Information concerning the provision of investment services

Transcription

1 Information concerning the provision of investment services

2 Contents Introduction Information regarding Banco Santander, S.A > General information > Communications with customers > Activities with credit institution agents > Nature and frequency of supporting documents and periodic statements > Protecting customers assets > Conflict of Interest Policy Customer MiFID Classification Procedure for the provision of investment services Safeguarding financial instruments Incentives Associated costs and expenses Order execution policy Financial instruments and investment risks > Fixed Income and Hybrid Instruments > Money Market Instruments > Variable Income > Collective Investment Institutions (CII) > Derivatives > Structured or referenced products > ETPs: ETFs, ETNs and ETCs > Other considerations Annex 2

3 Introduction In accordance with current regulations governing investment services 1, Banco Santander, S. A. hereby informs its customers of the relevant general information relating both to the bank and to the various financial instruments and services it provides. The content contained in this document can be further supplemented via our continuously updated website and with the information that will be made available to customers through prospectuses and presentations in the provision of various services. Also, if you need any further clarification, you may visit our branch offices or contact the Santander Personal service (please call ) if you have subscribed to this service. Information regarding Banco Santander General information Banco Santander, S.A., with tax ID No. A and registered address in Santander, Paseo de Pereda, 9-12, is registered in the Bank of Spain Register of Institutions under number Commercially it uses, among others, certain brands such as Santander Private Banking in private banking, Santander Select in personal banking and Santander Global Corporate Banking for corporate clients. All products and services provided by the Bank are subject to the current legislation and are supervised by the Bank of Spain, the National Securities Market Commission and other regulatory bodies. For more information, please contact: Banco de España Calle Alcalá, Madrid (España) Tel Comisión Nacional del Mercado de Valores Calle Edison, 4 Oficina de atención al inversor Madrid (España) Tel Communications with customers Language Methods of communication The correspondence that Banco Santander, S. A. addresses to its customers will be in Spanish. If you would like to request that such correspondence be made in a different language, please contact your branch office, where you can request further information. The general methods available for communicating with the Bank include: > > In person via the Bank s own branch network, including the Santander Private Banking, Santander Select and Santander Empresas specialised networks, as well as the credit institution agents network. > > By telephone via Santander Personal (by calling ) and Superlínea (by calling ). > > By means of Internet and mobile banking in the case of those customers who have subscribed to these remote banking services. > > Through the established channels (those mentioned above and also by fax and by post) for the presentation of formal complaints and grievances to the Customer Complaints and Customer Service at this address: Complaints and Customer Service, Gran Vía Santander, Gran Vía de Hortaleza, 3, Edificio La Magdalena, planta baja, Madrid, with telephone number: , fax and atenclie@gruposantander. com or to the Customer Ombudsman s Office, at Apartado de Correos 14019, Madrid, with telephone number and oficina@ defensorcliente.es > > With regard to the means, channels and methods of sending orders relating to financial instruments, these are specified in detail in each of the contractual documents that regulate their operational aspects. In addition to face-to-face contact through the Bank s branch network, orders may be sent via Internet banking, mobile banking or telephone banking if the customer has subscribed to these services with the Bank and they are available for this purpose. Activities via Credit Institution Agents Banco Santander, S. A. may be referred via a Credit Institution Agent. 1. Directive 2014/65/EU of the European Parliament and of the Council, dated 15 May 2014, regarding Financial Instrument Markets and its two implementing measures in the Commission Delegated Directive (EU) 2017/593, dated 7 April 2016, and the Commission Delegated Regulation (EU) 2017/565, dated 25 April As well as Royal Legislative Decree 4/2015, approving the revised text of the Securities Market Act (Ley del Mercado de Valores, hereinafter referred to as LMV) and RD 217/2008, dated 15 February, on the legal framework for investment service companies and other institutions that provide investment services. 3

4 Agents are individuals or companies that undertake, within the context of a commercial relationship with Banco Santander, the promotion of its services, business acquisition, reception and transmission of customer orders, marketing of financial instruments and, if they are so authorised by the Bank, advice on financial instruments and investment services offered by Banco Santander. Agents appointed by Banco Santander, S. A. conduct their business based on the principles of confidentiality, objectivity, information transparency, professionalism and impartiality, seeking the optimum safeguarding of the customer s interests and acting in accordance with the codes and practices of conduct for this type of activity. In accordance with Bank of Spain Circular 4/2010, dated 30 July, Banco Santander verifies the professional competence of its agents and that their activities comply with current regulations. Agents of Banco Santander, S.A. are included in the register established by the Bank of Spain for this purpose. Nature and frequency of the notifications of execution of orders and periodic statements for financial instruments Banco Santander, S.A. shall make information on the execution of investment services, execution or reception and forwarding of orders on financial instruments available to those customers to whom it provides such services, under the terms established by law. In those cases where customers are required to be provided with a notification confirming the execution of an order no later than the first working day after execution or, if confirmation is received from a third party, no later than the first working day after receipt of the third party s confirmation, the Bank will send the customers this notification in a durable format. In the case of providing discretionary portfolio management services, customers will be sent a statement or extract of the portfolio management activities carried out on their behalf, including details of the transactions executed during the period, with the frequency that is stipulated in the regulatory contract for this service, on a quarterly basis as a minimum. The Bank shall also provide its customers, at least quarterly, with a statement detailing the financial instruments held on their behalf, unless such information has previously been provided to them in another periodic information statement. Mechanisms for protecting and safeguarding customer assets Banco Santander, S.A. is a recognised credit institution and it operates and maintains specific procedures to guarantee the safeguarding of the assets it holds on behalf of its clients, both in the case of financial instruments and for funds. Also, and with respect to the funds and financial instruments held on behalf of its customers, Banco Santander, S.A. is a member of the Deposit Guarantee Fund for Credit Institutions (FGD), which guarantees the depositor, up to the maximum amount established by law (at the date of this prospectus edition, 2017, this amount is 100,000 EUROS), the repayment of credit balances held in accounts, including funds from transitory situations arising from traffic operations and nominative deposit certificates that the institution is obliged to repay under the applicable legal and contractual conditions, regardless of the currency in which they are registered and provided that they are established in Spain or another Member State of the European Union. Deposits in securities and financial instruments entrusted to a credit institution are guaranteed up to a maximum of 100,000 EUR (at the date of this prospectus edition, 2017), per depositor in the credit institution, irrespective of the guarantee for deposits in money that may be held in the same institution, in accordance with the terms set out in current legislation. For informative purposes, it is hereby stated that the FGD has its headquarters at calle José Ortega y Gasset, número 22, tel: , fogade@fgd.es. and website Banco Santander, S.A. offers customers detailed information on the relevant Fund, its operation, the conditions and method of complaint, the guarantee, its scope and regulation, among other matters, in the Notice Board available at the Bank s website, www. bancosantander.es, as well as in any of its offices. Conflict of Interest Policy Banco Santander, S.A. has a Conflicts of Interest Policy and specific procedures that allow it to identify, register, proactively manage and, when it cannot be avoided, disclose to its customers the possible conflict of interest situations that may be harmful to them. 4

5 The stated policy: > > Seeks to identify, without being exhaustive, the activities, types of instruments and transactions that may give rise to a conflict of interest that may imply a risk of harming the interests of one or more customers. > > Specifies the procedures to be followed and the measures to be adopted for the prevention and management of such situations, promoting the independence of the competent persons carrying out the activities concerned. > > In the event that the conflict of interest is unavoidable, the Bank has specific procedures established for disclosing its existence and nature to its customers, prior to the provision of the investment service that may be affected by the conflict of interest, so that they have the necessary information to determine whether or not they consider it advisable to use the service. To request more information about the Conflicts of Interest Policy, you may use any of the channels indicated in the previous section Communications with customers Language Communication Methods. Customer Classification Classification Rules The relevant legislation establishes a system for classifying customers into three different categories, which are intended to reflect both their level of knowledge and experience in the financial markets and their ability to take on the risks arising from their investment decisions, with the aim of aligning the protection rules to such information: Non-Professional (Retail) Customer (essentially all private persons acting as individuals, SMEs, local authorities, etc.): They receive the maximum level of protection provided by law, both when carrying out suitability and appropriateness assessments and in the scope of the documentation and information prior to and after contracting, which must be made available to them. Professional Customer (essentially institutional and experienced investors, regional authorities etc.): They receive an intermediate level of protection, since it is assumed that they have the necessary experience, knowledge and qualifications to make their own investment decisions and understand and assume the risks involved. Eligible Counter-party Customer (banks, savings banks, investment and pension funds, SICAVs, securities companies, central banks, insurance companies, national governments and their related services, etc.): the Act gives these types of customers a basic level of protection, since they are entities accustomed to operating directly in the financial markets. The legislation establishes objective criteria for the classification that have been strictly observed by Banco Santander, S.A. for its implementation and individualised communication with its customers. The classification communicated by the Bank is also valid for the purposes of the classification carried out by other Santander Group companies, such as Santander Securities Services, S.A., Santander Private Banking Gestión, SGIIC S.A. and Santander Asset Management SGIIC, in those cases where a shared provision of services is provided, at any given time, through the intermediary of Banco Santander. Right to request changes to the assigned Classification In accordance with the Customer Classification Policy established at Banco Santander, the classification changes that may be requested are described below: Original Classification Possible Classification Changes Non-Professional Customer Professional Customer Eligible Counter-party Customer Professional Customer Non-Professional Customer Eligible Counter-party Customer Professional Customer Non- Professional Customer 5

6 In order to apply for a change in classification, it will be necessary to submit a duly completed and signed form for this purpose to your local branch office. This form is available at under the MiFID Regulations section or may be requested at your local office. The Bank s acceptance of the request will depend on the customer s compliance with the legal and regulatory requirements established at any given time for the implementation of the change. The specific case of a request to change from a Non- Professional to a Professional Customer implies an express waiver of the treatment as a Non-Professional and the associated level of protection. In such a case, the declarations of compliance with at least two of the three requirements set out below and required by law must be indicated on the above-mentioned form and information and sufficient justification of such requirements must be provided together with it, in the event that the Bank does not have the data required for direct verification: > > Have carried out transactions of considerable volume in the securities markets in the last four quarters with an average frequency of more than ten transactions per quarter; > > The cash and value of financial instruments deposited with financial institutions is greater than 500,000 euros; > > Holds or has held in the past, for at least one year, a professional position in the financial sector that requires knowledge of the planned transactions or services. On the basis of the request for change submitted, the Bank shall inform the customer, if applicable, of the new classification assigned or the rejection thereof. This new notification is also valid for the purposes of the classification carried out by other Santander Group companies, such as Santander Securities Services, S.A., Santander Private Banking Gestión, SGIIC S.A. and Santander Asset Management SGIIC, in those cases where a shared provision of services is provided, at any given time, through the intermediary of Banco Santander. In the event that the new classification granted is derived from data that the Bank cannot directly or fully verify and is based on the information provided by the customer themselves, the latter is responsible for the accuracy and veracity of such data and information, exempting the Bank from any damage or liability that may result from the inaccuracy or lack of veracity of such data and information. Nevertheless, the Bank may request additional information from the customer in order to verify such data if this is required for the assignment of the classification requested. 6

7 Procedure for the provision of investment services Advice Banco Santander, S.A. expressly states that the investment advice service it provides to the customers to whom it chooses to provide this service, will not be independent. The non-independent advisory service allows the Bank to receive incentives from third parties for providing the service. The Bank will provide access to a wide range of sufficiently diversified financial instruments that are suitable for the customer, based on the criteria of proportionality and representativeness of the available financial instruments. Receiving incentives does not undermine the Bank s ability to act in the best interests of its customers. The provision of the advisory service requires an assessment of suitability, in order to comply with Securities Market Law. To this end, the Bank will collect the information from its customers necessary for such an assessment by means of questionnaires corresponding to the advisory service to be provided, which will give us access to information on their knowledge and experience, financial situation and investment objectives, so that the appropriateness of the recommendations can be assessed. Completion of the suitability test allows us to identify the customer s investor profile, which is necessary for the comprehensive advisory services. This test will be valid for five years, although any change in the customer s personal circumstances will require an update by completing a new test. The Bank also provides a non-independent advisory service for hedging instruments specially designed for companies in the area of their commercial and financing operations. For this purpose, the Bank has a specific suitability test for companies. The Bank will make investment recommendations to whoever appears as the first account holder in a given account/holding. The recommendations or service shall be provided in accordance with the investment profile and the appropriateness result assigned to the first account holder as a result of the suitability test carried out. As a consequence, the rest of the joint account holders will assume the investment activity undertaken based on the advice provided in accordance with the aforementioned investment profile and as a result of appropriateness, without prejudice to any other investments that may be made in relation to that position by any of the joint account holders, if they are entitled to do so, that will also be binding on all the joint account holders. It is assumed that those in a position of first account holder have greater knowledge and experience of financial products and services than the other joint holders. Joint account holders may, by mutual agreement, send written instructions to the Bank to change the order of the account holders so that the first account holder is the one whose knowledge, experience and investment profile is that deemed most appropriate for the investment position or service under co-ownership.. The Bank shall inform the remaining account holders by letter of the investment profile assigned to the first account holder by virtue of the suitability test questionnaire and the other circumstances indicated above. The Bank may advise in five areas: 1. Ongoing investment advice, in which the Bank has a constant relationship with the customer and provides investment recommendations in exchange for an advisory fee. 2. Occasional investment advice, understood as personalised recommendations to the customer of investment products, with an overall approach, within a portfolio of simple custody. In order to provide this service, an investment proposal is prepared, ensuring that the recommendations included in it are appropriate for the customer s investor profile, according to the defined parameters. 3. Occasional hedging instrument advice, understood as personalised recommendations to companies in the area of their commercial and financing operations, for each financial hedging instrument. 4. Occasional investment advice for Global Corporate Banking (GCB) customers, understood as personalised recommendations to companies in the area of their business activity. 5. Simplified investment advice, understood as a limited and one-off advice service by product. For this service, the appropriateness assessment will be carried out on each occasion by means of specific questions relating to the customer s investment objectives in this 7

8 transaction and their financial situation in relation to it; there must also be a suitability test, previously completed by the customer, to assess their knowledge and financial experience. This will be an assessment of suitability commensurate with the advisory service provided. For the first two areas, the appropriate controls on the suitability of recommendations made to customers have been defined by considering all of their holdings in liabilities, savings and investment products at the Bank as sole account holder or first account holder (in the case of joint accounts). In the two types of advice referred to above, any new product recommendations will be analysed as a whole, with all the holdings at the Bank of the sole or first account holder, provided that these products are suitable according to the level of knowledge and financial experience of the customer. For occasional advice on hedging instruments, the recommendation is made by analysing the suitability of each instrument individually, taking into account the specific outcome of the suitability test s hedging questions, and provided that such an instrument is appropriate based on the customer s level of knowledge and financial experience. For occasional advice provided by GCB, the recommendation is made by analysing the suitability of each recommended instrument individually, with the investor profile of the customer revealed in its suitability test. Basically, the customers to whom this specialised advisory service is provided are customers classified as professionals. The simplified advice is aimed at customers who do not require a full service. It is a limited and sporadic service where the Bank will not review the situation in conjunction with the customer s holdings but only the appropriateness of the recommended product in isolation. In order to provide advice, the Bank has adapted its IT systems and has tools that allow it to verify the appropriateness and suitability of the recommendations made to the customer based on the parameters defined in its procedures. The ongoing investment advisory service, limited to the private banking segment, is called Santander advice. Its terms and conditions are included in a contract for advice where Banco Santander, S.A. undertakes (i) to monitor the investments of the customer, (ii) to notify the customer of the measures it deems they should take to better match their investments to their investor profile and their economic-financial situation, and (iii) to adequately inform the customer of the performance of the investments. The Bank sends a personalised monthly monitoring report and other information on markets and financial instruments electronically to customers who subscribe to this service. This is without prejudice to the customer s free choice as to whether or not to execute the recommendations made by the Bank and which, in all events, will be included in an investment proposal previously made to the customer. The customer is not guaranteed any results or returns on investments, it being understood that the customer knows and accepts that the analysis and financial advice provided by the Bank will be based on proven techniques suitable for their profile but that, since they depend on multiple variables, on the intrinsic circumstances of the market itself and on the risk and randomness inherent in any investment in securities, they will under no circumstances imply any certainty as to the accuracy or correctness of their content. For this service, the Bank offers customers a wide range of investment products that include Collective Investment Institutions from third-party providers. In the case of occasional advice, both on investment and hedging instruments, the recommendations made on the basis of a proposal to customers do not have a previously agreed frequency between the Bank and the customer. These will be carried out, where appropriate, in the contacts that the Bank s commercial staff maintain with customers, at their request or at the initiative of the Bank within its commercial activities. The Bank is not obliged to carry out any subsequent monitoring or proposals regarding the customer s investments or hedges (even if they are based on specific advice), and the monitoring of their progress and any decisions regarding the maintenance of the investment, if necessary, is left to the customer. In providing the advisory service, the Bank has defined internal controls on the appropriateness and suitability of products for customers and has developed the appropriate applications to systematise and automate sales processes in an objective manner and ensure that recommendations are aligned with the customer profile. Nevertheless, the customer, under their own initiative and responsibility, may instruct such transactions as they deem appropriate, in which case the Bank shall not be obliged to include the instructed transaction in an investment or hedging proposal, nor to check its suitability for the customer s profile, except in the terms and scope required by current legislation. For the investment advisory service, the Bank offers customers a wide range of products of different types: investment funds, structured notes, financial liabilities, etc., originating from Santander Group companies. This range, when providing the full advice service by portfolio, both one-off and ongoing, also includes Collective Investment 8

9 Institutions from third-party providers, as well as fixedincome and equity instruments. The Bank shall review, on an annual basis, the continuing suitability of the instruments in which customers have invested: > > When they have been advised on the provision of a full service by portfolio, the appropriateness of the customers active holdings will be reviewed according to the investor profile derived from their current suitability test. > > When the simplified advisory service has been provided, the appropriateness of the products that may have been recommended shall be reviewed annually with reference to the information collected in the suitability assessment when providing the service. When providing one-off advice on hedging instruments, the Bank will only recommend products originating from Santander Group companies, within a wide range of possibilities. The Bank shall report at least quarterly on the valuation of the hedging instrument acquired under the advisory service. In the one-off advice that can be provided by the GCB team on investment instruments, mainly with professional customers, the Bank will primarily recommend products originating from Santander Group companies, within a wide range of possibilities, aimed especially at this type of institutional customer. The Bank shall report at least quarterly on the valuation of the investment instrument acquired under the advisory service. Non-advised sale Banco Santander, S.A. has controls on its computerised trading platform for the non-advised purchasing of complex and non complex products and for nonprofessional, professional and counter- party customers, which generate the appropriate warnings. The Bank provides its customers with tools that help them to make their investment decisions, providing complete and appropriate information within the wide range of products it markets. The Bank shall also send the customer, at least quarterly, statements of their financial position with the valuation of the instruments traded and, at least annually, reports on profitability, costs and expenses. In the case of the marketing of complex products for non-professional customers, as required by the MiFID Directive and its Spanish implementation, an evaluation of the suitability is carried out and in the event that the transaction to be carried out is not appropriate, the customer is informed accordingly. In order to carry out the appropriateness assessment, the suitability test will be completed and will be valid for an annual period, with the possibility of renewal for up to three years. However, in the event of having processed the suitability test, the Bank has opted to use the information available in the suitability test carried out for customers, without the need for a different questionnaire, for reasons of efficiency and automation of processes. The suitability test includes information relating to the customer s knowledge and experience and therefore encompasses the appropriateness test. Nevertheless, completion of the above-mentioned suitability test does not imply a presumption that the Bank is obliged to provide a financial advisory or portfolio management service. If a client does not wish to receive advisory or discretionary management services, it will be sufficient to complete the Suitability test, which only covers questions relating to financial knowledge and experience. As a general rule, the Bank will ensure, using the appropriate tools, that complex and non-complex products are appropriately marketed to non-professional customers through the evaluation of their appropriateness, for which it will use the appropriateness test if the customer has this or, failing that, the suitability test, completed by the customer. For this reason, any customer who orders a complex or non-complex product without the aforementioned appropriateness or suitability tests will always do so on their own initiative. Only the answers given by customers to the relevant questions concerning their financial knowledge and experience, as reflected either in the appropriateness test or in the suitability test, shall be taken into consideration in the assessment of suitability. For certain transactions that are carried out at the initiative of the customer, such as simple execution relating to non-complex products, the Bank may not assess their suitability for the customer, informing the customer accordingly. It is assumed that orders instructed directly by the customer, concerning non-complex products, via the remote channels that the Bank may have available at any given time, are at the initiative of the customer and may not, therefore, be evaluated. 9

10 Discretionary Management of Investment Portfolios The provision of the discretionary management service requires having a suitability test in place in order to comply with Securities Market Law. As a result, Banco Santander, S.A. does not provide discretionary portfolio management services to customers without a suitability test. In this way, the management will be conducted in accordance with the mandate given and the information provided by the customer on their knowledge and experience, financial situation and investment objectives. In addition to the investor profile from the suitability test, all discretionary management portfolios in the Bank have their own risk profile defined according to their investment policy. This profile is registered, with the customer s signature, in the standard portfolio management contract. Control of the level of risk with respect to the investor profile resulting from the test will be carried out by taking into account all the customer s holdings as sole account holder or first account holder (in the case of joint accounts) held at the Bank, in such a way that the discretionary management portfolio will be added to other investments that the customer may have with the Bank. Discretionary management portfolios are the subject of periodic performance reviews, with particular attention being paid to the performance of both market strategies and asset selection. In addition, each portfolio has an identified benchmark, included in the contract, against which the performance of the portfolio will be compared. The Bank shall inform the client of possible decreases in the value of the managed portfolio equal to or greater than 10%, as well as multiples of this percentage, with respect to the equity valued at the beginning of each reporting period. Also. discretionary management portfolios are subject to continuous monitoring of the risk they assume, both in general terms and by asset type or degree of concentration. Assets eligible for discretionary management portfolios are: securities listed on stock exchanges or organised trading systems; shares or holdings in collective investment schemes; money market instruments; financial liabilities (in Banco Santander); fixed-income financial assets and listed hybrid instruments with available market value; and derivative financial instruments. The valuation methods for these assets will depend on the type of asset and will be included in the managed portfolio contract. Banco Santander ensures that ethical, social and environmental criteria are properly integrated into the performance of its business and has various policies, codes and internal regulations applicable in each area. Therefore, within the portfolios managed by the Bank, no investments will be made in assets issued by companies that do not comply with these policies. As part of its discretionary management activity, the Bank will carry out all types of transactions relating to purchases, sales, subscriptions and redemptions (direct and by transfer), amortisations, exchanges, conversions, on the aforementioned categories of securities and, in general, as many transactions as are necessary for carrying out the administration and management of the entrusted portfolio. Under no circumstances shall the commitments acquired by the transactions arranged, especially the possible use of derivative instruments, exceed the net asset value of the portfolio under management. The Bank will not conduct securities lending operations on assets included in a discretionary management portfolio. Nor will transactions be carried out with derivative financial instruments involving commodities with settlement in kind. All of the above is in accordance with the terms agreed in the investment portfolio management and administration contract signed by the customer with the Bank. The Bank may delegate the discretionary management of portfolios to other entities, without limiting the Bank s liability to the customer for such delegated activity. 10

11 Information for the purpose of safeguarding financial instruments held on behalf of customers Banco Santander, S.A. has appropriate internal mechanisms and measures, in accordance with the regulations applicable to the deposit of financial instruments and securities, in order to ensure, as far as possible, the due protection of the customers assets. When providing the service of administration and custody of financial instruments on behalf of its customers, both in discretionary management portfolios and in those of sole depository, the Bank may, in certain cases, resort to the use of Sub-custodians whenever this is necessary or convenient for the effective custody and administration of the securities in question. In the case of transactions with securities in foreign markets in which the usual practice requires (for reasons of cost and operational simplicity) the use of global accounts, the said securities shall be deposited in a global account (or omnibus account ) opened in the name of the custodian of the securities, i.e. the Bank (or a third party designated for that purpose), in an international Sub-custodian and in which the securities belonging to a variety of customers shall be held. In this case, both the Bank and the designated Sub-custodians shall take the necessary measures to ensure that, throughout the custody structure described above, these securities always remain identified as belonging to customers and are properly segregated with respect to the Bank s own assets and those of the Sub-custodians. Furthermore, the Bank and the Sub-custodians shall maintain the necessary internal records to enable the Bank and the Sub-custodians to identify, at any time and without delay, the current securities holdings and transactions of each of its customers. The Bank shall act with due competence, care and diligence in the selection, appointment and periodic review of the Sub-Custodians, ensuring that they are reputable institutions with solid experience and standing in the market. In certain situations, it may happen that accounts containing the customer s financial instruments are or will be subject to a legal system other than that of a Member State of the European Union, and the rights relating to such financial instruments may, therefore, differ accordingly. Since this information is extensive and changes over time (because of the potentially large number of international sub-custodians that may be used depending on customers investment decisions), in order to comply with current regulations on the protection of customer assets, the Bank makes full, up-to-date and accurate information available to its customers regarding the identity, country of origin, credit rating, requirements and rules on segregation of assets and specific risks derived, in each case, from the use of global accounts of each of the international Subcustodians, urging them to review and analyse it carefully before proceeding with the acquisition and deposit of foreign securities in their accounts. This information can be viewed at www. bancosantander.es, in the section Legal Information - MiFID -- Subcustodian Information. Rights of guarantee, retention or compensation In the event of default or non-payment by customers, under Securities Market legislation and in respect of securities transactions, in order to cover such transactions, there is a financial guarantee right in favour of Market members, central counterparties and central depositories in respect of securities or cash after settlement of the transactions, where cash or securities have been advanced to cover such settlement. This guarantee covers the price of the securities, cash, and the amount of any possible fines or penalties. Similarly, in the area of custody of foreign financial instruments, it is standard practice and a condition required by international sub-custodians on accepting the provision of their services that, in the corresponding contracts, they are granted rights of retention, guarantee, realisation or disposal of the securities as a means of insuring their risk against breach of the financial obligations of the contract. The Bank shall debit the amounts arising from charges, expenses and taxes due for the custody and owed by the Customer to the account associated with the portfolio or securities account and, in the absence of a sufficient credit balance on that associated account, to any of the current or savings accounts held with the Bank in the name of the Customer. If there is not sufficient balance in these accounts, the Bank may proceed to sell the financial instruments 11

12 deposited, registered or administered and make the appropriate compensation with the resulting balances, without prejudice to the right of retention attributed to the Bank by law, regarding the financial instruments of the Customer for guaranteeing the remuneration owed. Incentives The fees, commissions and non-monetary benefits that the Bank provides to or receives from third parties in connection with the provision of investment services to its clients in respect of financial instruments are known as Incentives. The incentives received or granted do not prevent Banco Santander, S. A. from pursuing the best interests of its customers. In those cases in which the Bank receives incentives, it will apply the mechanisms and measures established to ensure that the services and products offered to customers are the best and most appropriate, in accordance with current regulations. The Bank provides its customers with tools that make it easier for them to reach investment decisions and provide them with sufficient information to monitor them. Information on the current incentive scenarios is available to customers at under the heading Legal information: MIFID. In addition, the Bank informs its customers, depending on the type of service or financial product purchased, about the possible existence of an incentive related to such products or services. The Bank shall provide its customers with detailed information on any potential incentives received in connection with the provision of a particular investment or transaction service performed on their behalf. in the Notice Board section. When the Bank recommends or markets financial instruments, it shall inform customers in good time of all costs and expenses associated with the investment and ancillary services, as well as those relating to the recommended or marketed financial instrument. Such information shall include the method of payment, which may be explicit by debiting the current account or implicit in the price of the instrument, either at the time of acquisition or on a recurring basis. The information shall include details on the exchange rate and charges applied in the case of any non-euro currency transactions. The above information shall always be provided in the case of financial instruments that have a KID from the PRIIPs standard or a KIID from the UCITS 2 standard. If the Bank is unable to provide a breakdown of costs and expenses available before providing the service, it shall provide customers with a reasonable estimate of such costs and expenses. After providing the service, the Bank will inform customers of the total costs and expenses of the transaction carried out, and the customer may request a detailed breakdown of these costs and expenses. In the event of recommending or marketing the instruments, and if services are provided on an ongoing basis, the Bank Information on associated Costs and Expenses Banco Santander, S.A. will receive the fees established in its Tariff Booklet or those agreed in the individual contracts concluded with customers for the performance of its activities and the provision of investment services. The commissions set out in the Booklet are the maximum, duly notified and published by the CNMV, without prejudice to those applied to customers within this framework. Any changes made by the Bank to its Fees and Expenses for transactions involving investment instruments shall be communicated in writing to the account holder, although such information may be incorporated into any periodic information that the Bank is required to provide. The Tariff Booklet is available at any of the Bank s offices and on the Bank s website 2. KID: Key investment document PRIIPs: European regulation relating to Packaged Retail and Insurance Based Investment Products. KIID: Key investor information document UCITS: European directive on harmonised collective investment schemes (Undertakings for the Collective Investment in Transferable Securities 12

13 shall provide aggregate information on investment costs and expenses at least annually. Tables explaining the costs and expenses associated with operating in non-complex fixed-income and variable rate trading centres, as well as for fixed-income instruments issued by credit institutions and investment services companies that do not incorporate an embedded derivative, have been included in the annex to this prospectus. Information on the Order Execution Policy The current regulations require the institutions that provide execution and/or reception and transmission of orders services to establish measures that allow the best possible results for customers. Banco Santander currently provides both services, depending on the instrument to which these services refer: Reception and transmission of orders: in the cases of shares and holdings in CII of managers not linked to the Santander Group, certain listed variable-income instruments, certain fixed-income instruments and some derivatives in organised markets in which the Bank transfers customer orders to a third party for their execution. Execution of orders: in the case of unlisted investment funds (except for third-party fund managers CII), certain listed variable-income instruments, certain fixedincome instruments, some derivatives in organised markets and, generally, over-the-counter products in which the Bank directly executes customer orders. The Bank has established an Order Execution Policy or Better Execution Policy, which covers the mechanisms and procedures adopted with the aim of achieving a better result for its customers classified as Non-Professionals or Professionals in the provision of both services, taking into account the various factors: price, costs, speed, settlement volume and probability of the transaction, with the total amount (price and costs) being the priority factor for Non-Professional customers. In OTC (Over the Counter) transactions, where the Bank acts as a counter-party, the best execution policy aims to ensure the fairness of the price offered in the transactions. The Order Execution Policy does not apply to any other financial instruments that are not expressly included therein. The Bank will publish, on on an annual basis and for each class of financial instrument, the five main execution centres for non-professional and professional customer orders, in terms of trading volumes, where they executed customer orders in the previous year. The Bank shall also publish, on an annual basis and for each class of financial instrument where it is necessary to transmit orders to a third party for their execution, the five main investment services companies to which it has forwarded customer orders for execution in the previous year. 13

14 Depending on the type of financial instrument, this policy distinguishes between: Reception and Transmission of orders: As noted above, for certain instruments, the Bank forwards customer orders to a third party for their execution. > > Holdings in Collective Investment Institutions (CII) by managers not linked to the Santander Group 3 (third party managers) and criteria for determining classes of shares: The execution of the subscription and redemption orders for shares and units of collective investment institutions from third-party managers, where Banco Santander is a trading entity registered with the CNMV, may be carried out through trading platforms for this type of asset. The Bank has selected Allfunds Bank, S.A. as the preferred platform for processing orders relating to third-party management companies CII, via the corresponding subdistribution contracts. Allfunds Bank has reasonable measures in place to ensure the optimal execution of subscription and redemption orders for CII taking into account the price, costs, speed and likelihood of execution and settlement of the relevant order. In relation to price, orders are executed at the appropriate net asset value for each CII depending on the cut-off time set by the particular manager, and the execution and settlement of orders through Allfunds Bank do not involve any additional charge. Banco Santander s automatic connection with Allfunds Bank provides access to the legal information of the various CII, speeds up the processing of orders and settlements and reduces operational risks. In particular, when the Bank processes investment orders or investment decisions on CII with different classes registered with the CNMV for trading in Spain and available through Allfunds Bank, derived from the provision of advisory services or discretionary portfolio management, such orders will be transferred for execution in the most advantageous class for the customer in terms of fees, based on the volume of the transaction to be carried out and the minimum amounts and requirements demanded in each class. In the area of discretionary portfolio management, the classes selected will be those defined by the various managers where there is no possibility of a rebate of the CII management fee. In the event that the Bank receives any rebate, considered as an incentive for the purposes of securities regulations, for holdings in discretionary managed portfolios, this rebate will be paid to the customer. > Listed equities, SICAV shares traded on secondary markets, certain fixed-income instruments, warrants, certificates and Exchange Traded Products (ETPs): In transactions relating to these instruments traded in markets where the Bank is not a member, the Bank acts as receiver of its customers orders and transfers them to the intermediary who is the party ultimately responsible for the execution of such orders in the chosen execution centres. This type of trading can be carried out at different execution centres where the instruments concerned are traded: regulated markets, multilateral trading facilities (MTFs) or organised trading facilities (OTFs) 4. The Bank, via the various intermediaries, will direct its retail customers equity transactions preferentially towards regulated markets, provided that the conditions for optimal execution are met, or alternatively towards MTFs. The Bank has identified appropriate execution centres for the various securities and will thus forward orders to these specific centres which have been identified for their execution The CII transactions managed by Santander Asset Management Luxembourg, S. A. will also be processed under the scheme described in this section. 4. There are also other types of execution centres provided for in the regulations: systematic internalisers, market makers and liquidity providers.

15 In the evaluation of the execution centres, the following elements have been identified: Liquidity: priority is given to execution centres that provide significant and sufficient liquidity, measured on the basis of historical data on the number of transactions and average daily traded volumes, to ensure that the execution of customer orders is carried out at the best available prices at all times. Clearing and settlement: Priority is given to execution centres that carry out the clearing and settlement of the transactions executed there through central counterparties recognised for the purposes of securities settlement and payment standards or clearing and settlement facilities with high credit ratings. The list of the envisaged execution centres is available in the Order Execution Policy at The Bank has defined criteria for the selection of intermediaries through which to carry out transactions on these instruments in its Order Execution Policy and internal procedures. According to these, the intermediary must: > > Have its own Order Execution Policy. > > Have access to the execution centres. > > Have arrangements for the clearing and settlement of transactions with institutions that are members of the central counterparties or clearing and settlement systems of the selected execution facilities. > > Be able to consistently and systematically obtain the best possible result for the Bank s customers orders, in the corresponding execution centres included in its Order Execution Policy. Intermediaries will be selected on the basis of: security coverage, operational capacity and service level. Where appropriate, the choice of such intermediaries for the execution of a particular order may be decided according to the type of order, the instrument on which it is based, the characteristics of the execution centre where it can be executed and the instructions received from the customer. The Bank will review annually the quality of execution obtained in the different centres, based on data relating to liquidity and market depth, clearing and settlement operations, as well as the performance of the various intermediaries in terms of speed and operational agility. This analysis shall include a review of total costs (including price and fees) for the execution of transactions, distinguishing them between execution centres and intermediaries. > > Some derivatives in organised markets: In transactions involving these customer instruments in certain business sectors, the Bank will use the services of an intermediary to execute orders, in cases where the Bank (i) is not a member of nor has direct access to organised markets in which derivatives are traded, or (ii) having access to these markets, considers that it is preferable to use an intermediary on the basis of the terms and conditions offered or the volume of the customer s order. In selecting possible intermediaries, the above procedure shall apply. Execution of orders: > > Holdings in Collective Investment Institutions (CII) by managers linked to the Santander Group 5 : The execution of subscription and redemption orders is carried out directly in the Santander Group s Spanish management companies for their own funds registered for marketing in Spain. This model of direct execution in the Santander Group s management companies ensures that customers obtain the best possible result as a total remuneration, every time: > > The price of the financial instrument corresponds to the Net Asset Value of the Share (VLP) calculated by the management company in accordance with the CIIs regulations. > > There are no costs related directly to execution other than those set out in the funds own prospectuses. 5. With the exception of the transactions concerning CII managed by Santander Asset Management Luxembourg, S. A. which are transferred to a third party for execution, as indicated above. 15

16 In addition, the Bank considers that: > > The execution speed is guaranteed and is that provided directly by the fund management company when assigning the VLP to the client s order, calculated in accordance with the regulations specific to CIIs, based on the time of receipt of the client s subscription or redemption order, in accordance with the cut-off times established by the management company itself and the criteria set out in the prospectus of the CII to be contracted. > > The probability of execution and liquidation is very high, since the management companies ensure the execution of client subscription and redemption orders when the requirements set out in the prospectuses of each CII are met. > > There are no restrictions on the volume of execution of client subscription and redemption orders if the requirements of the prospectuses are adhered to, especially in types of funds with minimum subscription and/or redemption conditions. > > The nature of the order is not considered to be an applicable factor since the execution of subscription or redemption orders from clients can only be carried out under the terms set out in the fund prospectuses. > > These orders are executed on the most advantageous type for the client in terms of commissions, depending on the volume of the transaction to be carried out and the minimum amounts and requirements established for each type. > > In the area of discretionary portfolio management, the classes selected will be those defined by the managers for this type of service, where there is no possibility of a rebate of the CII management fee. In the event that the Bank receives any rebate, considered as an incentive for the purposes of securities regulations, for holdings in discretionary managed portfolios, this rebate will be paid to the customer. centre: price, costs, speed, settlement volume and probability of the transaction. The selection of execution facilities is carried out in accordance with the previous paragraph when dealing with transactions transmitted to an intermediary for execution. Access to potential execution facilities shall be determined by the arrangements for the clearing and settlement of transactions with institutions that are members of the central counterparties or clearing and settlement systems of the selected execution facilities. In operations in the Spanish market, the Bank is a clearing member of Santander Securities Services, S. A., which has the technical means for clearing and settling cash flows and for safeguarding the correspondence between the central accounting record and the transaction detail records. Each year, the Bank will publish on its website www. bancosantander.es the five main centres for the execution of retail and professional customer orders in relation to each type of financial instrument. The Bank will also review annually the quality of execution obtained in the different centres, based on data relating to liquidity and market depth, and clearing and settlement operations. This analysis shall include a review of total costs (including price and fees) for the execution of transactions. In addition, in cases where a single execution facility is used for the majority of transactions involving a type of financial instrument, the advantages and disadvantages of such a choice will be assessed. > > Listed equities, SICAV shares, warrants, certificates and Exchange Traded Products (ETPs), traded in secondary markets where the Bank is a market member: These transactions may be carried out in different execution facilities where the instruments indicated are traded, provided that the Bank is a member: regulated markets, multilateral trading facilities (MTF), organised trading facilities (OTF). The Bank will direct the transactions of its retail customers preferably towards regulated markets, provided that the conditions for optimal execution are met, or alternatively towards MTFs. The Bank has identified appropriate execution facilities for the various securities and will thus forward orders to these specific centres which have been identified for their execution. For transactions on instruments traded at different facilities where the Bank is a member, the following factors will be considered when selecting the execution 16

17 In the case of client orders for instruments traded in several markets where the Bank is a member, the selection of the trading centre shall be made following the procedure described in the equity section. > > Structured Instruments and Derivatives Derivatives in organised markets: In the case of derivatives listed on markets in which Banco Santander is a member and/or to which it has direct access, client orders will be processed for execution in the relevant markets. These markets are the only possible execution facilities for these derivative financial instruments and allow the best possible result to be obtained consistently for customers in terms of price and cost in the absence of other options for execution. OTC Transactions In these transactions, the Bank acts as a counterparty to the client. When executing these orders, including those processed on tailor-made products, the Bank shall calculate a fair and reasonable initial base price, based on market data, to which the costs and trading margins provided for that purpose shall be added when they are implicit in the final price of the transaction. Thus, final pricing for the customer includes: > > Fixed Income Instruments and other financial assets: OTC transactions: These are operations executed outside a trading centre, in which, due to volume, liquidity or price, the Bank may execute the orders received from its clients, with the Bank acting as the counterpart to the client s transaction. For these transactions, the Bank shall provide a fair and reasonable price, taking into account comparable market data within the price bands existing in the market, including the brokerage margins and costs established for this purpose, where these are implicit in the final price to the customer. Transactions in trading centres where Banco Santander is a market member. The Bank may execute orders received from its clients through these markets, after analysing the variables of traded volume, liquidity, speed or price. These orders will be processed in accordance with the regulations established in each of the trading centres, and the brokerage fees established for this purpose will be applied. For the operations described in this section, the Bank does not act as a counterparty to its clients. > > The base supply and demand price, calculated taking into account certain adjustments due to different concepts of objective market risk. > > Depending on the type of instrument, adjustments for risk are added according to the nature and size of the client and the transaction (client credit risk, liquidity risk, financing risk). > > Other costs and expenses of the transaction for the client when they are implicit in the price, including brokerage margins. In the issuance of custom structured notes to retail or professional clients, understood as non-public placements, the reasonableness of the price applied to customers on a primary basis shall be justified similarly to previous OTC transactions. Exclusions from the best execution policy: The following are excluded from the scope of the obligations of the order execution policy: > > Transactions in the primary market of issuances that are only sold through private placements to eligible counterparts. > > Transactions in the primary market of issuances sold through public placements (deposit of the issuance prospectus at the CNMV). > > Operations developed by the Bank for the management of its own portfolio and the Bank s actions as a market maker. 17

18 Consideration of specific instructions from the clients Issuance by customers of specific instructions not included in the Order Execution Policy established by Banco Santander may prevent the best possible result defined therein from being obtained by preventing the application of the mechanisms and measures contemplated therein. In the event that there is a specific instruction from the customer, the Bank will execute the order following the instruction, considering covered any requirements regarding the best execution with respect to said order or at least with respect to the factors of the order which affect the instruction. The following will be considered specific instructions from the clients: > > The express indication by the client of the execution facility to which the order is sent. > > The express indication by the client of the currency of the order, in the case of financial instruments traded in different currencies. > > Certain types of orders such as stop-loss, which are executed according to certain prices. In all the cases indicated, the measures and mechanisms established in the Order Execution Policy shall cease to be applicable as soon as they are incompatible with the specific instructions. The Bank reserves the right to admit orders with specific instructions. the object of investment services provided by the Bank to its clients. The information contained in this document does not exclude that, at the time of presentation of a certain product or financial instrument to a client, including others not contemplated herein, the Bank shall provide specific information relating to the same. In any case, the Bank will make available to its customers the information legally required in each case or will proceed to its provision, if appropriate. For products affected by PRIIPs or UCITS regulations, the Bank will provide the customer with the key data document corresponding to the product in which they wish to invest. In the event that there are official prospectuses duly registered with the relevant supervisory bodies in relation to an issue of financial instruments offered to the client, the Bank shall inform the client of their availability. The acquisition of a financial instrument, whether for investment, hedging, speculation, etc., entails financial risks that must be assessed by the clients before contracting. There may even be different risks within the same financial instrument, depending on its characteristics. Risk is an element inherent to financial instruments. It means uncertainty and this implies the possibility not only of obtaining lower or higher returns than expected, but also, in the worst case scenario, of losing part or all of the capital invested. Risk and return are related. As a general rule, the higher the expected return, the greater the risk which is assumed. Transactions involving fixed-income and equity instruments carried out under the Discretionary Portfolio Management service Banco Santander provides its clients with discretionary portfolio management services. In order to perform this service, it delegates the management to Santander Private Banking Gestión SGIIC or to Santander Asset Management SGIIC. In the investment or divestment decisions on fixedincome and equity instruments, which both managers may take in relation to the portfolios delegated by the Bank, their respective policies for best execution of orders shall apply. The Bank shall verify that both management companies, within these policies, respect the principles set out in their own best execution policy. Information on financial instruments and associated investment risks Below, Banco Santander, S. A. describes the main characteristics and most common risks associated with the most common financial instruments, within those included in MiFID regulations and the Securities Market Law (Ley de Mercado de Valores - LMV), which may be 18

19 1. Fixed income and hybrid instruments Fixed-income assets are a broad set of tradeable securities issued by both private companies and public institutions. Economically, they represent loans that the issuing entities of these financial instruments receive from investors. Unlike equities, the holder of fixed-income securities has economic but not political rights, since he does not hold any title to the shares of the issuing company of the financial instrument in question. The most important is the right to receive the agreed remuneration and the return of all or part of the capital invested on a given date. Hybrid instruments are financial assets that constitute a form of financing for issuing entities that combines characteristics of debt (degree of subordination in liquidation) and equity (share in the entity s results to varying degrees). > > Risk factors Fixed-income assets and hybrid instruments to a greater extent are subject to a range of risks that may entail the total or partial loss of the investment. Listed below are the main sources of significant risk that may affect these financial assets. Risk due to evolution of interest rates: Duration: Price risk involves the possibility that, when the investor wishes to sell the asset before maturity, its sale price may be lower than the purchase price. In the case of fixed income securities, this risk is mainly linked to changes in interest rates. When an investor acquires an asset with a longer maturity than their own investment period, then it will have to be sold on the secondary market upon that date. If interest rates have risen during that time, it could yield a lower return than expected at the time of contracting the bond, and may even record losses. In contrast, lower interest rates could lead to higher returns than initially expected at the time of the bond contract (this effect is lower in certain fixed-income securities that remunerate at variable rates which include interest rate fluctuations). Price sensitivity to variations in interest rates is measured by the duration, which is the average life of a fixed-income security, taking into account the number of coupons outstanding, their distribution and amount, and the other income to be received within that time. This is a very important concept for estimating the risk that a certain security implies. Longer duration means greater risk because, in the event of equally intense increases or decreases in interest rates, the variation in the price of the product will be greater. Credit or insolvency risk This is the risk of the issuer of a security being unable to meet its coupon and principal repayment payments, or of a delay in such payments. The issuer may be a company, financial institution, state or public body. When the issuer of securities (fixed income) is a State, credit risk is referred to as country risk. On some occasions there have been unilateral suspensions in the payment of interest on foreign public debt issued by countries. Historically and in a normal market context, the issuances by the most important OECD States are considered to be risk-free assets, provided that they are held to maturity (if the securities are sold on the secondary market before amortisation, the price obtained will be that which the market is willing to pay at that time). Any private issuer, regardless of its solvency, carries a risk that is usually higher than that of government bonds; and therefore, higher returns are also typically required. Before investing, the credit quality of the issuer should be taken into account. For this purpose, you can refer to 19

20 the ratings given by specialised agencies on the credit quality and financial strength of issuing companies, states and public administrations. These ratings may be on the issuer, or in the case of private securities, on these and/or each of their issues. However, it should be remembered that a credit rating does not constitute a recommendation to buy, sell or subscribe to securities and that the credit rating may be suspended, modified or withdrawn at any time by the relevant rating agency. The fundamental criterion used to assess the solvency of an issuer is usually its ability to generate profits in the future and, consequently, its ability to meet its payment commitments. On occasions, the solvency of a particular issuance may be linked to the offer of additional guarantees (such as securitisations). In the event of the issuer s insolvency, it is important to know the status of the different types of issuance and the ranking of claims. In the event of insolvency or declared bankruptcy of the issuer or guarantor, the ranking of claims shall not necessarily coincide with the payment recovery order set out in the issuance prospectus. Holders of subordinated debt, preferential shares and preferred stock would not recover their investment until after preferential and unsubordinated creditors under the insolvency laws in force, i. e. after all other unsubordinated creditors had recovered it and only before ordinary shareholders. For this reason, when it comes to subordinated debt, preferential shares and preferred stock, the risk of total or partial loss of the investment is increased. A special scenario involves fixed-income instruments, including unsubordinated ones, issued by credit institutions and investment firms. Law 11/2015 of June 18, on the recovery and resolution of credit institutions and investment service companies, contemplates, in certain instances, the possibility of amortisation and conversion of these instruments, which could lead to the loss of the investment in the event of the resolution of the credit institution or investment services company. Typically, issuers with lower financial soundness (lower rating) are required to obtain higher returns to offset the higher risk borne by the investor. Lack of marketability and liquidity risk: Liquidity risk is the difficulty that an investor who wishes to convert the purchased financial instrument into cash may encounter, either because there is no trading or reference market where it can easily or quickly exit its position, or because there is no demand on the relevant market for that instrument in the short term or the term in which the investor wishes to sell it. As a general rule, financial instruments traded on organised markets are more liquid than those not traded on organised markets. The Issuer of the securities cannot ensure that a market may be created or maintained for the trading of these securities, nor that there may be a regular valuation and/ or price thereof. Consequently, there is the possibility that these securities may lack liquidity, making it difficult for their holders to sell them and that they may be forced to remain in the investment until maturity, if applicable. Also, if there is a third party willing to acquire these securities, the price may not reflect the market value of 20

21 the product and may be less than the nominal and/or the acquisition price paid by the investor. Consequently, the risk of lack of liquidity may lead to a loss in the price obtained upon exiting the investment, should it be necessary to sell quickly. Payment limitation risk: There are risks that may affect the remuneration to be received by holders in the form of coupons. These risks will be greater depending on the type of issuance in question. The collection of returns on an issue may be limited by a number of factors, among others: (i) the lack of sufficient distributable profits of the issuer to cover payment, (ii) the existence of regulatory restrictions, (iii) the need to previously cover the payment of other higher-ranking obligations, (iv) where the return to investors is at the discretion of the issuer, who is not required to pay it if it considers that it may affect their financial and solvency position, and/or (v) by the terms of the issuance. If the yield is not paid in full on one of the agreed dates, the uncollected portion may not be recovered, even if the issuer generates future profits. Non-payment or conditional payment risk: Some fixed income securities issues are permanent and therefore have no maturity date. There are also issuances where a possible early amortisation date is foreseen; in which case, it should be taken into consideration that normally this right is exercised only by the issuer in accordance with the terms and conditions of the issuance, whereby the investor may be obliged to maintain their investment for a long period of time. Convertible or exchangeable bonds give their owners the right to exchange them for shares on a certain date. Upon the date of exchange, the investor has two alternatives: to exercise the conversion option, if the price of the shares offered in the exchange/conversion is less than their market price; or to hold the bonds until the date of the next conversion opportunity or until maturity. In practice this means exposure to equity market risk. With necessarily convertible bonds, the holder may not waive the exchange, which shall take place on the date or dates specified in the prospectus according to the established equation. In short, it is an agreement to purchase a certain number of shares in the future, so the value of the bonds will fluctuate depending on the fluctuations of the shares into which they will be converted. Thus, depending on the price of the shares at the time of conversion, the swap may be detrimental to the investor, generating losses. Other circumstances which may affect the price: The price of fixed-income securities is exposed to a number of other factors, in addition to those mentioned above, which may have an adverse effect and, therefore, add to the product s risks, which may entail losses. Among others: lowering of the issuer s rating, adverse performance of the issuer s businesses, non-payment of issuance returns on the agreed dates, variation in exchange rates on foreign currency issuances. Reinvestment risk: If the asset acquired generates coupons or cash flows prior to the maturity date, the interest rate at which these coupons or cash flows may be reinvested until maturity of the asset is unknown. The initial return will have been calculated assuming a reinvestment of such coupons at the same rate, so if such reinvestment were at a lower rate, the total return would also be less. 21

22 the original bond gives entitlement may be purchased separately. > > Debt of the Autonomous Community and other Public Bodies. The Autonomous Communities, local governments and various public entities issue shortterm securities (loans) and long-term securities. Its characteristics are similar to those of Treasury bills and government bonds and debentures, respectively. Mortgage Bonds These are fixed-income securities issued exclusively by credit institutions (banks and savings banks) and backed globally by their mortgage loan portfolio. They are usually long-term issuances and have different interest rates and repayment terms. Specifically, the issuing entity reserves the right to the early repayment of part or the total amount of the issuance during its life, in accordance with the provisions of the Law regulating the mortgage market. Corporate or Private Fixed Income Instruments (Bonds and Debentures) The bonds and debentures issued by companies are medium- and long-term fixed-income securities. Their characteristics can vary considerably from one issuer to another, and even differ among different issuances from the same company. These differences may include the maturity date, interest rate, coupon frequency, issue and amortisation prices, redemption clauses and other terms of the issuance, as well as convertibility options, if any, the priority of rights in the event of settlement or the guarantees offered, among others. > > Fixed-Income Financial Instruments > > Hybrid Instruments Government Debt They are fixed-income securities, issued by the State, the Regional Governments and other Public Bodies. In general, they are liquid securities with lower credit risk than private fixed-income instruments. Depending on the terms and characteristics, there are different types of public debt, which in the case of the Spanish Treasury are: > > Spanish Government Bonds and Debentures. These are the main medium-term (bonds) and longterm (debentures) fixed-income instruments issued by the State. They are explicit performance issuances. Currently, 3 and 5-year bonds and 10-, 15- and 30-year debentures are issued. Over the course of their lives, these assets accrue a fixed interest rate which is paid by means of annual coupons. Some long-term public debt issues are made in the form of segregated securities or strips, in which the principal capital and each of the coupons to which Preferential shares These are securities issued by a company that does not confer any shareholding in its capital or voting rights. It has a perpetual nature and its profitability, generally variable, is not guaranteed. It is a complex, high-risk instrument. Given the subordination of these issuances and the ranking order in the event of insolvency proceedings, there is a risk of total loss of the investment if this situation were to arise within the issuing company. Convertible contingent bonds (CoCos) They are a type of debt and equity hybrid issuance, with a defined coupon that can be cancelled at the issuer s request, where there is the option to convert into shares of the issuing entity under predetermined conditions, usually if its capital ratio falls below a certain level. It is a complex, high-risk instrument that can reach the total investment and is therefore not suitable for non-expert investors. 22

23 Convertible and/or exchangeable bonds and debentures These are bonds or debentures that can be converted into shares or other types of bonds. The difference between exchange and conversion is that, in the former, the conversion into shares is effected by delivery of old shares which are part of the issuer s treasury stock, while in the latter, new shares are delivered. Until the conversion date, the holder receives interest through the collection of periodic coupons. The number of shares to be delivered for each bond or debenture, the manner in which prices are to be determined, and the dates of exchange or conversion are specified in the issuance prospectus. Characteristics relevant for analysing fixed income assets and hybrid instruments Below are some of these characteristics, which have a direct influence on the degree of complexity and risk of the instrument. > > Category of the issuance in the event of insolvency: secured, senior or subordinated bonds. > > Duration and maturity. > > Coupon type: fixed, floating, or referenced. > > Repayment rate: at maturity, perpetual or exchangeable or convertible or necessarily convertible bonds. > > Trading market. Hybrid and complex fixed-income instruments issued by financial institutions in the European Union are considered products subject to the PRIIPs (packaged retail and insurance-based investment products) regulations. The characteristics of the instrument in question, its risks, possible scenarios of positive or negative developments and the target audience for which they are intended are set out in the Key Information Documents (KIID) provided to retail customers prior to making transactions on those instruments. Regulatory classification of fixed income For the purposes of Order ECC/2316/2015 of 4 November, concerning reporting and classification requirements for financial products, fixed-income instruments 6 are classified according to their level of risk, liquidity and complexity according to the following characteristics: - Risk level: the standard classifies products into 6 levels of risk according to whether their nature is subordinate, their currency, the percentage of the commitment to repay the principal invested, term and credit rating of the originator, issuer or guarantor. > > > Class 1: Non-structured bank deposits / Euros. > > > Class 2: Unsubordinated Issuances in euros. 100% principal capital guaranteed. Term <= 3 years. Credit quality level 1 BBB+ or higher. > > > Class 3: Unsubordinated Issuances in euros. 100% principal capital guaranteed. Term > 3 and <= 5 years. Credit quality level 2 BBB- or BBB. > > > Class 4: Unsubordinated Issuances in euros. 100% principal capital guaranteed. Term > 5 and <= 10 years. Credit quality level 2 BBB- or BBB. > > > Class 5-1: Unsubordinated Issuances in euros. 100% principal capital guaranteed. Term > 10. Credit quality level 2 BBB- or BBB. > > > Class 5-2: Unsubordinated Issuances in euros. 90% principal capital guaranteed. Term <= 3 years. Credit quality level 2 BBB- or BBB. > > > Class 6: Remaining products not included in any other category. - Liquidity: alerts on possible liquidity limitations and on the risks of the early sale of the financial product. 6. This regulation does not apply to Spanish government debt and that issued by institutions, bodies or agencies of the European Union and central governments, regional or local authorities or other public authorities, bodies governed by public law or public enterprises of the Member States of the European Union, analogue to those of Spain 23

24 - Complexity: In accordance with the securities regulations (MiFID and LMV) fixed-income instruments with embedded derivatives and perpetual issuances are considered to be complex products for the purposes of the LMV, and it is therefore necessary to evaluate their suitability for retail customers in the event of their commercialisation. In addition, fixed-income financial instruments issued by credit institutions and investment services companies in the European Union are considered to be complex since they are liabilities eligible for internal recapitalisation of the issuing institution 7. It is therefore necessary to assess their suitability for retail customers. For other fixed-income instruments, considered to be non-complex products, the assessment of suitability is not required when a client requests it from the institution on his or her own initiative. In the case of non-complex fixed-income assets, as well as those issued by credit institutions and investment services companies that do not include an embedded derivative, these features are communicated to the client in the general description of the nature and risks of the fixed-income asset that is provided prior to the contracting of the same through the following figures: > > Risk indicator: A figure is given with the risk level of the product and the following warning: This number is indicative of the risk of the product, where 1/6 is indicative of lower risk and 6/6 of higher risk. > > Liquidity indication: One or two padlocks will be included depending on the product s return-to-maturity commitment, possible liquidity limitations and the risks of early sale of the financial product (existence of commissions or penalties for early cancellation, notice periods). > > Complexity indication: It should be stated that this is not a simple financial product and may be difficult to understand. For complex fixed-income instruments (except those issued by credit institutions and investment services companies that do not include an embedded derivative), information on the characteristics, risks and possible development scenarios of these instruments are described in the PRIIP KID given to the retail customer. Regulatory classification of hybrid instruments According to securities regulations (MiFID and LMV), hybrid instruments are considered complex products. It is therefore necessary to assess the suitability of these instruments in purchase transactions carried out by retail clients. Information on the characteristics, risks and possible development scenarios of these instruments are described in the PRIIP KID given to the retail customer. Possible development scenarios of non-complex fixed-income instruments Among the possible positive and negative scenarios for the performance of a fixed-income investment, it is worth considering: > > Whether the investment is held until maturity, in which case the amortisation will be for the nominal value of the securities that would be compared with their acquisition price. > > The variation in the asset s valuation, before the amortisation date, according to the interest rates and duration of the instrument in question, as well as the other risk factors indicated above, based on the investor s purchase price for these securities. > > The amount of the coupons that may be received. The worst-case scenario for a fixed-income investment is that of losses to the investor, which may arise if there is a continuous rise in interest rates and other negative events related to the issuing entity and/or its market, in the event of the client s need for early sale before maturity. The longer the duration of the securities, the greater the effect on the price of the security. The optimal scenario is one in which the valuation of the instrument exceeds the nominal value due to a fall in interest rates and which therefore represents an additional income to that of the coupons to be received, in the event of a sale before maturity. The neutral scenario for an investor is the receipt of coupons and the amortisation of the nominal value of the securities at maturity. 7. In accordance with Law 11/2015 of 18 June, concerning the recovery and resolution of credit institutions and investment services companies and EU Directive 2014/59 24

25 2. Money Market Instruments Money market instruments are short-term assets normally traded on the money market with a maturity of 25 months or less. > > Risk factors The risk factors associated with money market instruments are the same as those described in the section above > > Money Market Instruments Spanish Treasury Bills These are short-term assets (maximum 18 months) issued by the State through the Directorate General of the Treasury. They always have discount yield (implicit return) and are represented exclusively by book entries, without the physical security. The Treasury regularly issues these securities through competitive auctions as a method of State financing. There are currently three types of Bills offered, depending on their maturity period: 6, 12 and 18 months. Company Promissory Notes They are zero coupon, fixed-income securities issued with a discount, so their profit is obtained in the difference between the purchase price and the nominal value of the promissory note received at the amortisation date. They are short term, and the maturity period is usually between 3 days and 25 months. The placement of promissory notes on the primary market is carried out either through competitive auctions in which the acquisition price is determined, or through direct negotiation between the investor and the financial institution. In the Spanish market, they can be traded in AIAF. Although it is a suitable investment for retail customers, it is important to refer to the information published by the markets on issuances, prices, volumes and cross trades, and to analyse whether the liquidity of the security is appropriate for the specific requirements that the investor may have set in that regard. European Commercial Paper (ECP) These are short-term debt instruments issued in the international capital market. They are neither liquid nor have a secondary trading market. They are usually issued at a discount on their nominal value. They can be issued in different currencies in which case they include currency risk. > > Regulatory classification of money market instruments Company promissory notes and ECPs are subject to Order ECC/2316/2015 of 4 November, concerning reporting and classification requirements for financial products, and are classified according to their level of risk, liquidity and complexity as described in the section on fixed-income instruments. These features are communicated to the client in the general description of the nature and risks of the financial instrument that is provided prior to the contracting of the same. Money market instruments are considered to be noncomplex products for the purposes of MiFID and LMV, and therefore the assessment of suitability is not required when a client requests it from the bank on his or her own initiative. The development scenarios for money market instruments are similar to those of non-complex fixed-income securities, with a lower impact of possible fluctuations in expected profitability due to (i) the shorter duration of these instruments, so that possible changes in their valuation are reduced and (ii) they are zero coupon instruments acquired at a discount and therefore do not have periodic coupons. 25

26 3. Variable Income Shares are the main variable-income instrument, in which it is not possible to know with certainty the return on the investment; both the price at which they may be sold and the dividends to be received during their holding period are uncertain. Other variable-income or equity instruments are preferred subscription rights. > > Risk factors It should be noted that risk, as an inherent characteristic of equity securities, means uncertainty, and this implies the possibility not only of obtaining lower returns than expected, but also, and with the same probability, of obtaining higher returns. This translates into the possibility of total or partial loss of the investment made in shares. Risk due to variation in listed prices: The share quotation depends at all times on the valuation that market participants make of the issuing company. This assessment depends on a number of factors. The main factors are expectations about the company s future profit and its growth rate. Other factors, such as expectations on different macroeconomic indicators, investor confidence, exchange rate developments on stocks traded in other currencies, etc., as well as economic, political and other news items affecting financial instrument markets, the financial system and the general economy, also play a role. Of course, the current value of these expectations varies constantly, and consequently so do the volumes of securities that are offered and demanded at each price. As a result, the prices at which orders are crossed are changed throughout the trading session, and from one session to another. In addition, certain corporate events will also influence the share price, including dividend payments, public offerings to acquire or sell shares or capital increases. A company s credit rating downgrades also have a negative impact on its price. In general, when one speaks of a listed company s risk (depending on the source), only price risk is considered, since it is understood that the rest of the risks are already included in the price risk. In this regard, it is possible to calculate the past risk of a security or an index by measuring volatility. Moreover, a critical situation of a listed company can lead to a total loss in the value of its shares, which implies the loss of the entire investment made in those shares. Risk due to changes in interest rates: In general, expectations of increased interest rates generate falls in quotations because: > > Fixed-income securities, which generally entail less uncertainty for the investor (i.e., less risk), offer higher returns, which may trigger a transfer of funds from variable income to fixed-income positions. > > They increase companies financing costs and therefore lower future profits are expected. Liquidity risk: The shares can be distinguished according to the quoted market. Regulated markets facilitate the trading of securities and therefore their liquidity, allowing shareholders to easily dispose of their positions. However, some circumstances may limit such liquidity, such as suspension of a company s listing for a period of time or exits of certain companies from the Stock market, in which case shareholders would lose the ability to sell on the market. In general, narrow securities are considered to be those with the lowest liquidity. This may be influenced by a number of factors, including the market capitalisation of 26

27 a company (number of shares quoted multiplied by their price) and its depth (offer and demand for shares of a company trading on a particular market). Given the broad range of regulated and unregulated equity markets and possible multilateral trading systems, the possibilities of variations in the liquidity of securities are diverse. In any case, it is worth remembering that the risk of lack of liquidity may entail a penalty in the price obtained upon exiting the investment. Payment risk: The remuneration in variable income can be understood in two concepts, one for the difference between the purchase price and the sale price and which is therefore exposed to the risks already described in the evolution of the quotation prices, and the other for the company s remuneration policy via dividends. In this respect, the dividends paid by each company will depend on its profits and growth expectations. > > Regulatory classification of variable income For the purposes of Order ECC/2316/2015 of 4 November, concerning reporting and classification requirements for financial products, variable-income instruments are classified according to their level of risk, liquidity and complexity according to the following characteristics: - Risk level: the standard classifies products into 6 levels of risk according to whether their nature is subordinate, their currency, the percentage of the commitment to repay the principal invested, term and credit rating of the originator, issuer or guarantor. The classification of the 6 levels is described under the fixed-income classification section. - Liquidity: alerts on possible liquidity limitations and on the risks of the early sale of the financial product. - Complexity: In accordance with the securities regulations (MiFID and LMV), shares admitted to trading on a regulated or equivalent market in a third country are considered as non-complex products and therefore the assessment of suitability is not required when a client requests it from the entity on his or her own initiative. Pre-emptive subscription rights are treated differently depending on whether they are acquired by acquiring the rights necessary to complete the rounding off determined in the capital increase in question, in which case they are considered to be non-complex, or if they are acquired by acquiring additional rights, in which case they are considered to be complex. Unquoted shares or shares traded on non-regulated markets are classified as complex products and it is therefore necessary to evaluate their suitability for retail customers in the event of their commercialisation. In financial transactions, these features are communicated to the client in the general description of the nature and risks of the product (Scrip dividend, capital increases, swaps...) that is provided prior to the contracting of the same via the following figures: > > Risk indicator: A figure is given with the risk level of the product and the following warning: This number is indicative of the risk of the product, where 1/6 is indicative of lower risk and 6/6 of higher risk. > > Liquidity indicator: One or two padlocks will be included depending on the product s return-to-maturity commitment, possible liquidity limitations and on the risks of early sale of the financial product (existence of commissions or penalties for early cancellation, notice periods). > > Complexity indicator: It should be stated that this is not a simple financial product and may be difficult to understand. For the specific case of shares and pre-emptive rights listed on secondary markets, the risk indicator is as follows: 6 / 6 This number is indicative of the risk of the product, where 1/6 is indicative of lower risk and 6/6 of higher risk Pre-emptive subscription rights acquired for the purpose of a capital increase and which do not correspond to the securities previously held or those required for rounding off are considered to be complex instruments. 27

28 > > Possible development scenarios of equities Among the possible positive and negative scenarios for the performance of a variable-income investment, it is worth considering: > > The positive or negative fluctuation of the listed price based on the acquisition price of such securities for the investor; > > The amount of dividends that may be received; > > The impact of possible financial events (subscription bonuses for shares, sale of pre-emptive rights in capital increases, scrip dividends, etc.) that include income for the customer but may affect the share valuation. 4. Collective Investment Institutions (CII) The variety of collective investment institutions is very wide due to the markets in which their investments are realised and the sectors, geographical areas, types of assets, currencies, etc. in which they invest. Their results will depend on the management carried out, as well as on market movements and may lead to losses on the investment made. The characteristics of the CII concerned and its management style are set out in the prospectus to be lodged with the regulatory body in the country of its management company (CNMV in Spain). The Key Investor Information Document (KIID or DFI in Spain) allows the essential characteristics, nature and risks of the CII to be understood and informed investment decisions to be made. 8 The following are considered as collective investment institutions (classification according to their legal form): The worst-case scenario for an equity investment is the one that entails the total loss of the investment, should the share price become zero. This extreme situation may arise in the event of insolvency proceedings or in the event of bankruptcy of the issuing body. The optimal scenario is one in which there is a continuous upward trend in the share price, together with a sustained payment of dividends by the listed company. However, it is necessary to consider the inherent volatility in the equity market in order to understand that the share price suffers ups and downs and it is essential to establish a time horizon for the investment in order to assess whether the performance has been as expected by the investor. Within the range that exists between the two scenarios described (which correspond to what would be considered the most unfavourable and the most favourable type scenarios, respectively), there are intermediate scenarios which are characterised in all cases by the high volatility of the shares and the existence of increases and decreases in the price, more or less continuous and of greater or lesser intensity, depending on the different factors that end up impacting on the price, both of a macroeconomic and sectoral nature, as well as specific aspects of the share issuing institution itself. Investment funds. Open-ended collective investment schemes (SICAV). > > Risk Factors of Collective Investment Institutions The nature and extent of the risks will depend on the type of CII and on its individual characteristics (defined in the prospectus) and on the shares in which it invests its equity and, therefore, the specific risks of the different types of assets covered by this document will be applicable. Accordingly, the choice between the different types of CII should be made taking into account the investor s ability and willingness to take risks and their investment time frame. Additional risks, over and above those of the assets in which the CII investments materialise, include the following: As from January 2020 the UCITS KIID will be replaced by the PRIIPs KID.

29 Risk due to variations in net asset value Knowing the composition of the portfolio and the investment purpose of the fund is fundamental because it allows the investor to get an idea of the risk that is being assumed, based on the investment percentages in each type of financial asset, in euros or other currencies, in one or another geographical area, etc. The performance of the portfolio is what determines the net asset value at which a customer can redeem their investment in the fund. Generally speaking, the following observations can be made: > > Equity investment, by its very nature, is generally riskier than fixed-income investment, but losses can also occur in fixed-income investment, and the investor must be aware of this fact. See the Fixed Income Risk Factors and Equity Risk Factors sections. > > Some CII, due to their investment policy, may hold securities in the portfolio that carry greater credit or counter-party risk. Investment in emerging country securities, both fixed-income and equity, can also add risk to the fund due to markets that are more volatile, less stable and more far-reaching. Investment in assets expressed in currencies other than the euro implies a risk, known as currency risk, arising from possible fluctuations in exchange rates. > > Another circumstance to take into account is that when the CII invests in securities that are not traded on regulated markets, an additional risk is being taken as there is less control over their issuers. Moreover, the valuation of these investments is more complicated as no objective market price is available. Leverage risk (Risk due to investment in derivative financial instruments) CII that invest in derivative financial instruments (futures, options) may incorporate a higher risk due to the intrinsic characteristics of these products (e.g. leverage). Portfolio losses may therefore multiply, but gains could also multiply. However, it should be borne in mind that some CII use derivatives exclusively or primarily to reduce the risks of the cash portfolio (hedging). The description of the investment policy included in the prospectus should indicate whether derivatives will be used for investment or hedging purposes. The use of OTC derivatives also entails a counter-party risk, as they are exposed to the solvency and ability to respect the terms of the contracts of the derivative s counter-party. Liquidity risk In order to assess liquidity risk, it is essential to consider the frequency of publication of the net asset value, the possible existence of notice periods for requests for repayments and the possible existence of settlement periods for the requested redemptions. All these details are set out in the fund s prospectus. Most of the CII that are deemed to be UCIT III / IV have a daily net asset value, have not established notice periods for redemptions and their settlement is relatively flexible, so they are not affected by this situation. Other aspects to be considered in terms of liquidity include the possibility of the closing of a fund, in which case the participant must maintain their investment in the fund until redemptions can be made again. In the case of SICAVs, the obligation to maintain a minimum amount of capital may sometimes lead to delays in making the requested redemptions. Currency risk This can be considered in two respects. If the investments made by the CII are expressed in a currency other than that used for the calculation of the net asset value, the fluctuation in their prices will have a direct influence on the valuation. In addition, in the case of CII where the net asset value is expressed in a currency other than the reference currency of the investing customer, the latter takes on an additional risk in the event of adverse movements in that currency. 29

30 > > Types of Collective Investment Institutions There is a large variety of CII, however, we would like to make special mention of a few due to their greater importance or special characteristics. UCITS Collective Investment Institutions These are Collective Investment Institutions that are harmonised at a European level and are therefore subject to regulations that establish limitations and obligations regarding the management and control of investments. These measures are aimed at enhancing investor protection. Most of the CII sold through the Bank are UCITS. In general, collective investment institutions harmonised at a European level (UCITS) are considered to be non-complex products and, therefore, the assessment of suitability is not required when a client requests it from the bank on his or her own initiative. Structured CII units and shares are considered to be a complex product. In the case of non-european or non-ucits CII, these will always be considered as complex. Hedge funds, real estate funds and private equity funds are classified as complex products and it is therefore necessary to evaluate their suitability for retail customers in the event of their commercialisation. Hedge Fund Collective Investment Institutions Their main features are: i) greater flexibility when it comes to making their investments, which is sometimes accompanied by less transparency; ii) their indebtedness which, if not properly controlled, can be high; and iii) less liquidity due to the setting of specific notice periods for subscriptions and redemptions and settlement periods. They are subject to risks of a nature and degree different from those of ordinary collective investment institutions. Their performance may be unrelated to equity or fixed income market trends. It is possible to differentiate between those that acquire stocks directly based on the alternative management strategy or strategies they wish to pursue, and those that invest in other hedge funds. The latter are referred to as hedge funds or IICIICIL. Due to their special nature, these types of CII are not advisable for clients who do not have sufficient knowledge and financial experience to fully understand their characteristics and risks. Real Estate Funds These are collective investment institutions that invest in real estate and therefore depend on the performance of this market. Also, as this is a less liquid market than the financial markets, the frequency of calculation and publication of net asset value is lower and the possible dates for redemption are also reduced. Private Equity or Venture Capital Funds These are institutions that take direct holdings in businesses or companies with a long-term business investment commitment. Liquidity is therefore normally limited to planned redemption dates. Investors also occasionally make additional contribution commitments at the start of their investment. > > MiFID classification of CII 30

31 5. Derivatives These are sophisticated products which in some cases involve the risk of total loss of the investment and in other cases involve the acceptance of commitments which may entail losses. In order to invest in them, therefore, it is necessary to have specific knowledge of both the products and the operation of the trading systems, as well as a high predisposition and ability to take high risks. Investment in derivative products requires financial expertise, sound judgement and constant monitoring of the stock position. Derivative products can be used for different purposes. On the one hand, they can be used to limit, in whole or in part, the risk of loss of a portfolio or fund; on the other hand, they also make it possible to add risk to an investment (by placing a bet on the future value of an underlying asset) in order to achieve higher returns. A common feature of all derivative products is the leverage effect, which defines the relationship between the invested capital and the result obtained. For the same amount, the potential gains or losses from trading derivatives may be greater than those that would arise if the underlying assets were traded directly. Among derivatives, the main distinction is provided by those listed on an organised or non-organised market, in the latter case they are called OTC (Over the counter). Derivatives issued by EU institutions and where the customer s counter-party is an EU institution, in the case of OTC derivatives, are considered products subject to the PRIIPs (packaged retail and insurance-based investment products) regulations. The characteristics of the derivative in question, its risks, possible scenarios of positive or negative developments and the target audience for which they are intended are set out in the Key Information Documents (KIID) provided to retail customers prior to making transactions on those instruments. For clients classified as eligible professionals or counterparties, the Bank shall make the necessary pre-contractual information available to them, adapted to their classification and the type of derivative instrument with which they will operate, including a description of their characteristics and risks. > > Risk Factors for Derivatives All derivative products carry a high risk. Even for those intended to hedge another risk, the derivative considered in isolation involves risk. The risk factors are multiple and therefore derivatives require constant monitoring of the situation. Some of these risks are briefly outlined below: Interest rate risk This is one of the variables that has a direct impact on the valuation of derivatives and, therefore, the variation in interest rates will cause their price or valuation to fluctuate. Risk of changes in the underlying factors and their volatility and other factors All derivatives are linked to an underlying element that may be indices, inflation rates, shares, exchange rates, interest rates, commodities, etc. The changes to this underlying element in its trading market affect the variation in the price or valuation of the derivative and its result at maturity, which may lead to partial or total loss of the investment. The volatility of the underlying asset is vital when calculating the price or valuation of these assets. The higher the volatility, the greater the possibility of gain but also the greater the risk of loss. Also, in the valuation of derivatives, in addition to the variation in the underlying factors, the volatility and interest rate developments mentioned above, other factors such as the passage of time and/or currency exchange rates also play a role. The effect of these factors has to be analysed as a whole, so it is possible that although the underlying factors can change favourably, the value of the financial derivative at a given date may be reduced as a result of the negative change in one or more of the other factors. Credit/counter-party risk In OTC derivatives where the counter party assumes obligations when the derivative matures, there is a risk that it will fail to meet its obligations and produce a financial loss for the customer. In the case of derivatives in organised markets, there is a clearing house which interposes itself between the contracting parties and takes on the obligations of the participants, thus limiting this risk which becomes contingent upon the clearing house. Liquidity risk When dealing with organised market derivatives, they are quoted in such a way that a stock can be disposed of at public prices, giving liquidity to that stock. In the case of OTC derivatives, the possibility of disposing of the stock rests with the counter-party with whom the derivative was arranged and the agreement previously reached. 31

32 Leverage risk As noted above, leverage is an embedded concept in derivatives, which makes it possible to multiply profits but also potential losses, when they are not limited by the type of derivative under consideration. Risk of taking on additional financial commitments Depending on the type of derivative involved, the stock to be taken may directly involve taking on financial commitments when the derivative matures, so that at that date the holder has to meet those commitments. For this reason, organised markets require guarantees to be deposited in accounts opened for this purpose, when the option acquired involves obligations. Number of days to maturity risk The passage of time reduces the value of the options. Therefore, as the expiration date approaches, the option value may be lower for this reason. > > > Types of Derivatives There is a wide variety of derivative types for which the possible underlying factors, complexity and heterogeneity mean that it is not possible to include all the possibilities in this section. Futures A futures contract is a contract in which the parties agree to buy and sell a specified amount of a security (underlying asset) at a predetermined future date, at a prearranged price. In other words, they are forward contracts involving financial instruments (securities, indexes, loans or deposits...) or commodities (i.e. goods, which can be agricultural products, raw materials, etc.). Futures can be traded on organised or non-organised markets, in the latter case they are called OTCs (Over the counter). Futures can be settled by physical handover or by exchange. Trading in futures requires constant monitoring of the stock position. They carry a high risk if not properly managed. In certain circumstances, it may involve losses in the customer s portfolio. Special mention is made of exchange-rate insurance, or currency forward, which are agreements between two parties to buy or sell a specific amount of a currency at a specified price on a future date. At closing there is no exchange of funds, only at maturity or year-end. Options An option is a contract that involves the right or obligation to buy or sell a certain amount of the underlying asset, at a specified price (exercise price), and within the stipulated period of time. Options can be traded on organised or non-organised markets, in the latter case they are called OTCs (Over the counter). Options can be settled by physical handover or by exchange. Trading in options requires constant monitoring of the stock position. They carry a high risk if not properly managed. The value of premiums can change rapidly over time. In certain circumstances, part or all of the investment may be lost. The price of the option depends on several factors: the market price of the underlying asset at any time (share, index, interest rate, currency, etc.), the exercise price of the option, the volatility of the underlying asset, the risk-free interest rate, the time remaining to maturity, and other factors that depend on the nature of the underlying asset (the dividend in the case of share or index options, or the interest rate differential between currencies for foreign exchange options). In options it is essential to distinguish between the buyer s and seller s situation. The buyer has the right, but not the obligation, to buy or sell at maturity (depending on the type of option); however, the seller (or issuer) of the option is obliged to buy or sell if the buyer decides to exercise his right. The option price is what the buyer pays to obtain that right, and is called the premium. Upon maturity, it will be in the buyer s interest or not to exercise it depending on the difference between the price fixed for the transaction (strike price) and the price of the underlying asset in the spot market at that time. Exceptionally, when the options are American-style, the exercise of the option may occur at any time during the life of the product and when they are Bermuda-style, such exercise may occur at certain times throughout the life of the product. When it comes to purchased options, the loss will be limited to the full premium paid. In the case of sold options, the loss may be unlimited. Swaps These are swaps or agreements between two parties, whereby they mutually oblige each other to exchange assets or cash flows within the previously agreed terms and subject to the previously established conditions, where some variable has an uncertain evolution. We can distinguish between the following swaps: > > IRS = Interest Rate Swap. > > Basis Swaps. > > Currency Swaps. > > Inflation Swaps. > > Credit Default Swaps. > > Cross-Currency Rate Swaps. > > Commodity Swaps. 32

33 > > Equity Swaps > > Equity Index Swaps. > > Any type traded on financial markets. Due to the obligations involved, they entail a certain credit risk of the counter-party, and guarantees may therefore be required from the parties. Warrants A warrant is a tradeable security that includes the right to buy or sell an asset (underlying) at a specified strike price. It is therefore a derivative. Trading in warrants requires constant monitoring of the position. They carry a high risk if not properly managed. The value of premiums can change rapidly over time. In certain circumstances, part or all of the investment may be lost. As in the case of options, the warrant buyer has the right but not the obligation to buy or sell the underlying asset at maturity. Whether or not the buyer exercises this right depends on the price of the underlying asset (settlement price) at that time in relation to the strike price. It is normally settled for differences, giving the holder the difference between the two prices. The price of the warrant depends on different factors as we have indicated in the case of options. The main advantage, and at the same time the greatest risk when investing in warrants, is the leverage effect, which is generally a characteristic of derivatives since the price fluctuations of the underlying asset induce higher percentile variations in the premium value. In return, price movements that do not meet expectations may lead to the loss of the entire investment. In addition, leverage indicates the number of call warrant or put warrant rights which it is possible to purchase for the price of an underlying asset unit. Within the warrants family, we can identify other instruments that have more complex options structures, among others: > > Turbo warrants, which allow a bullish or bearish position with regard to an underlying asset, with a higher leverage. > > Multiple warrants, which follow the evolution of indexes with multiple levels of leverage. Certificates They are derivatives, and as such carry a high risk. They involve a bet on the price evolution of an underlying asset. They may generate positive returns, but if such an asset develops in a way that is contrary to expectations, there may not be any return, or even part or all of the amount invested may be lost. Its essential characteristics vary according to the terms and conditions established by each issuer: the underlying asset on which they are issued and, where appropriate, the practical rules for its substitution, the term, the issue price, the mechanism for calculating the return. Since these are very heterogeneous values, in order to know the specific product it is necessary to refer to the issuance prospectus, registered with the corresponding regulatory body (CNMV in Spain). They can be issued with a perpetual nature, in which case early amortisation options are available to subscribers. The investor s return consists of the gain or loss arising from the difference between the issue or purchase price of the certificate and its price at the time of exercise, sale or early amortisation. > > MiFID classification of derivatives All types of derivatives are considered complex products, as expressly stated in article of the LMV. It is therefore necessary to assess their suitability for retail customers when they are being marketed. 33

34 6. Structured or Referenced Products These products provide investors, on predetermined dates, with returns calculated according to an algorithm and linked to the evolution of financial assets, indexes, etc. Normally in their construction they combine a holding in a fixed-income financial instrument or deposit with a derivative referenced to different underlying assets. Its profitability will therefore depend on the structure used, which is determined by the combination of the two holdings and the type of derivative in question. They make it possible to limit the risks in an investment with such a combination of derivatives and/or fixedincome instruments, designing investment and financing operations tailored to the risk/return profile of the investor or issuer. Given the variety of these instruments and the large number of factors that influence the evolution of the value of the structured product as well as its final result, it is important to know the content of the prospectuses of these products, which include in greater detail the characteristics and possible risks that could affect these financial products. We are referring to the base prospectus in the case of structured bond issuance programmes and the final terms of each issuance, and to the structured investment fund prospectuses that are registered in the regulatory entity of the country of the manager (in our case CNMV). In addition to this information, structured products issued by institutions in the European Union are considered products subject to the PRIIPs (packaged retail and insurance-based investment products) regulations. The characteristics of the product in question, its risks, possible scenarios of positive or negative developments and the target audience for which they are intended are set out in the Key Information Documents (KIID) provided to retail customers prior to making transactions on those instruments 9. For clients classified as professionals or eligible counterparties, the Bank shall make available to them the necessary pre-contractual information, adapted to their cataloguing and the type of structured product on which they are to trade, including a description of their characteristics and risks. > > Risk Factors of structured or referenced products. These products have a risk level that depends on the specific structure used and can be high, which may generate a greater return than lower-risk assets at the same term, but may also produce partial or total losses of the principal capital invested. Given the existence of a derivative in the composition of the structured product in this investment, it is necessary to take into account the risks outlined in the Risk Factors in Derivatives section. By also including a fixed-income asset in its structure, it is also affected by the possible risks outlined in the Fixed Income Risk Factors section. By way of illustration, and without this list being comprehensive, we can indicate that the main risks would be: underlying asset fluctuation risk, Issuer or Guarantor insolvency risk, economic, political and any other type of risk affecting financial instrument markets, the financial system and the general economy. Any of these factors are contingencies that can occur and could have an adverse effect on the investment. The following risks, which are not expressly mentioned in the previous sections, deserve a special mention: Issuer risk and guarantor risk In the case of structured financial liabilities and bonds or structured notes, where the Issuer s and, where appropriate, the Guarantor s activities are related to the financial sector, the capacity of the Issuer and/or, where applicable, the Guarantor to meet and satisfy their obligations may be affected by (1) the failure of third parties to meet their obligations towards the Issuer and/ 9. For UCITS investment funds, the KIID will be provided 34

35 or, where applicable, the Guarantor, including risks related to the credit quality of borrowers, (2) the behaviour of the group to which they belong and the risks inherent to that group, (3) the risks associated with liquidity and financing, (4) fluctuations in interest rates, exchange rates, prices of bonds and shares, (5) operational risks (related to data processing systems, financial, accounting, breakdown in electrical networks, telecommunications or computer systems, among others) and (6) risks associated with increased competition in the financial services sector, as well as possible conflicts of interest that could arise if the Issuer and/or Guarantor were at the same time Calculation Agent and / or distributor of the undertaken investment. The Issuer and Guarantor s credit ratings may not reflect all the risks. One or more credit rating agencies may assign a rating to the issuance of which a bond or note is part. These ratings may not reflect the potential impact of all risks related to structure, market and other factors considered or not previously that may affect the value of the financial product. A credit rating does not constitute a recommendation to buy, sell or maintain the obligation(s) and may be reviewed or withdrawn by the rating agency at any time. The Issuer and/or Guarantor may act as a party to contracts with third parties that have agreed to provide services in relation to the structured financial product (such as, among others, payment agents and settlement and clearing institutions). In the event that such third parties fail to meet their obligations, the Issuer and/or Guarantor may be unable to meet their obligations with respect to the financial product purchased. Advance sale risk In the event that the principal capital of the product is guaranteed at maturity by the Issuer and/or the Guarantor, the investor in this type of asset must accept that if the same is disposed of at a date prior to the maturity date he or she may not recover the principal capital invested, nor obtain any return, since the principal recovery guarantee exists only at maturity date as long as the Issuer and, where applicable, the Guarantor make the payment. A similar situation exists in the case of guaranteed investment funds, the guarantee of which is valid only at maturity, under the conditions laid down in the prospectus. We can classify these products according to the investment vehicle in question: > > Investment fund. > > Bond or note > > Financial Liability They can also be classified according to the type of structure they contain. Depending on their structure and the return percentage of the principal capital, they can be: Hedging risk When issuing financial products of this type, the Issuer, the Guarantor and/or any of their respective subsidiaries or other parties may enter into one or more hedging transactions related to the underlying assets, which could affect the market price, liquidity or value of the financial product and which could be considered negative for the clients interests. > > Types of structured or referenced products Guaranteed products With these products, guarantees are established for the total or partial recovery of the invested capital: at maturity the investor will receive, as a minimum, the investment made or the guaranteed percentage thereof. This guarantee may be affected if the conditions set out in the prospectus are not met, or if the issuer or guarantor goes bankrupt in the case of structured bonds or notes and financial liabilities. However, they do not necessarily guarantee additional profitability, but rather this will depend on the evolution of the underlying asset of the product and the specific conditions of each structure. 35

36 Non-Guaranteed products They may entail losses of the invested principal capital. These products are designed with the profitability/ risk binomial in mind and respond to specific market expectations. Among many others: > > Coupon products: They provide attractive coupons in specific market situations, being able to take advantage even of lateral or bearish markets. > > Share products: Their performance is directly linked to the performance of an underlying asset (indexes, securities, etc.) in a more efficient way than investing in the underlying assets separately. > > Leverage Products: They allow the investor to obtain similar or higher returns on the underlying asset, without having to pay out its cost, being able to contribute a smaller amount thanks to combinations of options, financing, etc. > > MiFID classification of structured products Structured and referenced products are generally considered to be complex products because they contain a derivative. It is therefore necessary to assess their suitability for retail customers when they are being marketed. The exception is structured funds which have the classification of UCIT III / IV and which are therefore considered to be non-complex products since they are subject to the control rules required by European harmonisation. Structured funds subject to CNMV supervision that have the characteristics indicated in the CII section may also be considered as non-complex. 7. ETPs: ETFs, ETNs and ETCs ETPs (Exchange Traded Products) comprise ETFs (exchangetraded funds), ETNs (exchange-traded notes) and ETCs (Exchange Traded Commodities). These are funds, notes and products listed on the stock market. Due to their heterogeneity and the possibility of using derivatives, they can be highly complex, in which case they require extensive financial knowledge and special investor vigilance. An ETF or exchange-traded fund is a fund that can invest like other CIIs in different markets and asset types. They offer a wide range of possibilities for diversification in sectors, geographical areas, underlying assets and strategies, but adding some characteristics of listed shares. Their main characteristics are i) liquidity when quoted on a secondary market and there being market makers offering listing, ii) diversification, as they provide access to a wide range of asset types and strategies, including bearish betting on an index or asset (inverted) and leverage, iii) flexibility by allowing trading as long as the market is open with a quoted price at any time and with price limits. ETNs and ETCs are similar to ETFs in terms of their characteristics, but they may have added complexity in terms of the type of assets in which the investment takes place. In general, we can say that ETNs are structured products or notes listed on the stock market. ETCs have a wide variety and use different legal structures to materialize their investment, including commodity baskets. Therefore, a significant difference with ETFs is the different tax and legal treatment that ETCs and ETNs may have under different jurisdictions. ETPs managed by EU entities are subject to the PRIIPs (packaged retail and insurance-based investment products) regulations. The characteristics of the product in question, its risks, possible scenarios of positive or negative developments and the target audience for which they are intended are set out in the Key Information Documents (KIID) which will be made available to retail clients prior to placing orders on those instruments for execution in the market where they are traded. > > Risk Factors of ETFs, ETNs and ETCs Liquidity and trading price risks The agility of the sale will depend on the existing supply and demand for the specific ETF at each point in time and 36

37 may involve significant discounts in the price in relation to its settlement value. When trading ETFs on the market there may be discounts and rewards on the settlement value of the fund, meaning that if the fund is sold it may be below this value. In those ETFs, ETCs or ETNs that incorporate derivatives, especially in commodities, the lack of liquidity of these positions may affect the liquidity of the ETP. Risk of evolution different from that of the reference asset This risk is especially relevant in ETFs that replicate indexes and where deviations from the performance of the reference index in such cases may not be expected. ETF management charges lead to a deviation of their price in comparison with the performance of the corresponding index. With ETCs and ETNs on commodities that replicate the behaviour of a future, daily valuation adjustments may imply added distance from the evolution of the relevant future. Leverage risk Some ETFs are leveraged which can lead to an increase in both profits and losses, which can be high. In addition, the ETF s own internal functioning with the adjustments of derivative positions may lead to additional losses. The complexity of these instruments means they are not recommended for investors who do not have a high level of experience and financial literacy. Counter-party risk arising from the use of derivatives By using derivatives traded with a credit institution, ETFs, ETCs and ETNs are exposed to counter-party risk for failure to meet their obligations upon maturity of derivative positions. Other risks The risk factors mentioned in the Variable Income and Fixed Income section should be considered, depending on the market in which the ETF s investment materialises. > > MiFID classification of ETFs, ETCs and ETNs ETFs, ETCs and ETNs are generally regarded as complex products. It is therefore necessary to assess their suitability for retail customers when they are being marketed. The exception is that of ETFs which are classified as UCITS and therefore, as they are subject to the control standards of European harmonisation, can be considered as noncomplex products, when they are neither inverse nor leveraged. 37

38 8. Other considerations Other financial commitments may be acquired as a result of transactions with certain financial instruments. Likewise, the risks associated with a financial instrument consisting of two or more different instruments may be greater than the risks associated with any of its components. Annex: Information on Costs and Expenses associated with non-complex variable-income and fixed-income trading (transactions in trading centres). which would be incurred in order to execute the transaction. > > Current costs and expenses: referring to all costs that would be incurred in relation to the services rendered to the customer in connection with the transaction and for other costs arising from the custody and/ or administration of the financial instrument. This amount is provided on an annual basis, so the client can consider the cumulative impact that these costs will have on his investment according to the foreseen time horizon. > > Exit costs and expenses: referring to all costs that would be incurred as a result of the sale of the financial instrument. In transactions involving securities issued in currencies other than the euro, it would include the costs of converting the relevant currency into euro, which would be incurred in order to execute the transaction. In the specific case of fixed-income securities, the estimate assumes that the client will hold the investment until maturity. Given that these are estimates, mostly based on the Bank s Pricing Prospectus, the costs and expenses that are ultimately incurred in the transaction may differ from those obtained in these estimations, as the rates in the Pricing Prospectus correspond to maximum fees. The concepts of cost and expenses which carry any type of tax are included in the calculation taking this into account. If you would like to have more detail on the costs and expenses that will be applied in relation to this type of transaction throughout its life, considering also the specific conditions that you have negotiated with the Bank, you can receive this information by contacting your branch. 1. Estimation of costs and expenses related to domestic variable-income trading, expressed in euros (including stock and shares in ETFs): In line with that stated in the section Information on associated costs and expenses of this document, we provide you below with an estimate of the aggregated information on the total costs and expenses that will be incurred over the life of the investment, associated with the purchase of non-complex fixed and variable-income instruments or instruments issued by credit institutions and investment services companies at trading facilities that do not incorporate an embedded derivative. These estimates are based largely on the application of the general conditions set out in the Bank s Pricing Prospectus and are made on an investment basis of 10,000 euros. The cost and expenditure categories shown in the explanatory tables in this Annex are as follows: > > Initial costs and expenses: referring to all the costs that would be incurred as a result of the purchase of the financial instrument and that are not incurred again as long as the investment is alive. In transactions involving securities issued in currencies other than the euro, it would include, where applicable, the costs arising from the conversion of the euro into the relevant currency, Initial costs Current costs Exit costs Total Total (in %) % Recipient of costs and expenses over total Received by the Bank 2. Estimation of costs and expenses related to foreign variable-income trading, expressed in euros (including stocks and shares in ETFs): Initial costs Received by third parties Current costs Exit costs Total Total (in %) % Recipient of costs and expenses over total Received by the Bank Received by third parties

39 3. Estimation of costs and expenses related to foreign variable-income trading, expressed in a currency other than euro (*) (including stocks and shares in ETFs): Initial costs Current costs Exit costs Total Total (in %) % Recipient of costs and expenses over total Received by the Bank Received by third parties (*) If you have a current account open in the currency in which you are investing, the costs associated with the transaction would be equivalent to those shown in the table of foreign variable-income denominated in euro. 4. Estimation of costs and expenses related to domestic fixed-income trading, traded through the SEND market: Initial costs Current costs Exit costs Total Total (in %) % Recipient of costs and expenses over total Received by the Bank Received by third parties Estimation of costs and expenses related to foreign fixed-income trading, expressed in euros: Initial costs Current costs Exit costs Total Total (in %) % Recipient of costs and expenses over total Received by the Bank Received by third parties Estimation of costs and expenses related to foreign fixed-income trading, expressed in euros Initial costs Current costs Exit costs Total Total (in %) % Recipient of costs and expenses over total Received by the Bank Received by third parties (*) If you have a current account open in the currency in which you are investing, the costs associated with the transaction would be equivalent to those shown in the table of foreign fixed-income denominated in euro. 39