RISK FACTORS RELATING TO THE CITI FLEXIBLE ALLOCATION 6 EXCESS RETURN INDEX

Transcription

1 RISK FACTORS RELATING TO THE CITI FLEXIBLE ALLOCATION 6 EXCESS RETURN INDEX The following discussion of risks relating to the Citi Flexible Allocation 6 Excess Return Index (the Index ) should be read together with the Description of the Citi Flexible Allocation 6 Excess Return Index (the Index Description ), available here ( which defines and further describes a number of the terms and concepts referred to below. The Signals may not accurately predict the future performance of the Core Portfolio, in which case the methodology underlying the Index may not be successful and the level of the Index may decline. Each month, the Index will allocate exposure either to the Core Portfolio or to the Reserve Portfolio, depending on the Signals described in the Index Description. This monthly allocation methodology is premised on the assumption that, on each monthly Selection Day, these Signals will provide an accurate indicator of the performance of the Core Portfolio over the next month. In other words, the methodology assumes that the Core Portfolio is likely to appreciate over the next month if, as of a monthly Selection Day, (i) the Core Portfolio has been trending upward over a look-back period of between 20 and 120 Index Business Days up to and including that Selection Day and (ii) the market perception of risk measured by the Citi RAI is low relative to levels measured over the preceding year. This assumption may not prove correct for the simple reason that it is impossible to predict the future, as well as for the reasons more fully described below. If it does not prove correct, the allocation methodology underlying the Index may not be successful and the Index may experience significant declines. The Index s Signal-based allocation methodology has significant limitations. The Index s allocation methodology is based on two Signals measured on each monthly Selection Day: one based on the trend of the Core Portfolio (the Trend Signal ) and one based on the Citi RAI (the RAI Signal ). Limitations of the Trend Signal The Trend Signal is based on the assumption that if, as of a monthly Selection Day, the Core Portfolio has been trending upward over the applicable Trend Measurement Period of between 20 and 120 Index Business Days, it is likely to continue to trend upward over the next month. There is no guarantee that this will be the case, however. The Trend Signal is subject to a number of important limitations, including the following: Future conditions may differ from past conditions. The fact that the Core Portfolio may have generally appreciated over the Trend Measurement Period does not mean that it will continue to appreciate over the next month, because the conditions that may have caused that appreciation may no longer exist. Markets may be efficient. Even if future conditions do not differ materially from past conditions, past appreciation may not necessarily be an indicator of future appreciation. The efficient market hypothesis, a well-known theory in academic financial literature, states that the market is efficient and that current asset prices therefore reflect all available relevant information. If true, the efficient market hypothesis implies that any perceived historical trend in the level of the Core Portfolio should not be an accurate predictor of the Core Portfolio s future performance. Time lag. The Trend Signal suffers from a time lag, which may cause it to be late both in signaling an allocation to the Core Portfolio and in signaling an allocation away from the Core Portfolio. The Index determines the trend of the Core Portfolio based on its levels over a Trend Measurement Period of between 20 and 120 Index Business Days preceding (and including) a Selection Day. If the trend in the performance of the Core Portfolio changes, it may be a significant period of time before the time-weighted average level of the Core Portfolio reflects the change. The fact that the trend is measured only once per month further adds to the time lag. As a result of this time lag, the Trend Signal may signal an allocation to the Core Portfolio long after the Core Portfolio begins to decline, potentially resulting in a significant decline in the level of the Index over a significant period of time. Alternatively, the Trend Signal may not identify the Core Portfolio as being in an upward trend until long after the upward trend began. By the time the Trend Signal finally signals an allocation to the Core Portfolio, the trend may already have run its

2 course, and a period of decline may even have already begun. In other words, because the Trend Signal may signal an allocation to the Core Portfolio after it has already been trending upward for a significant period of time, the Trend Signal may effectively reflect a buy high strategy; and because the Trend Signal may signal an allocation away from the Core Portfolio only after it has already been trending downward for a significant period of time, it may effectively reflect a sell low strategy. This combination of buying high and selling low may result in poor Index performance. Measurement error. Even if the historical trend in the level of the Core Portfolio does prove to be a predictor of the future performance of the Core Portfolio, the way in which the Index measures the trend may not effectively capture it. The Index uses a fixed rule for determining whether the Core Portfolio is deemed to be in an upward trend or a downward trend: if the time-weighted average level of the Core Portfolio is greater than or equal to its simple average over the Trend Measurement Period, the Core Portfolio is deemed to be in an upward trend; and otherwise, the Core Portfolio is deemed to be in a downward trend. Any fixed rule for determining whether the Core Portfolio is in an upward or downward trend will necessarily be a blunt tool and, accordingly, may have a high rate of inaccuracy. Following this rule may cause the Index to identify the Core Portfolio as upward trending when it is not in an upward trend based on its most recent levels. In fact, the Index may identify the Core Portfolio as upward trending when it is in the midst of a significant decline, based on the most recent levels. Moreover, the Index may identify the Core Portfolio as downward trending, when it is in fact trending upward based on its most recent levels. The Trend Signal is particularly likely to incorrectly identify the trend when there is significant volatility in the levels of the Core Portfolio. The particular rules by which the Index operates may produce a lower return than other rules that could have been adopted for the identification of the trend in the level of the Core Portfolio. There is nothing inherent in the particular methodology used by the Index that makes it a more or less accurate predictor of a trend. It is possible that the rules used by the Index may not identify the trend as effectively as other rules that might have been adopted, or at all. Absence of trends. Trend-based methodologies perform poorly in volatile or sideways markets, where no clear trend is established. Even where no clear trend exists, the Index will interpret the levels of the Core Portfolio over the applicable Trend Measurement Period as indicating a trend one way or the other, and this interpretation may be erroneous. Whipsaws. Trend-based methodologies are particularly subject to whipsaws, which occur when the price of an asset that has been trending upward suddenly drops significantly. For example, if the Index identifies the Core Portfolio as being in an upward trend (and the Citi RAI indicates a market perception of a low level of risk), the Index will allocate its exposure to Core Portfolio. If, after being allocated exposure, the Core Portfolio suddenly declines significantly, the level of the Index would also decline significantly. Mean reversion. The Trend Signal is particularly likely to be ineffective if the Core Portfolio exhibits mean reversion tendencies. Mean reversion is the theory that asset prices tend to fluctuate around, and revert to, a particular level (the mean ) over time. If the Core Portfolio exhibits a high degree of mean reversion, its level may increase for a sufficient period of time to cause the Trend Signal to identify it as being in an upward trend, but then rapidly fall back toward its long-term mean after the Index allocates exposure to it, leading to declines in the level of the Index. Limitations of the RAI Signal The RAI Signal is based on the assumption that the level of risk perceived by the market as of a monthly Selection Day, as measured by the Citi RAI, is an indicator of the likelihood of appreciation in the Core Portfolio over the next month. There is no guarantee that this will be the case, however. The RAI Signal is subject to significant limitations, including the following: Risk mismatch. The risk measured by the Citi RAI may bear little relation to the risks that are relevant to the Core Portfolio. The Citi RAI is calculated based on an equally weighted average of the six RAI Components, which reflect market perceptions of risk in six different financial markets. None of the six RAI Components relates specifically to the Core Portfolio. Only one of the six RAI Components even 2

3 relates to equity securities, the largest asset class that is tracked by the Core Portfolio. The market perception of risk relating specifically to the Core Portfolio may be significantly higher or lower than the market perception of risk reflected in the six financial markets measured by the Citi RAI. Relative rather than absolute risk. The level of the Citi RAI does not provide an absolute measure of the market perception of risk, but rather a relative measure based on a comparison of the current levels of the RAI Components to their levels over the preceding year. A high or low level of the Citi RAI does not necessarily mean that the market perception of risk in the six selected financial markets is high or low, only that it is high or low relative to its level over the preceding year. If the market perception of risk remains relatively constant (whether high or low) for an extended period of time, the Citi RAI will be especially prone to large swings, because a relatively small change in the level of the relevant Reference Measure may result in a relatively large change in how that level ranks relative to levels measured over the previous year. In this circumstance, the Citi RAI will be particularly unlikely to provide an accurate indicator of whether the level of risk perceived in the market is high or low. The Citi RAI may not be indicative of market perceptions of risk. The level of the Citi RAI is simply the average level of each of the six RAI Components. The Index interprets this level as providing an indication of the general market perception of risk. However, this interpretation may or may not be a fair one. The Citi RAI is simply a mathematical calculation, and it may not indicate anything about the general market perception of risk. Three of the RAI Components measure levels of volatility implied in selected options markets (relating to interest rates, U.S. equities and foreign exchange rates relative to the U.S. Dollar). The fact that these implied volatilities may be greater on any particular day than they have generally been over the previous year does not necessarily mean that the market perceives a high level of risk in the relevant markets. Volatility is not necessarily directional; in other words, markets may be volatile in either an upward or a downward direction. Moreover, volatility (especially in interest rates and foreign exchange rates) may be driven by factors wholly unrelated to market perceptions of the level of risk of risky assets. For example, interest rates may be volatile because of uncertainty about fiscal and monetary policy, and foreign exchange rates may be volatile as a result of government actions. The factors that affect the RAI Components may be wholly unrelated to general market perceptions of risk, which may cause the Citi RAI to be a poor indicator of the market perception of risk. Inaccurate market perceptions. Even if the Citi RAI accurately captures the market perception of risk associated with the Core Portfolio, that market perception may be wrong and may change significantly over the course of a month. Although the Citi RAI is intended to be a forward-looking indicator, it is nevertheless based only on current market expectations, and current expectations may in turn be influenced by past performance. The market may perceive a low level of risk associated with the Core Portfolio as of a monthly Selection Day but the Core Portfolio may nevertheless decline significantly over the next month. Measurement error. The Index applies a fixed set of rules to determine and interpret the level of the Citi RAI. There is nothing inherent about the particular rules used by the Index that makes them any more likely to identify circumstances in which the Core Portfolio is likely to appreciate than any other rules that could have been used. For example, the Citi RAI could have been based on different measures than the six financial indicators represented by the RAI Components, or it could have been calculated based on a comparison against historical levels over a period longer or shorter than one year, or a Citi RAI level higher or lower than 50% could have been used as the dividing line between a high and low market perception of risk. It is possible that the rules used by the Citi RAI may not identify the market perception of risk or the likelihood of appreciation in the Core Portfolio as effectively as other rules that might have been adopted, or at all. Limited information about the Reference Measures underlying the RAI Components. The Reference Measures underlying the RAI Components are based on indices or calculations that are published by third parties. The Index Sponsor has no affiliation with those third-party publishers. All information about the Reference Measures contained above in the Index Description is based on publicly available information and has not been independently verified by the Index Sponsor. If you are considering an investment linked to the Index, you should make your own investigation into the Reference Measures. The Index Sponsor 3

4 can give no assurance that the third-party indices and calculations underlying the Reference Measures will accurately represent the financial markets that they purport to represent. Several of the Reference Measures are based on indices or calculations about which there is limited public information. Accordingly, particularly with respect to these indices or calculations, there is a heightened risk that they will fail to accurately represent the financial markets that they purport to represent or that they will otherwise provide values that are different from what may be expected. The Index is an excess return index, which means that an annual rate equal to the 3-month U.S. Dollar LIBOR rate will be deducted from the performance of the Strategic Portfolio. The performance of the Strategic Portfolio will not fully reflect the performance of the underlying Constituents. Instead, the performance of the Strategic Portfolio will reflect the performance of the underlying Constituents minus an annual rate equal to the 3-month U.S. Dollar LIBOR rate. Accordingly, the Index will appreciate only to the extent that the performance of the Strategic Portfolio exceeds the 3-month U.S. Dollar LIBOR rate (subject to the degree of exposure that the Index has to the Strategic Portfolio). If the Constituents in the Strategic Portfolio do not appreciate sufficiently, the deduction of the 3-month U.S. Dollar LIBOR rate from the performance of the Strategic Portfolio may cause the Index to decline even if the Constituents appreciate. Furthermore, if the Constituents in the Strategic Portfolio depreciate, the Index Level of the Index will decline by more than that depreciation, as the deduction of the 3-month U.S. Dollar LIBOR rate will add to the decline. The Index will be adversely affected by an increase in short-term interest rates because of the excess return feature. If there is an increase in short-term interest rates in the United States, as represented by the 3-month U.S. Dollar LIBOR rate, the Index will be adversely affected. This is because, due to the Index s excess return feature, the 3- month U.S. Dollar LIBOR rate is deducted from the performance of the Strategic Portfolio. The Core Portfolio is composed of risky assets. The Core Portfolio is a basket composed of equity indices, commodity futures indices and a U.S. Treasury bond index. The equity indices are concentrated in the United States, spanning large-capitalization, mid-capitalization and small-capitalization U.S. stocks, including stocks in the real estate sector, but also include developed and emerging market international equities. The equity indices compose 70% of the Core Portfolio, with 20% of the remainder allocated to U.S. Treasuries and 10% allocated to commodities. The indices that make up the Core Portfolio are risky indices and are subject to declines. The Core Portfolio is particularly exposed to risks associated with U.S. stocks, as 50% of the Core Portfolio is composed of U.S. equity indices. Included within those indices is a significant allocation to mid-capitalization and small-capitalization stocks, which may be more volatile and subject to heightened risks as compared to largecapitalization stocks. U.S. stocks are risky assets and subject to declines. The Core Portfolio also has exposure to international equities, including both developed and emerging market equities. International equities, and especially emerging market equities, may be subject to greater volatility and heightened risks as compared to U.S. equities. In addition to risk of declines in the stocks underlying these indices, these indices are subject to risks associated with currency exchange rate fluctuations. In general, if the U.S. Dollar appreciates against the currencies in which the stocks included in those indices trade, the levels of those indices would be expected to decline for that reason alone. The Core Portfolio allocates 10% of its exposure to commodity futures indices, with 5% allocated to gold futures alone. Commodity futures prices tend to be highly volatile and difficult to predict and may be significantly influenced by actions of governments or speculators. Indices that track commodity futures prices are also subject to a phenomenon known as negative roll yield, which refers to the tendency of commodity futures prices to decline solely as a result of the passage of time. Accordingly, even if spot prices for the underlying commodities remain stable, an index that tracks the performance of futures contracts referencing the underlying commodities would tend 4

5 to decline over time. The spot prices of the underlying commodities would need to increase significantly in order for an index tracking commodity futures contracts to appreciate. Although the indices that compose the Core Portfolio represent a number of different asset classes and markets, that diversification is no guarantee against declines of the Core Portfolio. Particularly in broad market downturns, even a diversified portfolio may experience significant losses. The Core Portfolio is composed of Constituents in a number of different markets and asset classes, which may offset each other. The Core Portfolio is composed of U.S. and international equity indices, commodity futures indices and a U.S. Treasury bond index. These indices represent very different markets and may perform differently from each other over time. If the levels of some indices appreciate while others decline, the declining indices will offset the gains of the appreciating indices, reducing the performance of the Core Portfolio. Alternatively, the indices that compose the Core Portfolio may become correlated in decline, so that the decline in some indices compounds the decline in the others. The Signal-based methodology may be overly conservative, resulting in exposure to the Reserve Portfolio at times when the Core Portfolio is experiencing significant appreciation and causing the Index to underperform the Core Portfolio. The Index will have hypothetical exposure to the Core Portfolio for a given month only if both Signals are pointing in the right direction. This condition may not be met even at a time when the Core Portfolio is appreciating significantly. For example, the Trend Signal may indicate a sharp upward trend in the Core Portfolio, and that trend may continue for a significant period of time, but the Index will not allocate exposure to the Core Portfolio unless the RAI Signal also indicates a market perception of a low level of risk. If the sharp upward trend corresponds with an increase in the implied volatilities measured by one or more of the RAI Components, the RAI Signal may indicate a high market perception of risk at that time, and the Index will have hypothetical exposure to the Reserve Portfolio, and not to the Core Portfolio. The Index may allocate its exposure to the Reserve Portfolio for an extended period of time. The Reserve Portfolio is intended to be a lower-risk, lower-reward alternative to the Core Portfolio. If the Index is allocated to the Reserve Portfolio at a time when the Core Portfolio is experiencing significant appreciation, the Index may significantly underperform the Core Portfolio. The Index s allocation methodology may not be successful if the Core Portfolio and the Reserve Portfolio decline at the same time. The Index s allocation methodology is premised on the Core Portfolio and the Reserve Portfolio being either uncorrelated or inversely correlated. The thesis underlying the allocation methodology is that, if the Index determines that the Core Portfolio is likely to decline over the next month, the Index may avoid losses and even potentially generate positive returns over that month by allocating exposure to the Reserve Portfolio instead of the Core Portfolio. If, however, the Reserve Portfolio also declines over that next month, then the Index will decline regardless of whether its exposure is allocated to the Core Portfolio or the Reserve Portfolio. If the Core Portfolio and the Reserve Portfolio tend to decline at the same time in other words, if they prove to be positively correlated the Index s allocation methodology will not be successful, and the Index may experience significant declines. The Reserve Portfolio is not necessarily a low-risk alternative to the Core Portfolio and may experience significant declines. The Index is based on the assumption that the Reserve Portfolio will be a lower-risk, lower-reward alternative to the Core Portfolio that may be used to generate a modest Index return at times when the Core Portfolio is in decline. However, the level of the Reserve Portfolio is subject to market fluctuations just as the Core Portfolio is, and there is no assurance that the Reserve Portfolio will not prove to be as risky or even riskier than the Core Portfolio. The 5

6 Reserve Portfolio may experience significant declines, and if the Index has exposure to the Reserve Portfolio at the time of any such decline, the Index will be adversely affected. The Reserve Portfolio allocates 25% of its exposure to gold futures. Gold futures prices may be highly volatile, and a significant decline in gold prices may cause a significant decline in the Reserve Portfolio. Gold futures prices are also subject to the negative roll yield phenomenon described above under The Core Portfolio is composed of risky assets, which may cause an index on gold futures to decline even when spot prices are stable. Moreover, although U.S. Treasury bonds themselves are generally viewed as safe assets, a U.S. Treasury bond index tracks the value of U.S. Treasury bonds, which may be subject to significant fluctuations and declines. In particular, the value of U.S. Treasury bonds is likely to decline if there is a general rise in interest rates. A general rise in interest rates is likely to lead to particularly large losses on the Reserve Portfolio because, in addition to a reduction in value of U.S. Treasury bonds, the rise in the 3-month U.S. Dollar LIBOR rate will result in a greater excess return deduction. The Index s volatility targeting feature may result in a significant portion of its exposure being hypothetically allocated to uninvested cash, on which no interest or other return will accrue. The Index s volatility targeting feature may cause it to underperform the Strategic Portfolio, particularly in bull markets. The level of exposure the Index has to the Strategic Portfolio on any Index Business Day will depend on the level of volatility of the Strategic Portfolio measured over the period of 21 Index Business Days ending two Index Business Days prior to such Index Business Day. If the measured volatility exceeds the Index s Volatility Target (on an annualized basis), that Index will have less, and potentially significantly less, than 100% exposure to the Strategic Portfolio (subject to the volatility buffer). If the Index has less than 100% exposure to the Strategic Portfolio, the difference between 100% and the level of its exposure to the Strategic Portfolio will be hypothetically allocated to uninvested cash, on which no interest or other return will accrue. Historically, the volatility of the Core Portfolio has often significantly exceeded the Volatility Target of the Index, even at times of appreciation in the Core Portfolio. If the Index has less than 100% exposure to the Core Portfolio at a time when the Core Portfolio is appreciating, the Index will not fully participate in that appreciation. For example, if the Index has 50% exposure to the Core Portfolio and the Core Portfolio appreciates by 5%, the Index will appreciate by only 2.5% (less the excess return deduction and notional costs). The performance of the Index will be adversely affected by the deduction of notional costs. Certain notional costs are deducted in calculating the level of the Index. The specific amounts of each of these notional costs are set forth in the Index Description. The cumulative effect of these notional costs may be significant and will adversely affect the performance of the Index. Even if the methodology underlying the Index is successful, the level of the Index will decline unless it is sufficiently successful to overcome the cumulative effect of these notional costs. The magnitude of these notional transaction costs over any given time period will be influenced by a number of factors. One important factor may be the degree of volatility experienced by the Constituents in the Strategic Portfolio. In general, greater volatility of the Constituents in the Strategic Portfolio is likely to lead to greater notional transaction costs because greater volatility may result in greater weight changes at each monthly rebalancing, resulting in greater Rebalancing Costs, and may also result in more frequent exposure adjustments pursuant to the volatility targeting feature, resulting in greater Volatility Target Costs. In addition, greater volatility may lead to more frequent reversals in the Trend Signal from the prior month, which may result in the more frequent incurrence of Portfolio Switch Costs. Frequent reversals in the Trend Signal may also result from choppy markets that do not exhibit a consistent long-term trend. A lack of correlation among the Constituents may also lead to greater Rebalancing Costs, since it may result in greater dispersion of the weights of the Constituents over each monthly period, requiring a greater change in weights to bring each Constituent back to its target weight. Since March 31, 1997, to the date of this document, the total annual notional transaction cost experienced by the Index (based on historical data since July 18, 2014 and hypothetical back-tested data for the period prior to that date) has varied and has been as high as 0.76% per annum. The total annual notional transaction costs experienced by the Index in the future will depend on future conditions and may exceed that level. In addition, notional exposure costs 6

7 will accrue at a rate of 0.23% per annum at any time when the Core Portfolio is the Strategic Portfolio and at a rate of 0.225% per annum at any time when the Reserve Portfolio is the Strategic Portfolio. The Index may not achieve its Volatility Target. The Index seeks to limit volatility by allocating away from the Strategic Portfolio (and hypothetically into cash) on any Index Business Day on which the volatility of the Strategic Portfolio measured over the applicable 21 Index Business Day period is greater than its Volatility Target (subject to the volatility buffer). Because of this 21 Index Business Day measurement period, if the volatility of the Strategic Portfolio suddenly and significantly increases, it may be a significant period of time before the increase will be reflected to a meaningful degree in the volatility measurement and, consequently, before the exposure to the Strategic Portfolio can be reduced to account for the increased volatility. The Index level may experience significant declines for a significant period of time before any increase in volatility is reflected in the realized volatility measurement and the exposure to the Strategic Portfolio is reduced. The Index has limited historical information. The Index launched on July 18, Accordingly, the Index has limited historical data, and that historical data may not be representative of the Index s potential performance under other market conditions. Because the Index is of recent origin with limited performance history, an investment linked to the Index may involve a greater risk than an investment linked to one or more indices with an established record of performance. A longer history of actual performance may have provided more reliable information on which to assess the validity of the Index s Signalbased strategy as the basis for an investment decision. However, any historical performance of the Index is not an indication of how the Index will perform in the future. The Index Sponsor may enter into hedging transactions with the issuer of any investment product linked to the Index, which may cause the Index Sponsor to have a conflict of interest with investors in any such investment product. From time to time, one or more institutions may issue investment products linked to the Index. In that event, the Index Sponsor or its affiliates may enter into an agreement with the issuer of that investment product to hedge the issuer s obligations under that investment product, and the Index Sponsor or its affiliates may realize a profit in consideration for assuming the risks inherent in doing so. The costs to the issuer of entering into this hedging transaction, including the expected profits of the Index Sponsor or its affiliates, may adversely affect the economic terms of any investment product linked to the Index and may reduce its value. Furthermore, in connection with such hedging activities, the Index Sponsor or its affiliates may buy or sell the assets underlying the Constituents or derivative instruments linked to such assets or the Constituents. These hedging activities could affect the prices of the underlying assets and the levels of the Constituents in a way that adversely affects the performance of the Index. The Index Sponsor s business activities may cause it to have interests that are adverse to those of any investor in an investment product linked to the Index. The Index Sponsor and its affiliates are part of a global financial institution that, in the ordinary course of its business, may take actions that conflict with or adversely affect the interests of investors in any investment product linked to the Index. The Index Sponsor or its affiliates may publish research, express opinions or make recommendations from time to time relating to the financial markets or any Constituent or any asset underlying any Constituent. Any research, opinions or recommendations provided by the Index Sponsor or its affiliates may influence the price of any underlying asset and the level of any Constituent, and they may be inconsistent with an investment linked to the Index. The Index Sponsor or its affiliates may have published or may publish research or other opinions that call into question the investment view implicit in the Index. Any research, opinions or recommendations expressed by the Index Sponsor or its affiliates may not be consistent with each other and may be modified from time to time without notice. Investors in an investment product linked to the Index should make their own independent investigation of the Constituents and the merits of investing in an investment product linked to the Index. 7

8 The Index Sponsor or its affiliates may also trade the assets underlying the Constituents or derivative instruments linked to the Constituents or any such underlying assets as a regular part of their trading businesses. As with the hedging activity described above, this trading activity may affect the prices of the underlying assets and the levels of the Constituents in a way that adversely affects the performance of the Index. Furthermore, the Index Sponsor or its affiliates may currently or from time to time engage in business with the issuer of any shares underlying a Constituent. These activities may include extending loans to, making equity investments in or providing advisory services to any such issuer, including merger and acquisition advisory services. In the course of this business, the Index Sponsor or its affiliates may acquire non-public information about any such issuer and will not disclose any such information to any investor in any investment product linked to the Index. If the Index Sponsor or any of its affiliates is or becomes a creditor of any such issuer or otherwise enters into any transaction with any such issuer in the course of its business, the Index Sponsor or such affiliate may exercise remedies against that issuer without regard to the impact on the performance of the Index. Hypothetical back-tested Index performance information is subject to significant limitations. All information regarding the performance of the Index prior to July 18, 2014 is hypothetical and back-tested, as the Index did not exist prior to that time. It is important to understand that hypothetical back-tested Index performance information is subject to significant limitations, in addition to the fact that past performance is never a guarantee of future performance. In particular: The Index Sponsor developed the rules of the Index with the benefit of hindsight that is, with the benefit of being able to evaluate how the Index Rules would have caused the Index to perform had it existed during the hypothetical back-tested period. The fact that the Index generally appreciated over the hypothetical back-tested period may not therefore be an accurate or reliable indication of any fundamental aspect of the Index methodology. The hypothetical back-tested performance of the Index might look different if it covered a different historical period. The market conditions that existed during the historical period covered by the hypothetical back-tested Index performance information in the Index Description is not necessarily representative of the market conditions that will exist in the future. The hypothetical back-tested Index levels have been calculated based on the published historical levels of the Constituents of the Core Portfolio and the Reserve Portfolio and of the Reference Measures underlying the Citi RAI, applying the Index methodology substantially as described in the Index Description. However, prior to July 7, 2005, due to the unavailability of certain Reference Measures underlying the Citi RAI during the earlier period, the Citi RAI has been calculated using certain proxy Reference Measures that are different from the Reference Measures on which the Citi RAI is currently based. Although the Index Sponsor has attempted to select proxy Reference Measures that are comparable to the current Reference Measures, important differences exist between the proxy Reference Measures and the current Reference Measures. Accordingly, the hypothetical back-tested Index levels for the period prior to July 7, 2005 are likely to differ from the hypothetical back-tested Index levels that would have been calculated had the current Reference Measures underlying the Citi RAI been available, and such difference may have been significant. For more detail about the use of proxy Reference Measures prior to July 7, 2005 as well as other assumptions made in calculating the hypothetical back-tested Index levels, please see Important Information Regarding Back-Tested Index Performance Data, available here ( It is impossible to predict whether the Index will rise or fall. The actual future performance of the Index may bear little relation to its historical or hypothetical back-tested levels. Adjustments to any of the Constituents could adversely affect the level of the Index. The sponsors of the Constituents may add, delete or substitute the components that underlie the Constituents or make other methodological changes to the Constituents that could result in an adverse effect on the performance of 8

9 the Constituents. The sponsors of the Constituents are not involved with the Index in any way. In addition, the sponsors of the Constituents may discontinue or suspend calculation or publication of the Constituents at any time. In such an event, the Index Calculation Agent will have the sole discretion to substitute a successor Constituent that is comparable to the discontinued Constituent and make adjustments to the Index Rules as it determines appropriate to account for such change, or, in certain circumstances, suspend the calculation, publication and dissemination of the Index either temporarily or permanently. 9