Introducing the Citi Australian Inflation-Linked Securities Index (AUILSI) July 23, 2013 Contents Introducing the Citi Australian Inflation-Linked Securities Index (AUILSI)... 02 Composition and Design Criteria... 02 Data Availability and Accessibility... 03 Related Indices... 04 World Inflation-Linked Securities Index... 04 Emerging Markets Inflation-Linked Securities Index... 04 Euro Inflation-Linked Securities Index... 04 Appendix... 05 Characteristics of a Good Benchmark... 05 Citi Fixed Income Indices General Methodology... 05 CITI FIXED INCOME INDICES REGIONAL CONTACTS Americas 212 816 0700 fi.index@citi.com Asia Pacific +852 2501 2358 fi.index@citi.com EMEA +44 20 7986 3200 fi.index@citi.com Japan +81 3 6270 7225 fi.index.tk@citi.com 01
Australian Inflation-Linked Securities Index (AUILSI) We are pleased to introduce the Citi Australian Inflation-Linked Securities Index (AUILSI) which measures the returns of inflation-linked bonds with fixedrate coupon payments that are linked to the Consumer Price Index (CPI), published by the Australian Bureau of Statistics (ABS). The price of each issue in the index is adjusted by using an index ratio. This ratio is the current index level 1 divided by the inflation index level at the time of issue of the individual bond. Effective August 2013, Australia will be included and reported in the World Inflation-Linked Securities Index (WorldILSI) Additional Markets Indices. Composition and Design Criteria Figure 1 details the design criteria and calculation assumptions for the Australian Inflation-Linked Securities Index. Figure 1 Australian Inflation-Linked Securities Index Design Criteria and Calculation Assumptions Stated Coupon Minimum Maturity Minimum Issue Size Composition Inflation Index Weighting Rebalancing Reinvestment of Cash Flow Pricing Calculation Frequency Settlement Date Fixing Date Fixed-rate At least one year AUD 750 million Treasury Indexed Bonds (TIB) Consumer Price Index (CPI), published by the Australian Bureau of Statistics (ABS) Market capitalization Once a month at the end of the month At daily average of the dollar bank bill swap reference rate (BBSW), calculated from actual scheduled payment date of cash flow through end of reporting period. Citi trader pricing as of 4:30 p.m. (Sydney) Daily Monthly Settlement is on the last calendar day of the month. Daily Same day settlement except if the last business day of the month is not the last calendar day of the month; then, settlement is on the last calendar day of the month. Each month, the upcoming month s index constituents are fixed on the profile fixing date. Each year s scheduled fixing dates are published on the Citi Fixed Income Indices website. Index Base Date December 31, 2010 MATURITY SECTOR In addition to the broad categories we publish, we provide subsector breakdowns for many of our indices. One such subdivision is based on the remaining maturity of the underlying securities. We define our maturity sector buckets by including all underlying issues with a remaining average life at least equal to the lower bound, but less than the upper bound of the particular category. For example, the one- to three-years sector of the AUILSI would include all securities in the AUILSI with a remaining average life of at least one year, but less than three years. We then hold the set of bonds constant for the calculation month, even though the average life declines. INDEX QUALITY An index quality is assigned to each index bond as of profile fixing. The quality is first mapped to the S&P rating. If a bond is not rated by S&P but it is rated by Moody s, we assign the S&P equivalent of the Moody s rating to the index quality. If a bond is split-rated (an investment-grade rating by one rating agency and high-yield by the other), we assign the S&P equivalent investment-grade rating to the index quality. These ratings remain unchanged for the entire performance month. 1 The current inflation index level is set equal to a previous value; the look-back period is specified at the time of issuance for each individual bond. 02
Figure 2 Australian Inflation-Linked Securities Index (AUILSI) Index Profile, July 13 (Pricing Date: June 28, 2013) Description # of Issues Par Amount* Market Value* Market Weight (%) Average Coupon (%) Average Yield to Life (Years) Maturity (%) Modified Duration Effective Duration AUILSI 5 18.32 27.05 100.00 3.15 9.45 3.32 7.53 6.67 1-3 years 1 3.20 5.72 21.15 4.00 2.14 2.86 2.04 1.82 7-10 years 2 6.97 11.05 40.84 3.13 7.62 3.30 6.64 5.87 10+ years 2 8.15 10.28 38.01 2.83 13.88 3.59 11.55 10.22 * In AUD billions. Figure 3 Historical Index Values for the Australian Inflation-Linked Securities Index and its Maturity Sectors, December 31, 2010 June 30, 2013 150 AUILSI 1-3 3-5 7-10 10+ 140 130 120 110 100 Source: Citigroup Index LLC. Performance may be positive, negative, or zero. Past performance is not an indication of future results. Note that prior to August 2012 there were no bonds corresponding to the 1-3 years maturity sector. Data Availability and Accessibility Our indices are widely followed and broadly published. We employ many methods of distribution to allow for easy access to our indices. The main vehicles that we use to distribute index information are the Citi Fixed Income Indices website (www.yieldbook.com/citi-indices), The Yield Book and Yield Book Add-In, our fixed-income analytical software. Index information is also available from independent sources, such as data and analytic vendors. The level of data carried by these services varies from monthly sector-level returns to details on the individual security holdings of each index. The level of detail and coverage is wholly at vendors discretion. For more information, please refer to the Citi s Index Guide Third Quarter 2013 Edition. 03
Related Indices World Inflation-Linked Securities Index (WorldILSI) The World Inflation-Linked Securities Index (WorldILSI) measures the returns of inflation-linked bonds with fixed-rate coupon payments that are linked to an inflation index. Currently, the WorldILSI comprises debt from France, Germany, Italy, Japan, Sweden, United Kingdom and United States. Australia, Mexico, Poland and South Africa will join the WorldILSI, effective December 2013. Emerging Markets Inflation-Linked Securities Index (EMILSI) The Emerging Markets Inflation-Linked Securities Index (EMILSI) measures the returns of inflation-linked bonds with fixed-rate coupon payments that are linked to an inflation index. The EMILSI comprises debt from six emerging market countries, namely Brazil, Chile, Mexico, Poland, South Africa and Turkey, denominated in their respective currencies. Euro Inflation-Linked Securities Index (EuroILSI) The Euro Inflation-Linked Securities Index (EuroILSI) measures the returns of French, German and Italian inflation-linked bonds with fixed-rate coupon payments that are linked to the EU Harmonized Index of Consumer Prices (HICP) ex-tobacco and the Consumer Price Index (CPI) ex-tobacco. 04
Appendix Characteristics of a Good Benchmark Citi s fixed income indices are designed to be relatively stable and easily replicable benchmarks. This goal is achieved by having regard to the following desirable index characteristics: Relevance: An index should be relevant to investors. At a minimum, it should track those markets and market segments of most interest to investors. Comprehensiveness: An index should include all opportunities that are realistically available to market participants under normal market conditions. Replicability: The total returns reported for an index should be replicable by market participants. It must be fair to investment managers who are measured against it and to sponsors who pay fees or award management assignments based on performance relative to it. Furthermore, over time, an index must represent a realistic baseline strategy that a passive investor could follow. Accordingly, information about index composition and historical returns should be readily available. Stability: An index should not change criteria often and all changes should be easily understood and highly predictable. It should not be subject to opinions about which bonds to include on any particular day. However, index criteria must change occasionally to ensure that the index accurately reflects the structure of the market. A key virtue of an index is to provide a passive benchmark; investors should not be forced to execute a significant number of transactions just to keep pace. Barriers to entry: The markets or market segments included in an index should not contain significant barriers to entry. This guideline is especially applicable to an international index, in which an included country may discourage foreign ownership of its bonds or participation in its domestic currency or equity market. Expenses: In the normal course of investing, expenses related to withholding tax, safekeeping, and transactions are incurred. For a market or market segment to be included, these ancillary expenses should be well understood by market participants and should not be excessive. For example, if expenses are unpredictable or inconsistently applied, an index cannot hope to measure market performance fairly. Simple and objective selection criteria: A clear set of rules should govern the inclusion of bonds or markets in an index, and investors should be able to forecast changes in composition. This list of desirable characteristics may not be exhaustive, and different investors may place a different emphasis on each. In constructing indices, some desirable characteristics may have to be sacrificed to ensure that others are met. However, it is critical that an index follows objective rules that are well defined, so that all interested parties can understand how to apply the information to their particular situation. General Methodology for Citi s Fixed Income Indices All of Citi s fixed income indices follow the general methodology outlined in this section. For more details, please see the Citi Index Guide Third Quarter 2013 Edition, on www.yieldbook.com/citi-indices Index Profile Monthly Rebalancing With the growing importance of global indices to portfolio managers and investors throughout the world, it is important to communicate the new index preliminary profile on a timetable that will provide sufficient time for portfolio managers to respond to changes in their benchmarks within their own time zone. The profile fixing enables the dissemination of index information ahead of the month-end date so that investors have time to prepare rebalancing transactions. Fixing Dates The annual schedule of fixing dates is made available on the Citi Fixed Income Indices website (www.yieldbook.com/citi-indices) and monthly publications. Index fixing dates provide a clear reference point for index users to know, in advance, of any changes to the composition of the indices for the upcoming month. On each index fixing date, publicly available securities information is used to determine index eligibility and indicative values for the following month s index profile. A preliminary profile setting out the anticipated composition of each index is announced via the website one (1) US business day following the index fixing date. Between announcement of the preliminary profile and calendar month-end, Citi continues to track market activities and will remove issues that are called, tendered, or defaulted. This process enables those tracking the Citi s fixed income indices to anticipate changes to index composition, providing sufficient clarity and time to effect any consequent portfolio rebalancing. 05
Index rules stipulate that there must be a minimum of four (4) business days following each index fixing date and before calendar month-end in all of the following business regions: US, Japan, UK, EMU, and Australia. Index fixing dates are subject to change if unforeseen circumstances arise affecting these business days, such as catastrophic natural disasters or regional political conflicts. Issues Eligibility For an issue to be eligible for inclusion in an index, all information on the issue must be publicly available on or before the fixing date, and the first settlement and interest accrual date of the issue must be on or before the end of the month. Whilst Treasury auctions may be announced prior to the fixing date, the results must be final by the fixing date in order to be considered for inclusion. At the same time, bonds that no longer meet the maturity or amount outstanding or rating criteria are removed from the index. Any buyback or reverse auction occurring on or before the fixing date may also cause the bond to be removed from the index. Pricing Source Citi trader pricing is the primary pricing source for Citi Fixed Income Indices. Prices from third-party pricing sources, transaction-related information, and proprietary pricing models supplement Citi trader prices to ensure completeness. Verification Reliable pricing of each security is necessary to ensure reliable index values and returns, thus third-party pricing sources and statistical techniques are used to identify pricing anomalies. The prices are provided as indications only. Price challenges are reviewed by the Citi Fixed Income Indices team which may, at its discretion, adjust prices and update pricing models. 06
www.yieldbook.com/citi-indices ADDITIONAL INFORMATION AVAILABLE UPON REQUEST This communication is issued by members of Citigroup Global Markets Inc. or one of its affiliates (collectively, Citi ) that are not research analysts, and the information in this communication ( Communication ) is not intended to constitute research as that term is defined in applicable regulations. Unless otherwise indicated, any reference to a research report or research recommendation is not intended to represent the whole report and is not in itself considered a recommendation or research report. All views, opinions and estimates expressed in this Communication (i) may change without notice and (ii) may differ from those views, opinions and estimates held or expressed by Citi or other Citi personnel. This Communication is provided for information and discussion purposes only. Unless otherwise indicated, it does not constitute an offer or solicitation to purchase or sell any financial instruments or other products and is not intended as an official confirmation of any transaction. Unless otherwise expressly indicated, this Communication does not take into account the investment objectives or financial situation of any particular person. Recipients of this Communication should obtain advice based on their own individual circumstances from their own tax, financial, legal and other advisors before making an investment decision, and only make such decisions on the basis of the investor's own objectives, experience and resources. The information contained in this Communication is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness cannot be assured, and such information may be incomplete or condensed. Citi often acts as an issuer of financial instruments and other products, acts as a market maker and trades as principal in many different financial instruments and other products, and can be expected to perform or seek to perform investment banking and other services for the issuer of such financial instruments or other products. The author of this Communication may have discussed the information contained therein with others within or outside Citi and the author and/or such other Citi personnel may have already acted on the basis of this information (including by trading for Citi's proprietary accounts or communicating the information contained herein to other customers of Citi). Citi, Citi's personnel (including those with whom the author may have consulted in the preparation of this communication), and other customers of Citi may be long or short the financial instruments or other products referred to in this Communication, may have acquired such positions at prices and market conditions that are no longer available, and may have interests different from or adverse to your interests. Investments in financial instruments or other products carry significant risk, including the possible loss of the principal amount invested. Financial instruments or other products denominated in a foreign currency are subject to exchange rate fluctuations, which may have an adverse effect on the price or value of an investment in such products. No liability is accepted by Citi for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from this Communication. Past performance is not a guarantee or indication of future results. Any prices provided in this Communication (other than those that are identified as being historical) are indicative only and do not represent firm quotes as to either price or size. You should contact your local representative directly if you are interested in buying or selling any financial instrument or other product or pursuing any trading strategy that may be mentioned in this Communication. Although Citibank, N.A. (together with its subsidiaries and branches worldwide, Citibank ) is an affiliate of Citi, you should be aware that none of the financial instruments or other products mentioned in this Communication (unless expressly stated otherwise) are (i) insured by the Federal Deposit Insurance Corporation or any other governmental authority, or (ii) deposits or other obligations of, or guaranteed by, Citibank or any other insured depository institution. IRS Circular 230 Disclosure: Citi and its employees are not in the business of providing, and do not provide, tax or legal advice to any taxpayer outside of Citi. Any statements in this Communication to tax matters were not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. 2013 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. The Yield Book is a registered service mark of The Yield Book Inc and is registered in the U.S. and other countries.