
As a result, the estimated initial value of the notes on the Pricing Date was determined based on the market conditions on the Pricing
Date.
The Reference Assets
All disclosures contained in this pricing supplement
regarding the Reference Assets, including, without limitation, their make-up, method of calculation, and changes in their components and
their historical closing levels, have been derived from publicly available information prepared by the applicable sponsors. The information
reflects the policies of, and is subject to change by, the sponsors. The sponsors own the copyrights and all rights to the Reference Assets.
The sponsors are under no obligation to continue to publish, and may discontinue publication of, the Reference Assets. Neither we nor
BMO Capital Markets Corp. accepts any responsibility for the calculation, maintenance or publication of and Reference Asset or any successor.
We encourage you to review recent levels of the Reference Assets prior to making an investment decision with respect to the notes.
The NASDAQ 100® Index
The NASDAQ 100® Index is a modified market capitalization-weighted
index of 100 of the largest stocks of both U.S. and non-U.S. non-financial companies listed on The NASDAQ Stock Market based on market
capitalization. It does not contain securities of financial companies, including investment companies. The NASDAQ 100® Index, which
includes companies across a variety of major industry groups, was launched on January 31, 1985, with a base index value of 250.00. On
January 1, 1994, the base index value was reset to 125.00. The NASDAQ OMX Group, Inc. publishes the NASDAQ 100® Index. Current information
regarding the market value of the NASDAQ 100® Index is available from NASDAQ OMX Group, Inc. (“NASDAQ OMX”) as well as
numerous market information services.
The share weights of the component securities of
the NASDAQ 100® Index at any time are based upon the total shares outstanding in each of those securities and are additionally subject,
in certain cases, to rebalancing. Accordingly, each underlying stock’s influence on the level of the NASDAQ 100® Index is directly
proportional to the value of its share weight.
Index Calculation
At any moment in time, the level of the NASDAQ 100®
Index equals the aggregate value of the then-current share weights of each of the component securities, which are based on the total shares
outstanding of each such component security, multiplied by each such security’s respective last sale price on The NASDAQ Stock Market
(which may be the official closing price published by The NASDAQ Stock Market), and divided by a scaling factor (the “divisor”),
which becomes the basis for the reported level of the NASDAQ 100® Index. The divisor serves the purpose of scaling such aggregate
value to a lower order of magnitude, which is more desirable for reporting purposes.
Underlying Stock Eligibility Criteria and Annual Ranking Review
Initial Eligibility Criteria
To be eligible for initial inclusion in the NASDAQ
100® Index, a security must be listed on The NASDAQ Stock Market and meet the following criteria:
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the security’s U.S. listing must be exclusively on the NASDAQ Global Select Market or the NASDAQ Global Market;
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the security must be issued by a non-financial company;
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the security may not be issued by an issuer currently in bankruptcy proceedings;
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the security must generally be a common stock, ordinary share, American Depositary Receipt, or tracking stock (closed-end funds, convertible
debentures, exchange traded funds, limited liability companies, limited partnership interests, preferred stocks, rights, shares or units
of beneficial interests, warrants, units and other derivative securities are not included in the NASDAQ 100® Index, nor are the securities
of investment companies);
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the security must have a three-month average daily trading volume of at least 200,000 shares;
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if the security is issued by an issuer organized under the laws of a jurisdiction outside the United States, it must have listed options
on a recognized market in the United States or be eligible for listed-options trading on a recognized options market in the United States;
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the issuer of the security may not have entered into a definitive agreement or other arrangement which would likely result in the
security no longer being eligible;
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the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn; and
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the issuer of the security must have “seasoned” on the NASDAQ Stock Market or another recognized market (generally, a
company is considered to be seasoned if it has been listed on a market for at least three full months, excluding the first month of initial
listing).
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Continued Eligibility Criteria
In addition, to be eligible for continued inclusion
in the NASDAQ 100® Index the following criteria apply:
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the security’s U.S. listing must be exclusively on the NASDAQ Global Select Market or the NASDAQ Global Market;
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the security must be issued by a non-financial company;
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the security may not be issued by an issuer currently in bankruptcy proceedings;
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the security must have an average daily trading volume of at least 200,000 shares in the previous three-month trading period as measured
annually during the ranking review process described below;
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if the issuer of the security is organized under the laws of a jurisdiction outside the United States, then such security must have
listed options on a recognized market in the United States or be eligible for listed-options trading on a recognized options market in
the United States, as measured annually during the ranking review process;
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the issuer of the security may not have entered into a definitive agreement or other arrangement that would likely result in the security
no longer being eligible;
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the security must have an adjusted market capitalization equal to or exceeding 0.10% of the aggregate adjusted market capitalization
of the NASDAQ 100® Index at each month-end. In the event that a company does not meet this criterion for two consecutive month-ends,
it will be removed from the NASDAQ 100® Index effective after the close of trading on the third Friday of the following month; and
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the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn.
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These eligibility criteria may be revised from time to time by NASDAQ
OMX without regard to the notes.
Annual Ranking Review
The component securities are evaluated on an annual
basis (the “Ranking Review”), except under extraordinary circumstances, which may result in an interim evaluation, as follows.
Securities that meet the applicable eligibility criteria are ranked by market value. Eligible securities that are already in the NASDAQ
100® Index and that are ranked in the top 100 eligible securities (based on market capitalization) are retained in the NASDAQ 100®
Index. A security that is ranked 101 to 125 is also retained, provided that such security was ranked in the top 100 eligible securities
as of the previous Ranking Review or was added to the NASDAQ 100® Index subsequent to the previous Ranking Review. Securities not
meeting such criteria are replaced. The replacement securities chosen are those eligible securities not currently in the NASDAQ 100®
Index that have the largest market capitalization. The data used in the ranking includes end of October market data and is updated for
total shares outstanding submitted in a publicly filed SEC document via EDGAR through the end of November.
Replacements are made effective after the close
of trading on the third Friday in December. Moreover, if at any time during the year other than the Ranking Review, a component security
is determined by NASDAQ OMX to become ineligible for continued inclusion in the NASDAQ 100® Index, the security will be replaced with
the largest market capitalization security meeting the eligibility criteria listed above and not currently included in the NASDAQ 100®
Index.
Index Maintenance
In addition to the Ranking Review, the securities
in the NASDAQ 100® Index are monitored every day by NASDAQ OMX with respect to changes in total shares outstanding arising from corporate
events, such as stock dividends, stock splits and certain spin-offs and rights issuances. NASDAQ OMX has adopted the following quarterly
scheduled weight adjustment procedures with respect to those changes. If the change in total shares outstanding arising from a corporate
action is greater than or equal to 10%, that change will be made to the NASDAQ 100® Index as soon as practical, normally within ten
days of such corporate action. Otherwise, if the change in total shares outstanding is less than 10%, then all such changes are accumulated
and made effective at one time on a quarterly basis after the close of trading on the third Friday in each of March, June, September and
December.
In either case, the share weights for those component
securities are adjusted by the same percentage amount by which the total shares outstanding have changed in those securities. Ordinarily,
whenever there is a change in the share weights, a change in a component security, or a change to the price of a component security due
to spin-off, rights issuances or special cash dividends, NASDAQ OMX adjusts the divisor to ensure that there is no discontinuity in the
level of the NASDAQ 100® Index that might otherwise be caused by any of those changes. All changes will be announced in advance.
Index Rebalancing
Under the methodology employed, on a quarterly basis
coinciding with NASDAQ OMX’s quarterly scheduled weight adjustment procedures, the component securities are categorized as either
“Large Stocks” or “Small Stocks” depending on whether their current percentage weights (after taking into account
scheduled weight adjustments due to stock repurchases, secondary offerings or other corporate actions) are greater than, or less than
or equal to, the average percentage weight in the NASDAQ 100® Index (i.e., as a 100-stock index, the average percentage weight in
the NASDAQ 100® Index is 1%).
This quarterly examination will result in an index
rebalancing if it is determined that: (1) the current weight of the single largest market capitalization component security is greater
than 24% or (2) the “collective weight” of those component securities, the individual current weights of which are in excess
of 4.5%, when added together, exceed 48%. In addition, NASDAQ OMX may conduct a special rebalancing at any time if it is determined to
be necessary to maintain the integrity of the NASDAQ 100® Index.
If either one or both of these weight distribution
requirements are met upon quarterly review, or NASDAQ OMX determines that a special rebalancing is required, a weight rebalancing will
be performed. First, relating to weight distribution requirement (1) above, if the current weight of the single largest component security
exceeds 24%, then the weights of all Large Stocks will be scaled down proportionately towards 1% by enough of an amount for the adjusted
weight of the single largest component security to be set to 20%. Second, relating to weight distribution requirement (2) above, for those
component securities whose individual current weights or adjusted weights in accordance with the preceding step are in excess of 4.5%,
if their “collective weight” exceeds 48%, then the weights of all Large Stocks will be scaled down proportionately towards
1% by just enough amount for the “collective weight,” so adjusted, to be set to 40%.
The aggregate weight reduction among the Large Stocks
resulting from either or both of the above rescalings will then be redistributed to the Small Stocks in the following iterative manner.
In the first iteration, the weight of the largest Small Stock will be scaled upwards by a factor which sets it equal to the average Index
weight of 1.0%. The weights of each of the smaller remaining Small Stocks will be scaled up by the same factor, reduced in relation to
each stock’s relative ranking among the Small Stocks, such that the smaller the component security in the ranking, the less the
scale-up of its weight. This is intended to reduce the market impact of the weight rebalancing on the smallest component securities in
the NASDAQ 100® Index.
In the second iteration, the weight of the second
largest Small Stock, already adjusted in the first iteration, will be scaled upwards by a factor which sets it equal to the average index
weight of 1%. The weights of each of the smaller remaining Small Stocks will be scaled up by this same factor, reduced in relation to
each stock’s relative ranking among the Small Stocks, such that, once again, the smaller the component stock in the ranking, the
less the scale-up of its weight.
Additional iterations will be performed until the
accumulated increase in weight among the Small Stocks exactly equals the aggregate weight reduction among the Large Stocks from rebalancing
in accordance with weight distribution requirement (1) and/or weight distribution requirement (2).
Then, to complete the rebalancing procedure, once
the final percent weights of each of the component securities are set, the share weights will be determined anew based upon the last sale
prices and aggregate capitalization of the NASDAQ 100® Index at the close of trading on the last day in February, May, August and
November. Changes to the share weights will be made effective after the close of trading on the third Friday in March, June, September
and December, and an adjustment to the divisor will be made to ensure continuity of the NASDAQ 100® Index.
Ordinarily, new rebalanced weights will be determined
by applying the above procedures to the current share weights. However, NASDAQ OMX may from time to time determine rebalanced weights,
if necessary, by instead applying the above procedure to the actual current market capitalization of the component securities. In those
instances, NASDAQ OMX would announce the different basis for rebalancing prior to its implementation.
License Agreement
The notes are not sponsored, endorsed, sold or promoted
by Nasdaq, Inc. or its affiliates (NASDAQ, with its affiliates, are referred to as the “Corporations”). The Corporations have
not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the notes. The
Corporations make no representation or warranty, express or implied to the owners of the notes or any member of the public regarding the
advisability of investing in securities generally or in the notes particularly, or the ability of the NASDAQ 100® Index to track general
stock market performance. The Corporations' only relationship to the Issuer (“Licensee”) is in the licensing of the Nasdaq®,
the NASDAQ 100® Index, and certain trade names of the Corporations and the use of the NASDAQ 100® Index which is determined, composed
and calculated by NASDAQ without regard to Licensee or the notes. NASDAQ has no obligation to take the needs of the Licensee or the owners
of the notes into consideration in determining, composing or calculating the NASDAQ 100®Index. The Corporations are not responsible
for and have not participated in the determination of the timing of, prices at, or quantities of the notes to be issued or in the determination
or calculation of the equation by which the notes are to be converted into cash. The Corporations have no liability in connection with
the administration, marketing or trading of the notes.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY
AND/OR UNINTERRUPTED CALCULATION OF NASDAQ 100® Index OR ANY DATA INCLUDED THEREIN, THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE NASDAQ 100®
Index OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ 100® Index OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT,
OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Russell 2000® Index
The Russell 2000® Index was developed by Russell
Investments (“Russell”) before FTSE International Limited (“FTSE”) and Russell combined in 2015 to create FTSE
Russell, which is wholly owned by London Stock Exchange Group. Russell began dissemination of the Russell 2000® Index (Bloomberg L.P.
index symbol “RTY”) on January 1, 1984. The Russell 2000® Index was set to 135 as of the close of business on December
31, 1986. FTSE Russell calculates and publishes the Russell 2000® Index. The Russell 2000® Index is designed to track the performance
of the small capitalization segment of the U.S. equity market. As a subset of the Russell 3000® Index, the Russell 2000® Index
consists of the smallest 2,000 companies included in the Russell 3000® Index. The Russell 3000® Index measures the performance
of the largest 3,000 U.S. companies. The Russell 2000® Index is determined, comprised, and calculated by FTSE Russell without regard
to the notes.
Selection of Stocks Comprising the Russell
2000® Index
All companies eligible for inclusion in the Russell
2000® Index must be classified as a U.S. company under FTSE Russell’s country-assignment methodology. If a company is incorporated,
has a stated headquarters location, and trades on a standard exchange in the same country (American Depositary Receipts and American Depositary
Shares are not eligible), then the company is assigned to its country of incorporation. If any of the three factors are not the same,
FTSE Russell defines three Home Country Indicators (“HCIs”): country of incorporation, country of headquarters, and country
of the most liquid exchange (as defined by a two-year average daily dollar trading volume) (“ADDTV”) from all exchanges within
a country. Using the HCIs, FTSE Russell compares the primary location of the company’s assets with the three HCIs. If the primary
location of its assets matches any of the HCIs, then the company is assigned to the primary location of its assets. If there is insufficient
information to determine the country in which the company’s assets are primarily located, FTSE Russell will use the primary location
of the company’s revenue for the same cross-comparison and assigns the company to the appropriate country in a similar fashion.
FTSE Russell uses the average of two years of assets or revenues data to reduce potential turnover. If conclusive country details cannot
be derived from assets or revenues data, FTSE Russell will assign the company to the country in which its headquarters are located unless
the country is a Benefit Driven Incorporation “BDI” country. If the country in which its headquarters are located is a BDI,
it will be assigned to the country of its most liquid stock exchange. BDI countries include: Anguilla, Antigua and Barbuda, Aruba, Bahamas,
Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands, Channel Islands, Cook Islands, Curacao, Faroe Islands, Gibraltar,
Guernsey, Isle of Man, Jersey, Liberia, Marshall Islands, Panama, Saba, Sint Eustatius, Sint Maarten, and Turks and Caicos Islands. For
any companies incorporated or headquartered in a U.S. territory, including countries such as Puerto Rico, Guam, and U.S. Virgin Islands,
a U.S. HCI is assigned. “N-Shares” of companies controlled by entities in mainland China are not eligible for inclusion in
the Russell 2000® Index.
All securities eligible for inclusion in the Russell
2000® Index must trade on a major U.S. exchange. Stocks must have a closing price at or above $1.00 on their primary exchange on the
“rank day” in May of each year (timetable is announced each spring) to be eligible for inclusion during annual reconstitution.
However, in order to reduce unnecessary turnover, if an existing member’s closing price is less than $1.00 on the last day of May,
it will be considered eligible if the average of the daily closing prices (from its primary exchange) during the month of May is equal
to or greater than $1.00. FTSE Russell adds initial public offerings (IPOs) each quarter to ensure that new additions to the institutional
investing opportunity set are reflected in representative indexes. A stock added during the quarterly IPO process is considered a new
index addition, and therefore must have a closing price on its primary exchange at or above $1.00 on the last day of the eligibility period
in order to qualify for index inclusion. If an existing index member does not trade on the rank day, it must price at $1.00 or above on
another eligible U.S. exchange to remain eligible.
Royalty trusts, limited liability companies, closed-end
investment companies (companies that are required to report Acquired Fund Fees and Expenses, as defined by the SEC, including business
development companies, are not eligible), blank check companies, special-purpose acquisition companies, exchange traded funds, mutual
funds and limited partnerships are ineligible for inclusion. Preferred and convertible preferred stock, redeemable shares, participating
preferred stock, warrants, rights, installment receipts and trust receipts are not eligible for inclusion in the Russell 2000® Index.
Annual reconstitution is a process by which the
Russell 2000® Index is completely rebuilt. On the rank day of July, all eligible securities are ranked by their total market capitalization.
The largest 4,000 become the Russell 3000E Index, and the other FTSE Russell indexes are determined from that set of securities. Reconstitution
of the Russell 2000® Index occurs on the last Friday in June or, when the last Friday in June is the 29th or 30th, reconstitution
occurs on the prior Friday. In addition, FTSE Russell adds initial public offerings to the Russell 2000® Index on a quarterly basis
based on total market capitalization ranking within the market-adjusted capitalization breaks established during the most recent reconstitution.
After membership is determined, a security’s
shares are adjusted to include only those shares available to the public. This is often referred to as “free float.” The purpose
of the adjustment is to exclude from market calculations the capitalization that is not available for purchase and is not part of the
investable opportunity set.
License Agreement
“Russell 2000®” and “Russell
3000®” are trademarks of FTSE Russell and have been licensed for use by us.
The notes are not sponsored, endorsed, sold or promoted
by FTSE Russell. FTSE Russell makes no representation or warranty, express or implied, to the owners of the notes or any member of the
public regarding the advisability of investing in securities generally or in the notes particularly or the ability of the Russell 2000®
Index to track general stock market performance or a segment of the same. FTSE Russell's publication of the Russell 2000® Index in
no way suggests or implies an opinion by FTSE Russell as to the advisability of investment in any or all of the securities upon which
the Russell 2000® Index is based. FTSE Russell's only relationship to the Issuer is the licensing of certain trademarks and trade
names of FTSE Russell and of the Russell 2000® Index which is determined, composed and calculated by FTSE Russell without regard to
the Issuer or the notes. FTSE Russell is not responsible for and has not reviewed the notes nor any associated literature or publications
and FTSE Russell makes no representation or warranty express or implied as to their accuracy or completeness, or otherwise. FTSE Russell
reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell 2000® Index. FTSE
Russell has no obligation or liability in connection with the administration, marketing or trading of the notes.
FTSE RUSSELL DOES NOT GUARANTEE THE ACCURACY AND/OR
THE COMPLETENESS OF THE RUSSELL 2000® INDEX OR ANY DATA INCLUDED THEREIN AND FTSE RUSSELL SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. FTSE RUSSELL MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER, INVESTORS,
OWNERS OF THE NOTES, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE RUSSELL 2000® INDEX OR ANY DATA INCLUDED THEREIN. FTSE RUSSELL
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE RUSSELL 2000® INDEX OR ANY DATA INCLUDED HEREIN WITHOUT LIMITING ANY OF THE FOREGOING. IN NO EVENT SHALL
FTSE RUSSELL HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED
OF THE POSSIBILITY OF SUCH DAMAGES.
The S&P 500® Index
The S&P 500® Index is intended to provide
an indication of the pattern of common stock price movement. The calculation of the level of this Reference Asset is based on the relative
value of the aggregate market value of the common stocks of 500 companies as of a particular time compared to the aggregate average market
value of the common stocks of 500 similar companies during the base period of the years 1941 through 1943.
S&P calculates this Reference Asset by reference
to the prices of the constituent stocks of this Reference Asset without taking account of the value of dividends paid on those stocks.
As a result, the return on the notes will not reflect the return you would realize if you actually owned the constituent stocks of the
S&P 500® Index and received the dividends paid on those stocks.
Computation of the S&P 500® Index
While S&P currently employs the following methodology
to calculate the S&P 500® Index, no assurance can be given that S&P will not modify or change this methodology in a manner
that may affect the Payment at Maturity.
Historically, the market value of any component
stock of the S&P 500® Index was calculated as the product of the market price per share and the number of then outstanding shares
of such component stock. In March 2005, S&P began shifting the S&P 500® Index halfway from a market capitalization weighted
formula to a float-adjusted formula, before moving the S&P 500® Index to full float adjustment on September 16, 2005. S&P’s
criteria for selecting stocks for the S&P 500® Index did not change with the shift to float adjustment. However, the adjustment
affects each company’s weight in the S&P 500® Index.
Under float adjustment, the share counts used in
calculating the S&P 500® Index reflect only those shares that are available to investors, not all of a company’s outstanding
shares. Float adjustment excludes shares that are closely held by control groups, other publicly traded companies or government agencies.
In September 2012, all shareholdings representing
more than 5% of a stock’s outstanding shares, other than holdings by “block owners,” were removed from the float for
purposes of calculating the S&P 500® Index. Generally, these “control holders” will include officers and directors,
private equity, venture capital and special equity firms, other publicly traded companies that hold shares for control, strategic partners,
holders of restricted shares, ESOPs, employee and family trusts, foundations associated with the company, holders of unlisted share classes
of stock, government entities at all levels (other than government retirement/pension funds) and any individual person who controls a
5% or greater stake in a company as reported in regulatory filings. However, holdings by block owners, such as depositary banks, pension
funds, mutual funds and ETF providers, 401(k) plans of the company, government retirement/pension funds, investment funds of insurance
companies, asset managers and investment funds, independent foundations and savings and investment plans, will ordinarily be considered
part of the float.
Treasury stock, stock options, equity participation
units, warrants, preferred stock, convertible stock, and rights are not part of the float. Shares held in a trust to allow investors in
countries outside the country of domicile, such as depositary shares and Canadian exchangeable shares are normally part of the float unless
those shares form a control block.
For each stock, an investable weight factor (“IWF”)
is calculated by dividing the available float shares by the total shares outstanding. Available float shares are defined as the total
shares outstanding less shares held by control holders. This calculation is subject to a 5% minimum threshold for control blocks. For
example, if a company’s officers and directors hold 3% of the company’s shares, and no other control group holds 5% of the
company’s shares, S&P would assign that company an IWF of 1.00, as no control group meets the 5% threshold. However, if a company’s
officers and directors hold 3% of the company’s shares and another control group holds 20% of the company’s shares, S&P
would assign an IWF of 0.77, reflecting the fact that 23% of the company’s outstanding shares are considered to be held for control.
As of July 31, 2017, companies with multiple share class lines are no longer eligible for inclusion in the S&P 500® Index. Constituents
of the S&P 500® Index prior to July 31, 2017 with multiple share class lines were grandfathered in and continue to be included
in the S&P 500® Index. If a constituent company of the S&P 500® Index reorganizes into a multiple share class line structure,
that company will remain in the S&P 500® Index at the discretion of the S&P Index Committee in order to minimize turnover.
The S&P 500® Index is calculated using a
base-weighted aggregate methodology. The level of the S&P 500® Index reflects the total market value of all 500 component stocks
relative to the base period of the years 1941 through 1943. An indexed number is used to represent the results of this calculation in
order to make the level easier to use and track over time. The actual total market value of the component stocks during the base period
of the years 1941 through 1943 has been set to an indexed level of 10. This is often indicated by the notation 1941-43 = 10. In practice,
the daily calculation of the S&P 500® Index is computed by dividing the total market value of the component stocks by the “index
divisor.” By itself, the index divisor is an arbitrary number. However, in the context of the calculation of the S&P 500®
Index, it serves as a link to the original base period level of the S&P 500® Index. The index divisor keeps the S&P 500®
Index comparable over time and is the manipulation point for all adjustments to the S&P 500® Index, which is index maintenance.
Index Maintenance
Index maintenance includes monitoring and completing
the adjustments for company additions and deletions, share changes, stock splits, stock dividends, and stock price adjustments due to
company restructuring or spinoffs. Some corporate actions, such as stock splits and stock dividends, require changes in the common shares
outstanding and the stock prices of the companies in the S&P 500® Index, and do not require index divisor adjustments.
To prevent the level of the S&P 500® Index
from changing due to corporate actions, corporate actions which affect the total market value of the S&P 500® Index require an
index divisor adjustment. By adjusting the index divisor for the change in market value, the level of the S&P 500® Index remains
constant and does not reflect the corporate actions of individual companies in the S&P 500® Index. Index divisor adjustments are
made after the close of trading and after the calculation of the S&P 500® Index closing level.
Changes in a company’s total shares outstanding
of 5% or more due to public offerings are made as soon as reasonably possible. Other changes of 5% or more (for example, due to tender
offers, Dutch auctions, voluntary exchange offers, company stock repurchases, private placements, acquisitions of private companies or
non-index companies that do not trade on a major exchange, redemptions, exercise of options, warrants, conversion of preferred stock,
notes, debt, equity participations, at-the-market stock offerings or other recapitalizations) are made weekly, and are generally announced
on Fridays for implementation after the close of trading the following Friday (one week later). If a 5% or more share change causes a
company’s IWF to change by five percentage points or more, the IWF is updated at the same time as the share change. IWF changes
resulting from partial tender offers are considered on a case-by-case basis.
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