Bank of Nova Scotia Issues $1.764 Billion Autocallable Notes Linked to Amazon and Alphabet Stock Performance

Structure of the Autocallable Notes and Reference Assets

The Bank of Nova Scotia's newly issued notes represent a complex derivative security whose value depends exclusively on the performance of two reference assets: Amazon.com Inc. common stock and Alphabet Inc. Class C capital stock. The disclosure states that payments on the notes are based on whichever reference asset exhibits the lowest percentage change from its initial value to its final value, designating this as the "Least Performing Reference Asset." This bilateral linkage means that investors bear downside risk based on the weaker performer between the two technology stocks, concentrating exposure to the equity market's most volatile segment.

The notes do not provide investors with direct ownership, voting rights, or dividend entitlements in either Amazon or Alphabet. The filing explicitly clarifies that acquisition of the notes does not confer "any legal or beneficial ownership of, any Reference Asset," meaning investors have no claim on the underlying stocks themselves. Instead, investors hold an unsecured debt obligation of the Bank of Nova Scotia, with returns calculated by reference to observed closing prices on specified observation dates. The Bank indicated that all payments on the notes will be made exclusively in cash, with no physical delivery of securities or dividend pass-through mechanisms.

Automatic Call Feature and Early Redemption Mechanics

A defining characteristic of these notes is their automatic call provision, which the Bank disclosed permits early redemption if closing values of both reference assets reach or exceed their initial values on any designated call observation date. If this condition is triggered, note holders receive a cash payment equal to the principal amount plus any contingent coupon that would otherwise have been payable and any accrued unpaid contingent coupons not yet distributed. Following an automatic call, no further payments accrue or become due on the notes, effectively terminating the investment relationship.

The automatic call feature creates a scenario in which upside participation is capped while downside exposure remains uncapped. Should both reference assets appreciate sufficiently to trigger the call, investors receive their principal and accumulated contingent coupons but forgo any further price appreciation. Conversely, if neither reference asset appreciates sufficiently to trigger an early call, investors face the full maturity evaluation of the least performing asset. This structural asymmetry reflects the derivative nature of the notes and the Bank's embedded hedging cost.

Contingent Coupon Payment Conditions and Memory Feature

The notes incorporate a contingent coupon mechanism whereby interest payments are conditional on reference asset performance relative to specified barrier values on designated contingent coupon observation dates. The filing discloses that if both reference assets close at or above their contingent coupon barrier values on any such observation date, a contingent coupon becomes payable on the corresponding payment date. Additionally, any previously unpaid contingent coupons that have accrued are also paid on the next date on which a coupon otherwise becomes payable, creating a "memory" feature that preserves accrued but unpaid coupons.

Conversely, if either reference asset closes below its contingent coupon barrier value on any observation date prior to the final valuation date, the contingent coupon scheduled for that date becomes unpaid and accrues as a claim against future coupon payments. The Bank's disclosure indicates that the contingent coupon will not be payable on the initially scheduled payment date but will instead carry forward and be paid only when both reference assets subsequently exceed their barrier levels on a future observation date. This accumulation mechanism means investors may experience extended periods without coupon receipts while coupon obligations pile up in the background.

Maturity Payment Structure and Principal-at-Risk Exposure

If the notes are not automatically called prior to maturity, the final cash payment on the maturity date of July 20, 2029, depends entirely on the final closing value of the least performing reference asset compared to its designated barrier value. The Bank disclosed that if the final value of the least performing asset equals or exceeds its barrier value at maturity, investors will receive 100% of the principal amount plus any remaining contingent coupon and accrued unpaid contingent coupons. However, if the final value of the least performing asset falls below its barrier value, investors will suffer a loss equal to the depreciation of that asset, with potential exposure to a complete loss of principal.

This maturity structure creates a scenario in which investors can lose up to 100% of their principal investment if the weaker-performing stock declines significantly from its initial level. The Bank's disclosure explicitly states that "you may lose up to 100% of the Principal Amount" in this scenario. Given that the notes are linked to the least performing of two large-cap technology stocks, market volatility or sector-wide corrections could trigger substantial losses. The disclosure provides no floor or downside protection mechanism, meaning the notes lack the principal guarantees typical of conventional fixed-income securities.

Pricing, Valuation, and Estimated Value Disclosure

The Bank of Nova Scotia disclosed that the original issue price of the notes is 100% of principal amount, totaling $1.764 billion. However, the Bank also disclosed that the initial estimated value of the notes at the time pricing was set on July 17, 2026, was $978.51 per $1,000 principal amount—approximately $21.49 per $1,000 or roughly 2.15% lower than the issue price. This variance reflects the Bank's internal pricing models, which incorporate the Bank's internal funding rate, underwriting commissions, and structuring costs associated with the notes and related hedging arrangements.

The Bank explicitly stated that its internal funding rate is "typically lower than the rate the Bank would pay when it issues conventional fixed rate debt securities," meaning the derivative structure reduces economic value to investors relative to a traditional debt offering. The disclosure notes that "the Original Issue Price you pay to purchase the Notes is greater than the initial estimated value of the Notes" and cautions that "the actual value of your Notes at any time will reflect many factors and cannot be predicted with accuracy." The Bank also indicated that, assuming constant market conditions, secondary market pricing through its affiliate Scotia Capital (USA) Inc. may exceed the estimated value for approximately three months after issuance, as the Bank may partially reimburse investors for hedging costs and structuring expenses no longer expected to be incurred.

Credit Risk and Unsecured Debt Status

The filing emphasizes that the notes are unsubordinated and unsecured debt obligations of The Bank of Nova Scotia, meaning all payments depend entirely on the Bank's creditworthiness and willingness and ability to perform. The Bank disclosed that the notes "are subject to the credit risk of the Bank" and that "any payment on your Notes is subject to the creditworthiness of the Bank." Unlike insured deposits, the notes receive no coverage under the Canada Deposit Insurance Corporation (CDIC) Act, the U.S. Federal Deposit Insurance Corporation (FDIC), or any other government deposit insurance program in Canada, the United States, or any other jurisdiction.

This means investors carry two distinct layers of risk: equity market risk related to the performance of Amazon and Alphabet stock, and counterparty credit risk related to The Bank of Nova Scotia. If the Bank were to experience financial distress or fail, investors could suffer losses even if the reference assets performed favorably. The disclosure does not provide credit ratings for the Bank or comparative information regarding the Bank's borrowing costs for conventional debt securities, leaving investors to assess counterparty credit independently.

Distribution Arrangement and Affiliate Conflict of Interest

The Bank disclosed that Scotia Capital (USA) Inc. (SCUSA), an affiliate of The Bank of Nova Scotia, has agreed to purchase the notes from the Bank at the principal amount and subsequently distribute them to other registered broker-dealers at the same principal amount. Rather than collecting traditional underwriting commissions, the Bank will periodically pay third-party dealers a structuring fee of $4.50 per note with respect to $1.512 billion of the $1.764 billion aggregate principal amount. This arrangement generates total structuring fees of approximately $6.804 million, distributed over the life of the notes.

The SCUSA affiliate also retained rights to use the pricing supplement in secondary market-making transactions in the notes after initial distribution. The filing notes that "unless we, SCUSA or another of our affiliates selling such Notes to you informs you otherwise in the confirmation of sale, this pricing supplement is being used in a market-making transaction." This arrangement creates potential conflicts of interest, as SCUSA's market-making activities and trading decisions may not align with the interests of note holders, particularly regarding secondary market liquidity and pricing.

Investment Restrictions and Settlement Details

The Bank set a minimum investment requirement of $1,000 per investor with integral multiples of $1,000 in excess thereof, limiting participation to investors able to commit capital in minimum thousand-dollar increments. The notes have a CUSIP of 063941CA4 and ISIN of US063941CA48, facilitating identification in settlement and trading systems. The notes are not listed on any U.S. securities exchange or automated quotation system, meaning they trade only in the over-the-counter market through dealers offering secondary market liquidity, which may be limited or sporadic.

Settlement of the notes occurred on July 22, 2026, five business days after the trade date of July 17, 2026. The Bank disclosed that the notes carry an approximate three-year term if not automatically called prior to maturity, with the maturity date of July 20, 2029. The three-year duration means investors' capital remains locked in the derivative structure for an extended period unless early automatic call provisions are triggered, potentially limiting flexibility for portfolio rebalancing or response to changing market conditions.

Risk Factors and Investor Considerations

The Bank's disclosure references "Additional Risks" beginning on page P-11 of the pricing supplement, "Additional Risk Factors Specific to the Notes" in an accompanying product supplement, and "Risk Factors" in accompanying prospectus materials. While the full risk disclosure extends beyond the content provided in this pricing excerpt, the Bank explicitly alerts investors that "investment in the Notes involves certain risks" and directs them to review comprehensive risk sections. The Bank specifically highlights "Risks Relating to Estimated Value and Liquidity," indicating that secondary market trading may be limited and pricing unpredictable.

The structure combines multiple risk dimensions: equity market exposure to technology stocks with no downside protection, counterparty credit risk concentrated in a single issuer, contingent coupon risk related to barrier-level conditions, lack of FDIC or CDIC insurance, absence of dividend or voting participation despite stock linkage, and limited secondary market liquidity. The early call feature caps upside participation, while the loss-of-principal exposure at maturity creates asymmetric risk. These factors collectively make the notes a sophisticated derivative investment unsuitable for investors seeking principal preservation or predictable income streams.

No Securities Exchange Listing and Secondary Market Considerations

The Bank disclosed that the notes "will not be listed on any U.S. securities exchange or automated quotation system," meaning they trade exclusively in the over-the-counter market. Secondary market liquidity depends on dealer willingness to quote prices and execute trades, which may vary considerably depending on market conditions, dealer inventory positions, and investor demand. The Bank's affiliate SCUSA retains discretion to engage in market-making activities but is under no obligation to maintain continuous two-way pricing or guaranteed liquidity.

The absence of exchange listing and the OTC-only trading structure create liquidity risk for investors seeking to sell notes prior to maturity or automatic call. Pricing in the secondary market may differ substantially from the estimated value disclosed at issuance, reflecting changes in market conditions, reference asset volatility, interest rates, credit spreads, and the Bank's funding costs. Investors contemplating early exit should anticipate potential bid-ask spreads, limited dealer inventory, and possible difficulty obtaining firm quotes, particularly during periods of market stress or elevated volatility in technology stocks.