The Science of Finance. Markit iboxx. Standardised Total Return Swaps

The Science of Finance

Markit iBoxx Standardised Total Return Swaps

Agenda

─ Total Return Swaps Overview ─ Markit iBoxx Indices Used in TRS Contracts ─ Why Total Return Swaps? ─ Total Return Swap Uses and Benefits ─ Market Participants ─ Overview of Markit iBoxx Corporate Bond Indices

─ Overview of the Markit iBoxx index families

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Overview

─ Markit iBoxx Total Return Swaps provide market participants with an effective way to get direct and standardised exposure to Markit’s global iBoxx indices ─ The instruments cover Euro, Sterling as well as USD investment grade and high yield bond and leveraged loan markets ─ Markit iBoxx indices are the market leading fixed income benchmark indices independent, objective and transparent ─ Multi-source pricing and independence guarantee that each bond or loan in the indices is objectively valued and make the indices the optimal underlying for index-based products such as TRS

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Markit iBoxx TRS Pay - off Overview

1. In the TRS format the index buyer receives the index performance at maturity vs 3 month Libor

Final level – initial level Initial level

Index Seller

Index Buyer 3 Month Libor

2. Dealer will quote the index Initial Level (live bid/offer) and the Libor leg spread level 3. The Final Level is the official closing level on the maturity of the swap

Markit iBoxx Total Return Swaps

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Markit iBoxx TRS Pricing Example

IBOXHY Index example as of Feb 28th ‘14 Index buyer:

Index Seller:

Enters into a Jun-20-14 Contract Pays running 3m$LIBOR (Q, ACT/360) Receives (20-June-14 + 3 BD) a final payment equal to (Final Level – 234.25) / 234.25

Receives running 3m$LIBOR (Q, ACT/360) Pays (20-June-14 + 3 BD) a final payment equal to (Final Level – 233.20) / 233.20

TRS expiry 20-Mar-14 20-Jun-14 20-Sep-14 20-Dec-14

Last NAV: 232.09 Funding: 3m$LIBOR Flat

Entry levels 232.40 / 233.35 233.20 / 234.25 233.60 / 234.75 233.80 / 235.25

** For illustration purpose only

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Markit iBoxx Indices Used in TRS Contracts

Index name

ISIN

BBG

iBoxx GBP Corporates

DE0005993174

IYDU

iBoxx EUR Corporates

DE0006301161

QW5A

iBoxx USD Domestic Corporates

GB00B05CZG16

ICPRDOV

iBoxx USD Liquid High Yield Index

GB00B4K07738

IBOXHY

iBoxx EUR Liquid High Yield Index

GB00B57G6H43

IBOXXMJA

iBoxx USD Liquid Leveraged Loans Index

GB00B4Q2XT74

IBXXLLTR

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Why Total Return Swaps?

─ Historically, options for investors to take exposure to diversified corporate cash bond and loans indices has been limited ─ Trading large quantities of individual bonds or loans can be time consuming, expensive and impractical ─ CDS indices do not directly factor in the interest rate components of cash bond indices ─ Cash-CDS basis to contend with ─ With bonds, ETFs and CDS indices, the investor needs to cross bid-offer on the way in and out (vs. expiration) ─ In the case of loans, there has been no other available substitute for CLO hedgers ─ Additionally, LCDX has demonstrated low liquidity

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Total Return Swap – Uses and Benefits

─ Markit iBoxx now offers Total Return Swaps on several iBoxx corporate bond and liquid leveraged loans indices ─ Markit iBoxx corporate bond and loans indices are used widely by credit investors and asset managers to benchmark against them ─ Allow investors to express views on the corporate credit and CLO market in a simple and efficient manner ─ Enable investors to benefit from TRS on iBoxx Leveraged Loans Index in an environment of increasing inflation and CLO issuance ─ Available on Bloomberg and Reuters with daily and historical index data

─ Multi-sourced pricing used for constituents ─ No tracking error and no rolls (rebalancing mechanism built-in)

─ Market weighting, Coupon re-investment

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Total Return Swap – Uses and Benefits (cont.)

Trading

Allows the ability to deploy capital quickly into the cash leveraged loan or cash bond asset class and gain exposure to multiple issuers ; Allows Long / Short exposures depending on market views

Access

Allows investors with restrictions from buying individual corporate loans or bonds the ability to access an asset class; broad based beta and dual access (rates and spreads) to bond and loans markets

Hedging

Allows accounts the ability to short the total returns of the leveraged loan or corporate bond asset class as a hedge or a directional view; Markit iBoxx used to remove beta and isolate alpha

Relative value

Allows investors to express views of Loans vs. HY and IG (iBoxx Loans vs. iBoxx HY and IG)

Operational

Markit iBoxx Indices have fewer documentation and settlement processes (assignments vs. participation) than individual loans or bonds

Tracking

iBoxx Loans is based on pure total loan returns, unlike LCDS/LCDX which is based on CDS on loans

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Market Participants

─ Asset Managers ─ Hedge Funds ─ Insurance Companies ─ Pension/Endowments ─ Private Banks ─ Distributors

─ Retail ─ Bank Credit Portfolio Managers

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Markit iBoxx TRS vs. Other Market Instruments

Instrument

Funding

Interest Rate Risk

Liquidity

Cash Bonds

Funded

Yes

Medium

ETFs

Funded

Yes

Markit iBoxx TRS

Unfunded

Singlename CDS CDS Indices

Can Be Shorted?

Tracking Bond/Loan Market?

No unless in Time a diversified portfolio consuming

Difficult

Yes, if representative portfolio

Medium

Yes

Difficult

Yes

Yes

Yes

Medium

Yes

Easy

Yes

Yes

Unfunded

No

Medium

No unless in Time a diversified portfolio consuming

Yes

No (basis)

Unfunded

No

High*

Yes

Yes

No (basis)

* LCDX has demonstrated low liquidity

Diversified Exposure

Establishing Size position

Easy

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Dealer Contacts Company

Contact

Contact

Bloomberg

BNP Paribas

Alexandre Caniou +44 20 7595 2195

Denis Gardrat +44 20 7595 8533

BNTR

Bank of America Merrill Lynch

Jean-Baptiste Binz (USD) +1 646 855 6403

Yannig Loyer (GBP, EUR) +44 20 7996 6166

Citi Group

Mark Desplinter +1 212 723 6118

Citi Index Trading +1 212 723 3570

Credit Suisse

Charles Kermisch +44 20 7888 6416

Marco Pouw +44 20 7888 1724

JP Morgan

Aymeric Paillat +44 20 7134 0541

Karim Awenat +44 20 7742 4220 Zaheen Mir +1 212 834 4544

Morgan Stanley

Ara Tachdjian +44 20 7677 6877

Adam Schwartz + 1 212 761 2549

Goldman Sachs

Jonathan Grau +1 212-902-0483 Manav Gupta + 44 20 7774-5153

Gerard Gorski +1 212-357-1076 Matthew Reid +44 20 7051-5862

Deutsche Bank

Index and ETF Desk +44 20 7545 2409

JIBX

The capitalised terms used in these materials but not defined in these materials shall have the meanings given to such terms in the iBoxx Bond Index Transaction Standard Terms Supplement. To the maximum extent allowed by law, neither Index Sponsor nor its affiliates, data provider, any Primary Dealer and/or Licensed Dealer make any representation, warranty, condition, undertaking or term, whether express, implied or statutory, regarding or relating to the Index or any data (including any Final Fixing Amount), documentation or materials relating to the Index provided or made available pursuant to such Index ("Materials") including (a) of merchantability or that the Materials are fit for any particular purpose; or (b) as to the accuracy, timeliness or completeness of all or any of such Materials or any of the results to be attained by any party from the use of such Materials. Neither the Index Sponsor nor its affiliates, data provider, any Primary Dealer and/or Licensed Dealer shall in any way be liable to any party whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by any party or its clients arising in respect of, or in connection with (i) any inaccuracy, error or omission, regardless of cause, in any of the Materials or (ii) any advice, opinion, recommendation, guidance, forecast, judgment, publication, conclusion or any course of action (or inaction) of any party or its clients, made or taken in reliance of, or based on, any of the Materials.

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Markit iBoxx Indices

Overview of iBoxx Corporate Bond Indices

─ Markit iBoxx indices are the market leading fixed income indices ─ Markit iBoxx Indices multi-sourced evaluated pricing and rigorous data quality checks provide the clearest view of the market and ensure that each bond in the indices is objectively valued ─ All Markit iBoxx indices are independent, objective and transparent ─ The independence of Markit iBoxx indices from individual banks make them optimal indices for index-based products such as ETFs ─ All Markit iBoxx indices are rebalanced monthly on the last business day of the month after the close of business, eliminating the need to roll the index. ─ The Markit iBoxx consolidated bond prices reflect high quality pricing in the fixed income market. Consolidated Euro and Sterling prices are calculated every minute and disseminated immediately to the market via data vendors

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Overview of iBoxx Liquid Leveraged Loans Index

─ Markit is the premier provider of independent, rules-based, and objective loans indices ─ Markit iBoxx Loans Indices are used effectively for trading, product structuring, and benchmarking ─ The index levels are calculated by incorporating both independent market data from Markit Loan Pricing and the latest loan reference and transaction information from Markit Loan Reference Data ─ iBoxx Liquid Loans Index is rebalanced monthly on the last business day of the month after the close of business, eliminating the need to roll the index

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Index structure

Markit iBoxx Corporates

The Markit iBoxx Corporates Indices represent the investment grade fixed-income Bonds issued by public or private corporations. — Corporate bonds are classified into Financials and Non-Financials and then into their multiple-level economic sectors, according to the issuer’s business scope. — The category insurance-wrapped is added under Financials for corporate bonds whose timely coupon and/or principal payments are guaranteed by a special monoline insurer such as AMBAC or MBIA

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Overview of Markit iBoxx Corporates Sectors

Financials

Economic Sector

Market Sector

Market Sub-Sector

Financials

Banks

Banks

Insurance

Life Insurance Nonlife Insurance

Financial Services

General Financial Real Estate

Non-Financials

Oil & Gas

Insurance-wrapped

Insurance-wrapped

Oil & Gas

Oil & Gas Producers Oil Equipment / Services & Distribution

Basic Materials

Chemicals

Chemicals

Basic Resources

Industrial Metals Mining Forestry & Paper

Industrials

Construction & Materials

Construction & Materials

Industrial Goods & Services

Aerospace & Defence Electronic & Electrical Equipment General Industrials Industrial Engineering Industrial Transportation Support Services

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Overview of Markit iBoxx Corporates Sectors

Non-Financials (cont)

Economic Sector

Market Sector

Market Sub-Sector

Consumer Goods

Automobiles & Parts

Automobiles & Parts

Food & Beverage

Beverages Food Producers

Personal & Household Goods

Household Goods Personal Goods Tobacco

Health Care

Health Care

Pharmaceuticals & Biotechnology

Consumer Services

Retail

Food & Drug Retailers General Retailers

Telecommunications

Media

Media

Travel & Leisure

Travel & Leisure

Telecommunications

Fixed Line Telecommunications Mobile Telecommunications

Utilities

Utilities

Electricity Gas / Water & Multiutilities

Technology

Technology

Software & Computer Services Technology Hardware & Equipment

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Markit iBoxx GBP Corporates Index

The Markit iBoxx GBP Corporates Indices represent the investment grade fixed income market for GBP denominated Corporate bonds. The Index Structure: — Financials - 4 Industries

— Non-Financials - 9 Sectors, 15 Industries — Senior — Subordinated

All bonds need to have an average rating of investment grade. Ratings from Fitch Ratings, Moody’s Investor Service and Standard & Poor’s Rating Services are considered. If more than one agency provides a rating, the average rating is attached to the bond.

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Markit iBoxx GBP Corporates Index

The Index Structure Sectors

Rating

AAA

AA

A

BBB

Financials Consumer Services Health Care Source: Markit Indices Data; February 2014 Technology

Financials Utilities Consumer Services Industrials Financials Health Care Oil & Gas Consumer Services Technology Health Care Technology

Utilities Industrials Oil & Gas

Telecommunications Consumer Goods Utilities Telecommunications Basic Materials Industrials Consumer Goods Oil & Gas Basic Materials

Telecommunications Consumer Goods Basic Materials

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Markit iBoxx EUR Corporates Index

The Markit iBoxx EUR Corporates Indices represent the investment grade fixed income market for EUR denominated Corporate bonds The Index Structure: — Financials - 4 Industries

— Non-Financials - 9 Sectors, 15 Industries — Senior — Subordinated All bonds need to have an average rating of investment grade. Ratings from Fitch Ratings, Moody’s Investor Service and Standard & Poor’s Rating Services are considered. If more than one agency provides a rating, the average rating is attached to the bond.

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Markit iBoxx EUR Corporates Index

The Index Structure Rating

Sectors

AAA

AA

A

BBB

Financials Source: Markit Indices Data; February 2014

Industrials Consumer Services Technology

Financials Utilities Consumer Goods Industrials Telecommunications Basic Materials Consumer Services Health Care Oil & Gas Financials Utilities Technology Industrials Telecommunications Consumer Services Health Care Technology

Utilities Telecommunications Health Care

Consumer Goods Basic Materials Oil & Gas

Consumer Goods Basic Materials Oil & Gas

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Markit iBoxx USD Domestic Corporates Index

The Markit iBoxx USD Domestic Corporate Index represents the investment grade fixed income market for Domestic USD denominated Corporate bonds The Index Structure: — Sectors — Non-Financials – Industries, Supersectors, Sectors — Senior — Subordinated

All bonds need to have an average rating of investment grade. Ratings from Fitch Ratings, Moody’s Investor Service and Standard & Poor’s Rating Services are considered. If more than one agency provides a rating, the average rating is attached to the bond.

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Markit iBoxx USD Domestic Corporates Index

The Index Structure Sectors

Rating

AAA

AA

A

BBB

Financials Health Care Industrials Utilities 2014 Source: Markit Indices Data; February

Financials Health Care Industrials Utilities Oil & Gas Consumer Goods Basic Materials

Oil & Gas Consumer Services Consumer Goods Oil & Gas Telecommunications Financials Consumer Services Basic Technology Health CareMaterials Consumer Goods Telecommunications Industrials Basic Materials Technology Utilities Consumer Services Telecommunications Technology

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Markit iBoxx EUR Liquid High Yield Index

The Markit iBoxx EUR Liquid High Yield Index consists of liquid EUR sub-investment grade rated bonds, selected to provide a balanced representation of the Markit iBoxx EUR Core High Yield Index. The Markit iBoxx EUR Liquid High Yield Index tracks the market for high yield corporate bonds and currently contains approximately 250 corporate bonds with sub-investment grade ratings.

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Markit iBoxx EUR Liquid High Yield Index

The Index Structure Rating

Sectors

BB

B

CCC

Financials Telecommunications Technology Source: Markit IndicesUtilities Data; February 2014

Financials Industrials Consumer Goods Industrials TelecommunicationsFinancials Construction & Materials Consumer Services Telecommunications Construction & Care Materials Technology Basic Materials Health Technology Basic Materials Utilities Media Oil & Gas Utilities Media

Industrials Construction & Materials Basic Materials Media

Consumer Goods Consumer Services Health Care Oil & Gas

Consumer Goods Consumer Services Health Care Oil & Gas

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Markit iBoxx USD Liquid High Yield Index

The Markit iBoxx USD Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe. The index is used as a basis for tradable products, including ETFs. Multi-contributor pricing and support for the index from leading financial institutions ensure that the index is a tradable reflection of the corporate high yield bond market.

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Markit iBoxx USD Liquid High Yield Index

Sectors Maximum age

5 years

Rating

Each bond assigned an index rating based on the highest rating from Fitch, Moody’s and S&P. Only bonds with a rating below investment grade are eligible. Split-rates bonds and bonds considered in default by one or more agencies are excluded. Bonds previously split rated or investment grade rated need to be rated sub-investment grade for 3 months before becoming eligible for inclusions

Issuer size

$1 billion

Issuer cap

3%

Lockout period

3 months

Minimum run

6 months

Consumer Services Oil & Gas Basic Materials Utilities

Industrials Telecommunications Consumer Goods

Financials Health Care Technology

Source: Markit Indices Data; February 2014

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Markit iBoxx Liquid Leveraged Loans Index

The Markit iBoxx Liquid Leveraged Loans Index consists of liquid senior loans, selected to provide a balanced representation of the broad USD liquid loans universe. The index is used as a basis for tradable products, including ETFs. Highland iBoxx Senior Loan ETF tracks the performance of the index. Multi-contributor pricing and support for the index from leading financial institutions ensure that the index is a tradable reflection of the corporate high yield bond market.

Number of Bonds

100

Spread

Rated loans must have a minimum current spread of 125 basis points over LIBOR to be eligible for the index

Time to maturity

Minimum initial time to maturity of 1 year is required for potential constituents.

Facility level capping

2%

Issuer level capping

5%

Industry level capping

15%

Liquidity

Liquidity scores are calculated based on Sources Quote, Frequency of Quotes, Number of Sources with Size, Bid-Offer spreads, Average quote size, Movers count

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Markit iBoxx Liquid Leveraged Loans Index

The Index Structure Rating

Sectors

B

BB

CCC

Consumer, Cyclical Communications Utilities

Consumer, Cyclical Industrial Technology Consumer, Cyclical Industrial Communications Consumer, Non-cyclical Basic Materials Communications Consumer, Non-cyclical Utilities Financial Energy Utilities Financial Industrial Consumer, Non-cyclical Financial

Source: Markit Indices Data; February 2014 Granular Level 1 sectors are aggregated into sector groups.

Technology Basic Materials Energy

Technology Basic Materials Energy

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Appendix

Markit iBoxx Portfolio Overview

Markit iBoxx Indices

Markit iBoxx EUR Indices The Markit iBoxx EUR Index family is designed to reflect the performance of EUR denominated investment grade debt. The index rules aim to offer a broad coverage of the EUR bond universe, whilst upholding minimum standards of investability and liquidity. As of 31 December 2011, the index tracks more than 2500 bonds with around EUR 7.1 trillion worth of debt. The indices are an integral part of the global Markit iBoxx index families, which provide the marketplace with accurate and objective indices by which to assess the performance of bond markets and investments. The Markit iBoxx EUR Index family is split into five major indices: Overall, Euro zone, Collateralized, Corporates, and Sub-sovereigns. These are further broken down into sub-indices based on ratings, maturities and sectors. All iBoxx indices are multi-source price. Prices for the bonds in the Markit iBoxx EUR indices are sourced from a number of leading market makers and other sources. The received quotes are subject to a rigorous quality control process which excludes stale or off-market prices, and the remaining quotes that pass the quality control are consolidated to the index price.

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Markit iBoxx Indices

Markit iBoxx GBP Indices The Markit iBoxx GBP Index family is designed to reflect the performance of GBP denominated investment grade debt. The index rules aim to offer a broad coverage of the Sterling bond universe, whilst upholding minimum standards of investability and liquidity. As of 31 December 2011, the index tracks more than 1000 bonds with around GBP 1.5 trillion worth of debt. The indices are an integral part of the global Markit iBoxx index families, which provide the marketplace with accurate and objective indices by which to assess the performance of bond markets and investments. The Markit iBoxx GBP Index family is split into five major indices: Overall, Gilts, Collateralized, Corporates, and Sovereigns & Sub-sovereigns. These are further broken down into sub-indices based on ratings, maturities and sectors. All iBoxx indices are multi-source price. Prices for the bonds in the Markit iBoxx GBP indices are sourced from a number of leading market makers and other sources. The received quotes are subject to a rigorous quality control process which excludes stale or off-market prices, and the remaining quotes that pass the quality control are consolidated to the index price

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Markit iBoxx Indices

Markit iBoxx USD Indices The Markit iBoxx USD Index family is designed to reflect the performance of USD denominated investment grade debt. The index rules aim to offer a broad coverage of the USD bond universe, whilst upholding minimum standards of investability and liquidity. As of 31 December 2011, the index tracks more than 4000 bonds with around USD 12.5 trillion worth of debt. The indices are an integral part of the global Markit iBoxx index families, which provide the marketplace with accurate and objective indices by which to assess the performance of bond markets and investments. The Markit iBoxx USD Index family is split into three major indices: Overall, Domestic and Eurodollar. These are further broken down into sub-indices based on sector, rating and maturity. All iBoxx indices are multi-source priced. Prices for the bonds in the Markit iBoxx USD indices are sourced from a number of leading market makers and other sources. The received quotes are subject to a rigorous quality control process which excludes stale or off-market prices, and the remaining quotes that pass the quality control are consolidated to the index price

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Markit iBoxx Indices

Markit iBoxx USD Liquid High Yield Index The Markit iBoxx USD Liquid High Yield Index is designed to reflect the performance of USD denominated high yield corporate debt. The index rules aim to offer a broad coverage of the USD high yield liquid bond universe and have been designed to provide a suitable basis for OTC, exchange-traded derivatives and Exchange Traded Funds (ETFs).

The indices are an integral part of the global Markit iBoxx index families, which provide the marketplace with accurate and objective indices by which to assess the performance of bond markets and investments. The index is market-value weighted with an issuer cap of 3%. The Markit iBoxx USD Liquid High Yield Index is rebalanced once a month at the month-end (the “rebalancing date”) and consists of sub-investment grade USD denominated bonds issued by corporate issuers from developed countries and rated by at least one of three rating services: Fitch Ratings, Moody’s Investors Service, or Standard & Poor’s Rating Services. The bonds in the Markit iBoxx USD Liquid High Yield Index must meet all the criteria described below as of the close of business three business days prior to the rebalancing date provided that the relevant bond data can be verified, at Markit Indices Limited’s sole discretion, as of such date (“bond selection cut-off date”). The new index composition becomes effective on the first business day of the next month (the “composition month”).

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Markit iBoxx Indices

Markit iBoxx Liquid Leveraged Loans Index The Markit iBoxx USD Liquid Leveraged Loan Index is a subset of the benchmark Markit iBoxx USD Leveraged Loan Index (USD LLI). The index is designed to track the broader loans market with a smaller subset of index constituents, providing a suitable basis for derivatives and Exchange Traded Funds (ETFs).

Proper representation of the liquid loan market is ensured by the minimum size requirements, sophisticated liquidity measures and weighting caps built into the index methodology. Wide range of analytical values and three sub-indices allow for sophisticated performance measurement .

Reference loan data is provided by Markit WSOData which represents up-to-date reference and transactional information on over 4,000 leveraged loans. Markit WSOData is accurately maintained in real-time by requiring an executed Credit Agreement for each loan, including subsequent amendments and receives over 7.5 million agent notices per year. This unparalleled access to loan information makes Markit WSOData the only accurate, up-to-date, comprehensive database for leveraged loan information

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Index rules

Markit iBoxx Rules, documentation, and methodology are all available online through our website: www.markit.com/indices

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