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Markit iBoxx Standardised Total Return Swaps

The Science of Finance

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─ 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

Agenda

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─ 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

Overview

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1. In the TRS format the index buyer receives

the index performance at maturity vs 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 TRS Pay - off Overview

Index Seller

Index Buyer

Final level – initial level

Initial level

3 Month Libor

Markit iBoxx Total Return Swaps

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IBOXHY Index example as of Feb 28th ‘14

Markit iBoxx TRS Pricing Example

** For illustration purpose only

Index buyer: 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

Index Seller: 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 Entry levels Last NAV: 232.09

20-Mar-14 232.40 / 233.35 Funding: 3m$LIBOR Flat

20-Jun-14 233.20 / 234.25

20-Sep-14 233.60 / 234.75

20-Dec-14 233.80 / 235.25

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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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─ 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

Total Return Swap – Uses and Benefits

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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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─ Asset Managers

─ Hedge Funds

─ Insurance Companies

─ Pension/Endowments

─ Private Banks

─ Distributors

─ Retail

─ Bank Credit Portfolio Managers

Market Participants

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Markit iBoxx TRS vs. Other Market Instruments

Instrument Funding

Interest

Rate Risk Liquidity

Diversified

Exposure

Establishing

Size position

Can Be

Shorted?

Tracking

Bond/Loan Market?

Cash Bonds Funded Yes Medium No unless in

a diversified portfolio

Time

consuming

Difficult Yes, if representative

portfolio

ETFs Funded Yes Medium Yes Difficult Yes Yes

Markit

iBoxx TRS

Unfunded Yes Medium Yes Easy Yes Yes

Single-

name CDS

Unfunded No Medium No unless in

a diversified portfolio

Time

consuming

Yes No (basis)

CDS Indices Unfunded No High* Yes Easy Yes No (basis)

* LCDX has demonstrated low liquidity

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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 <GO>

Bank of America

Merrill Lynch

Jean-Baptiste Binz (USD)

+1 646 855 6403

Yannig Loyer (GBP, EUR)

+44 20 7996 6166

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

JIBX <GO>

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

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.

Markit iBoxx Indices

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─ 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

Overview of iBoxx Corporate Bond Indices

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─ 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

Overview of iBoxx Liquid Leveraged Loans Index

Index structure

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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

Economic Sector Market Sector Market Sub-Sector

Financials Financials Banks Banks

Insurance Life Insurance

Nonlife Insurance

Financial Services General Financial

Real Estate

Insurance-wrapped Insurance-wrapped

Non-Financials Oil & Gas 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

Economic Sector Market Sector Market Sub-Sector

Non-Financials (cont) 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

Media Media

Travel & Leisure Travel & Leisure

Telecommunications 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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The Index Structure

Markit iBoxx GBP Corporates Index

Source: Markit Indices Data; February 2014

AAA AA A BBB

Rating Sectors

Financials Utilities TelecommunicationsConsumer Services Industrials Consumer GoodsHealth Care Oil & Gas Basic MaterialsTechnology



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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


— Financials - 4 Industries

— Non-Financials - 9 Sectors, 15 Industries

— Senior

— Subordinated


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The Index Structure

Markit iBoxx EUR Corporates Index


AAA AA A BBB

Rating

Financials Utilities Consumer GoodsIndustrials Telecommunications Basic MaterialsConsumer Services Health Care Oil & GasTechnology

Sectors



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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


— Sectors

— Non-Financials – Industries, Supersectors, Sectors

— Senior

— Subordinated


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The Index Structure

Markit iBoxx USD Domestic Corporates Index


Rating Sectors

AAA AA A BBB

Financials Oil & Gas Consumer ServicesHealth Care Consumer Goods TelecommunicationsIndustrials Basic Materials TechnologyUtilities



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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


BB B CCC

Rating

Financials Industrials Consumer GoodsTelecommunications Construction & Materials Consumer ServicesTechnology Basic Materials Health CareUtilities Media Oil & Gas

Sectors



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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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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 Source: Markit Indices Data; February 2014

Consumer Services Industrials FinancialsOil & Gas Telecommunications Health CareBasic Materials Consumer Goods TechnologyUtilities

Sectors

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Markit iBoxx Liquid Leveraged Loans Index

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

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.

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The Index Structure



Granular Level 1 sectors are aggregated into sector groups.

B BB CCC

Rating

Consumer, Cyclical Industrial Technology

Communications Consumer, Non-cyclical Basic Materials

Utilities Financial Energy

Sectors







Appendix

Markit iBoxx Portfolio Overview

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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 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 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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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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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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Markit iBoxx Rules, documentation,

and methodology are all available

online through our website:

www.markit.com/indices

Index rules

mines data

pools intelligence

surfaces information

enables transparency

builds platforms

provides access

scales volume

extends networks

& transforms business.

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