PIMCO Global Advantage Bond Index Rules (Final 5 ... - PIMCO Index

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May 31, 2013 ... The Bank of America Merrill Lynch Global Bond Index Rules. Refer to important disclosures at the end of the document. PIMCO Global ...
The Bank of America Merrill Lynch Global Bond Index Rules

PIMCO Global Advantage Bond Index Fine specifications May 2013

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules

1

Index Overview

The PIMCO Global Advantage Bond Index history starts on December 31, 2003 and it has a level of 100 on October 31, 2008. The index regional and instrument category weights are rebalanced quarterly and the bond selection is performed monthly on the last calendar day of the month. The bond selection is determined using information available as of the third business day before the last business day of the month end. The index/sub-index structure is presented below:

BofAML  ticker  GLAD   GLAN  GLAJ  GLAP  GADM  PGJC  GAAD  GAUS  GWUS  GXQI  PGUC  PGUS  GAEU  GWEU  ILUR  PGEC  PGES  GAJP  GWJP  GXYI  GAOI  GWOI  ILOI  PGOC  PGOS  GAEM  PGMX  PGEM  PGFX 

Index Name  PIMCO Global Advantage Bond Index  PIMCO GLADI (NY Close) USD UH  PIMCO GLADI JPY UH  PIMCO GLADI Partially Hedged  PIMCO GLADI 80% DM 20% EM EUR PH  PIMCO GLADI JPY Custom Hedge  PIMCO GLADI Developed Markets Overall  PIMCO GLADI US Overall   PIMCO GLADI US Swaps  PIMCO GLADI US Inflation‐Protected  PIMCO GLADI US Corporates  PIMCO GLADI US Securitized  PIMCO GLADI Eurozone Overall  PIMCO GLADI Eurozone Swaps  PIMCO GLADI Eurozone Inflation‐Protected  PIMCO GLADI Eurozone Corporates  PIMCO GLADI Eurozone Securitized  PIMCO GLADI Japan Overall  PIMCO GLADI Japan Swaps  PIMCO GLADI Japan Inflation‐Protected  PIMCO GLADI Other Industrialized Countries (OIC) Overall  PIMCO GLADI OIC Swaps  PIMCO GLADI OIC Inflation‐Protected  PIMCO GLADI OIC Corporates  PIMCO GLADI OIC Securitized  PIMCO GLADI Emerging Markets Overall  PIMCO GLADI EM External Bonds  PIMCO GLADI EM Internal Bonds  PIMCO GLADI EM Currencies 

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules

2 Index structure 2.1 Current index structure The index is comprised of 17 regional instrument categories. The regions, instrument categories, and their respective weights as of 31 October 2012 are presented below. .

Region US

23.5%

Eurozone

20.8%

Japan

8.3%

Other Industrialized Countries

11.4%

Emerging markets

36.0%

Category Swap Inflation-protected Corporate Securitized Swap Inflation-protected Corporate Securitized Swap Inflation-protected Swap Inflation-protected Corporate Securitized Internal bonds External bonds Currency

22.2% 11.1% 33.4% 33.3% 22.2% 11.1% 33.4% 33.3% 66.7% 33.3% 22.2% 11.1% 33.4% 33.3% 33.3% 33.4% 33.3%

2.2 Regional classification The global universe of available instruments is segmented into regions grouped around the following major economic areas: 

US means the United States of America.



Eurozone includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain and those member countries of the European Union that have adopted the Euro as the domestic currency.



Japan means Japan.



Other Industrialised Countries (OIC) are Australia, Canada, Denmark, Iceland, New Zealand, Norway, Sweden, Switzerland and the UK. While Iceland is included as part of the OIC for purposes of determining regional GDP weights, ISK denominated bonds are currently excluded from the index.



Emerging markets are defined in this document as those markets that are not included in any of the other regions.

2.3 Instrument categories

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules The index covers seven instruments categories each of which representing one or more of the key sources of fixed-income risk and return: 1) Interest rate duration, reflecting the sensitivity of bond prices to changes in both nominal and real yields, 2) credit premiums, reflecting the higher yields available on securities with credit risk; and 3) securitized instrument premiums, reflecting embedded pre-payment options and other premiums associated with mortgage-backed securities. Within each region, instrument categories are selected to represent these fixedincome exposures if a liquid and substantial market exists. 

Interest Rate Swap means a portfolio of funded interest rates swaps of standard maturities (2, 5, 10 and 30 years). It represents nominal interest rate duration exposure in the U.S., Eurozone, Japan and other industrialized countries.



Inflation-protected means central government bonds where coupon and redemptions are adjusted for inflation. It represents real interest rate duration exposure in the U.S, Eurozone, Japan and other industrialized countries.



Corporate means fixed coupon bonds issued by corporate issuers, and represents credit premium exposure in the US, Eurozone and other industrialized countries.



Securitized means securities backed by individual or pools of mortgages, representing securitized premium exposure in the US, Eurozone and other industrialized countries. This category includes both Public sector RMBS and covered bonds. (Public sector RMBS bonds are pass-through or bullet securities backed by specific mortgages where the issuer is a government-affiliated or sponsored entity and not a private sector bank or institution. Covered bonds are securities that fulfill the UCITS 22.4 requirements or that are structured so as to afford similar protection.)



Internal Bond means Emerging Market fixed coupon central government bonds denominated in the issuer’s domestic currency. It represents Emerging Markets interest rate duration exposure.



External Bond means fixed coupon central government bonds denominated in USD or EUR. It represents Emerging Markets credit premium exposure.



Currency means Emerging Markets short dated FX derivatives or T-Bills.

3 Weightings and restrictions In order to be eligible for inclusion in the index, a component generally must meet certain rating and size requirements. Within each qualifying currency, caps are imposed on certain instrument categories in order to reflect the global nature of the index while improving its replicability and investibility.

3.1 Restrictions on the number of instruments selected Limits are imposed on the number constituents selected for each currency/instrument category where the constituents for that component are represented by cash bonds. Other than the Emerging Markets Internal Bond component, currency/instrument category components that account for 5% or more of the index are restricted to 500 bonds each. Currency/instrument category components that account for less than 5%, and have a total face value in USD terms as of the preceding July 31 (converted at the average of the London closing exchange rates on May 31, June 30 and July 31) of USD200bn or more, are limited to a maximum of 200 bonds each. Currency/instrument category components that account for less than 5%, and have a total face value in USD terms as of the preceding July 31 (converted at the average of the London closing exchange rates on May 31, June 30 and July 31) of less than USD200bn, are limited to a

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules maximum of 75 bonds each for corporate components and 50 bonds each for securitized components. For the Emerging Markets Internal Bond component, a maximum of 15 securities is selected for each currency.

3.2 Intra-instrument category weighting The following weightings are applied inside an instrument category: 1. Bonds issued in the same currency within an instrument category are market capitalisation weighted. 2. Bonds in different currencies within an instrument category are GDP weighted, except for EM external bonds which are market capitalisation weighted. 3. Swaps in the same currency have fixed weights. 4. Swaps in different currencies within an instrument category are GDP-weighted. 5. FX Forwards for a single currency are equal weighted. 6. Emerging markets FX constituents are GDP weighted. 7. There are two limitations to the general weighting rules that are imposed to improve the investibility of the index. a. Within the Emerging Markets Internal Bond and Emerging Markets Currency components, the weight of an individual country whose currency trades predominately via NDFs is limited to 10% of the component. No caps apply if the currency trades in deliverable forwards b. The weight of a currency within a regional instrument category is limited to 10% if it has less than USD25bn face value in qualifying securities as of July 31 converted at the average of the May 31, June 30 and July 31 London closing exchange rates.

3.3 Regional re-weighting Regional weights are based on GDP data updated once a year in October. The new weights are published during September and become effective on 31 October. The region weight is equal to the sum of the average world GDP weights of all countries in the region (regardless of whether or not they qualify for the index) over the last five years divided by the total of the same for all countries in the world. Every quarter (on 31 January, 30 April and 31 July) country weights are reset to the prior 31 October levels. In between annual/quarterly reset dates, country weights float based on their relative total return performances. The annual source of the GDP data is the April edition of the World Economic Outlook published by the IMF. The calculation uses the GDP expressed at current prices in USD. Regional weights effective October 31, 2012 are detailed below. Should extraordinary events such as currency crises, rating downgrades to sub investment grade, etc. occur, a special review of regional weights may take place on other than the annual cycle with changes in weights, if any, announced prior to the rebalancing date on which they are to take effect.

Region US Eurozone Japan Other Industrialized Countries Emerging Markets

10/31/2012 weight 23.5% 20.8% 8.3% 11.4% 36.0%

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules

3.4 Instrument category weightings The instrument category weightings are not updated regularly. The category weightings are changed if either an instrument category is added to a region, or significant changes to relative importance of the individual categories require a readjustment of the weights. Changes to instrument category weight, if any, are announced concurrent with the annual regional weight announcement and become effective on 31 October. The weighting categories are:

Instrument category Interest Rate Swaps Inflation-protected Corporate Securitized EM internal bond EM external bond EM currency

United States 22.2% 11.1% 33.4% 33.3%

Eurozone 22.2% 11.1% 33.4% 33.3%

Japan 66.7% 33.3%

Other Industrialized Countries 22.2% 11.1% 33.4% 33.3%

Emerging Markets

33.3% 33.4% 33.3%

3.5 Weighting conventions and calculations The weights of a region, instrument category within a region or country within an instrument category are expressed in percentage terms rounded to one decimal place each. If the rounded weights do not add up to 1, the largest unrestricted segment(s) are adjusted in descending order by 0.1% each until the sum of all weights is 1. If the categories are equally weighted, the first category is adjusted by 10 basis points, if necessary). Combined weights are not adjusted.

3.6 Monthly adjustments to constituent holdings The index is adjusted for any constituent additions/removals, or country removals, on the last calendar day of the month based on inclusion criteria and information available up to and including the third business day before the last business day of the month. No changes are made to constituent holdings other than on month-end dates.

4 Selection rules 4.1 Swap indices The interest rate swap instrument category is comprised of funded 2-, 5-, 10- and 30-year interest rate par coupon nominal swaps denominated in each of currencies that make up the United States, Eurozone, Japan and Other Industrialized Country regions. The swaps are rolled into new on-the-run swaps every month. The weightings for each maturity within a currency are reset each month to the following fixed levels:

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules

Swap contract 2 year 5 year 10 year 30 year

Weight 45% 30% 20% 5%

The fixed intra-currency weights are reviewed annually and adjusted on October 31, as needed, to account for changes in the underlying market structure. Within the swap instrument category of the Other Industrialized Country region, relative weights of each currency are scaled to their corresponding GDP weights on October 31. In order to be included in the index, swaps must have an assumed investment grade rating based on the lower of (i) the arithmetic average of the Moody’s, S&P and Fitch local currency long-term sovereign bond rating for the corresponding country (Germany’s rating is used for Euro swaps), and (ii) AA-. If the long term local currency sovereign debt is not rated by any of the three rating agencies then the AA- rating is used. Swaps are removed from the index at the end of the month in which their assumed rating falls below investment grade. Subsequently upgraded swaps can only re-enter the index on the October 31 rebalancing date.

4.2 Inflation-protected indices Index qualifying instruments are limited to local currency bonds issued by central governments with principal and coupon payments linked to the regional or domestic measure of inflation. Debt issued by central banks is excluded from the index other than where the central bank is acting as the primary issuing agent for the central government. 4.2.1

Country Selection Criteria

To be included in the index a country must have (i) at least USD7bn in outstanding inflation adjusted principal value (ie, face value times the inflation factor) of local currencydenominated inflation-linked government debt, and (ii) an investment grade foreign currency long term sovereign bond rating based on an arithmetic average of Moody’s, S&P and Fitch. The country quality and size criteria are reviewed annually based on data as of July 31 and changes resulting from the annual review take place on the 31 October rebalancing date. The country rating criterion is also reviewed monthly and a country is removed from the index at the end of the month in which it falls below investment grade; however, upgraded countries are only added to the index on October 31. The size criterion is not examined in between annual reviews. For purposes of evaluating the annual size criterion, the total USD principal value includes outstanding debt that meets all qualifying criteria for the index as of July 31 and is converted into USD using the average of the London closing FX rates on the last business day of May, June and July. As of October 31, 2012, the index includes inflation-protected bonds issued by the United States, France, Germany, Italy, Japan, Australia, Canada, Sweden and the United Kingdom.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules 4.2.2

Bond Selection Criteria

Only fixed rate bullet bonds and amortizing bonds are eligible for inclusion in the index. Qualifying securities must have at least 18 months to maturity at the time of issuance and at least 1 year remaining time to maturity. In addition, the minimum amount outstanding for qualifying securities, stated in local currency terms, varies by currency: 

AUD1bn



CAD3bn



EUR2bn (bonds linked to Euro HICP or French Inflation ex Tobacco)



GBP1bn (bonds linked to CPI or RPI)



JPY200bn



SEK20bn



USD2bn

Selected bonds within each currency are capitalization-weighted based on the bonds’ actual amounts outstanding. Within the Inflation-protected instrument category of the Other Industrialized Countries region, relative weights of each currency are scaled to their corresponding GDP weights and the face amounts of bonds are adjusted on a pro-rata basis.

4.3 Corporate sub-indices 4.3.1

Eligibility Criteria

Qualifying corporate bonds must be publically issued in a qualifying domestic and/or international bond market and must have at least one year remaining term to final maturity, a fixed coupon schedule (including step up coupons) and an investment grade rating based on an arithmetic average of issue ratings provided by Moody’s, S&P and Fitch. Currently qualifying currencies and their respective minimum amount outstanding requirements for qualifying bonds, stated in local currency terms, are: 

AUD: 300mn



CAD: 300mn



CHF: 300mn



EUR: 500mn



GBP: 100mn



USD: 500mn

Bonds issued in the domestic market for the currency of denomination, global bonds (bonds issued in both the domestic market for the currency of denomination and the international market) and bonds issued only in the international (eurobond) market qualify for inclusion in the index. The index includes 144a securities with and without registration rights. Zero coupon bonds, taxable and tax-exempt US municipal, warrant-bearing, DRD-eligible and defaulted securities are excluded from the Index. Except as noted below, floating rate notes and bonds with embedded call and/or put options are also excluded from the index. Sinking fund bonds are included in the indices. Subordinated Financials (ie, other than senior or secured bonds) with put and/or call features, including callable perpetual subordinated Financials and hybrid (ie, fixed to floating rate) subordinated Financials, are included in the index. Qualifying callable perpetual subordinated Financials must be at least one year from the first call date. Qualifying hybrid subordinated

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules Financials must be callable within the fixed rate period and at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. . Limits are imposed on the number of corporate bonds per currency. Corporate currency segments that account for 5% or more of the PIMCO Global Advantage Bond Index are limited to a maximum of 500 bonds each. Corporate currency segments that account for less than 5%, and have a total face value in USD terms as of the preceding July 31 (converted at the average of the London closing exchange rates on May 31, June 30 and July 31) of USD200bn or more, are limited to a maximum of 200 bonds each. Corporate currency segments that account for less than 5%, and have a total face value in USD terms as of the preceding July 31 (converted at the average of the London closing exchange rates on May 31, June 30 and July 31) of less than USD200bn, are limited to a maximum of 75 bonds each. As of October 31, 2012, the following limits are in place: AUD 75 bonds; CAD 200 bonds; CHF 75 bonds; EUR 500 bonds; GBP 200 bonds; USD 500 bonds.

4.3.2

Sample bond selection

Corporate bonds are selected from the universe of eligible bonds in a three step process. First, all bonds within a currency are segmented based on sector classifications, level of seniority and time to maturity. Second, overall market profiles are compiled for each currency to determine percentage weights by segment. Finally, individual bonds are selected from the qualifying universe for each segment based on defined ranking criteria.

4.3.2.1

Bond classification

All qualifying corporate bonds are grouped into segments based on sector classification, level of seniority and time to maturity. Sector classifications are based on the BofAML index sector classification schema. Where it used as a criteria, seniority is segmented into two groups: (i) all senior and secured bonds, and (ii) all other bonds. For callable perpetual subordinated Financials time to maturity is based on the time to the first call date, and for hybrid subordinated Financials time to maturity is based on the time to the last call prior to the date the bond transitions from a fixed to a floating rate security. 4.3.2.2

Market profile

A market profile of all qualifying corporate bonds is created for each currency, segmenting eligible bonds into sector/seniority groupings and maturity bands and the full market value percentage weight is calculated for each segment. The structure of the market profile for each currency is a function of its size, based on the same criteria used to determine the maximum number of bonds allowed. The market profile structure is determined annually as of July 31 and the profile segment weights are compiled monthly on each rebalancing date. For currencies capped at 500 bonds the profile consists of four sector/seniority groupings and three maturity bands (12 segments in total): 

Sector/seniority groups o

Senior and secured Financials

o

All other Financials

o

All Consumer Cyclicals, Consumer Non-Cyclical, Media, Services, Technology & Electronics and Telecommunications.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules o 

All Automotive, Basic Industry, Capital Goods, Energy, Healthcare, Real Estate and Utilities.

Maturity bands: o

1-7 years

o

7-15 years

o

15+ years

For all other currencies the profile consists of two sector groupings and two maturity bands (four segments in total): 



4.3.2.3

Sectors o

All Financials

o

All Non-Financials

Maturity bands: o

1-7 years

o

7+ years

Bond selection

If the number of qualifying bonds in a given currency is less than the maximum number allowed, then all qualifying bonds are selected for the index. If the number of qualifying bonds in a given currency is greater than the maximum number allowed, then a sample set of bonds is selected from the qualifying candidates. First, the number of bonds to be selected from each segment in the profile is determined by multiplying the total number of bonds to be selected by the segment weight rounded to the nearest integer. If the aggregate number of bonds, after rounding segments to the nearest integer, is not equal to the total target number of bonds, the largest cells (based on the calculated market capitalization percentage weights) are adjusted in descending order of size by one each until the aggregate number matches the total target number, subject to the following constraints. 

The minimum number of bonds for a segment is 1, provided that there is at least one eligible bond.



The maximum number of bonds for a segment is limited to the number of eligible bonds in that segment.



If the number of bonds in a segment is higher or lower than its original number due to adjustments 1 or 2 above, the number of bonds in the larger of the two adjacent maturity bands for that segment is adjusted in the opposite direction provided the number of bonds in the adjacent maturity bands has at least 2 bonds in case of reduction and less than total number of available bonds in case of an increase.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules Within each segment, bonds are ranked by: 

Seasoning (all bonds issued within the last five years first, all other bonds second)



Amount outstanding (descending)



Age (descending)



Time to maturity (descending)



Total amount outstanding of all of the issuer’s qualifying bonds within the currency (descending)



Bond Identifier (ascending)

The highest ranked bonds in each cell are selected until the target number for the cell has been reached. Only one bond per issuer is considered in each cell until one bond from each issuer has been selected. If the number of bonds required is larger than the number of issuers, a second bond is selected from each issuer according to the ranking until the required number of bonds has been selected. Additional rounds of selections are made in a similar manner, as required. 4.3.2.4

Bond weights

Weights of selected bonds within each currency are capitalization weighted based on the bonds’ actual amounts outstanding. Within the Corporate instrument category of the Other Industrialized Countries region, relative weights of each currency are scaled to their corresponding GDP weights and the face amounts of bonds are adjusted on a pro-rata basis.

4.4 Securitized indices 4.4.1

Eligibility Criteria

The securitized indices contain public sector mortgage-backed securities and covered bonds. Private sector RMBS from individual issuers are not eligible for inclusion. The individual bond types and selection criteria for each region are as follows: US index Only US Agency 15- and 30-year TBA mortgage pass-through securities qualify for inclusion. Within each product, qualifying coupons must meet the following criteria: 

The aggregate face value of all productions years with an amount outstanding of $250mn or more is at least $5bn



There is at least $250mn in outstanding face value for any of the six preceding productions years (ie, to qualify for inclusion during 2012, a coupon must have at least $250mn face value in any one production year from 2006 through 2011)

To be included in the index, US Agency TBA mortgages must have an assumed investment grade rating. The assumed rating for pass-through securities backed by Ginnie Mae collateral is equal to the US local currency long term sovereign debt rating (based on an arithmetic average of Moody’s, S&P and Fitch). The assumed rating for pass-through securities backed by other US Agencies is equal to the arithmetic average of the Moody’s, S&P and Fitch senior debt ratings for the respective agencies.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules Euro index Euro-denominated covered bonds with at least 1 year remaining term to final maturity a fixed coupon schedule, a minimum amount outstanding of EUR1.0bn and an investment grade rating (based on an arithmetic average of Moody’s, S&P and Fitch) qualify for inclusion. Other Industrialised Countries Securitized indices The index includes: (i) covered bonds denominated in SEK, CHF and GBP, (ii) mortgage bonds denominated in DKK, and (iii) mortgage bonds issued by Canada Mortgage and Housing Corporation. For each, only fixed rate, non-callable bullet bonds or sinking funds are eligible for inclusion. In addition, qualifying securities must have at least 1 year remaining term to final maturity, an investment grade rating (based on an arithmetic average of Moody’s, S&P and Fitch) and a minimum amount outstanding, in local currency terms, of CAD1bn, CHF300mn, DKK5bn, GBP100mn or SEK2bn Limits are imposed on the number of securitized bonds by currency. Securitized currency segments that account for 5% or more of the PIMCO Global Advantage Bond Index are limited to a maximum of 500 bonds each. Securitized currency segments that account for less than 5%, and have a total face value in USD terms as of the preceding July 31 (converted at the average of the London closing exchange rates on May 31, June 30 and July 31) of USD200bn or more, are limited to a maximum of 200 bonds each. Securitized currency segments that account for less than 5%, and have a total face value in USD terms as of the preceding July 31 (converted at the average of the London closing exchange rates on May 31, June 30 and July 31) of less than USD200bn, are limited to a maximum of 50 bonds each. As of October 31, 2012, the following limits are in place: CAD 50 bonds; CHF 50 bonds; DKK 50 bonds; EUR 500 bonds; GBP 50 bonds; SEK 50 bonds; USD 500 bonds. 4.4.2

Sample bond selection

If the number of qualifying bonds in a given currency is less than the maximum number allowed, then all qualifying bonds are selected for the index. If the number of qualifying bonds in a given currency is greater than the maximum number allowed, then a sample set of bonds is selected from the qualifying candidates Where a sampling process is required for a given currency, selections are made by grouping qualifying bonds into issuer/maturity segments, determining the number of bonds to be selected in each segment and then ranking bonds within each segment based on defined criteria. Each month, all qualifying bonds for the currency are segmented by issuer and maturity (less than 5 years; greater than or equal to 5 years) and the full market value percentage weights are calculated for each. The number of bonds to be selected from each segment is determined by multiplying the total number of bonds to be selected by the segment weight rounded to the nearest integer. If the aggregate number of bonds, after rounding maturity bands to the nearest integer, is not equal to its target number of bonds, the largest segments (based on the calculated market capitalization percentage weights) are adjusted in descending order of size by one each until the aggregate number matches the target number, subject to the following constraints. 

The minimum number of bonds from a segment is 1, provided that there is at least one eligible bond.



The maximum number of bonds from a segment is limited to the number of eligible bonds in that segment .



If the number of bonds in a segment is higher or lower than its original number due to adjustments 1 or 2 above, the number of bonds in the other maturity band for the issuer

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules is adjusted in the opposite direction provided the number of bonds in the adjacent maturity bands has at least 2 bonds in case of reduction and less than total number of available bonds in case of an increase.

Within each segment, bonds are ranked based on the following criteria, and the required number of bonds are selected according to their rank. 

Seasoning (all bonds issued within the last five years first, all other bonds second)



Amount outstanding (descending)



Age (descending)



Bond Identifier (ascending)

4.5 Emerging Markets Internal Bonds 4.5.1

Country selection criteria

The index contains local currency denominated bonds from qualifying emerging market countries. To be included, a local currency market (i) must be investible, i.e. markets with significant capital controls and access restrictions or lack of liquidity are not eligible for the index, (ii) must have at least USD10bn total face value of local currency-denominated government debt and at least 5 bonds that meet all requirements for inclusion in the index, (iii) must have an investment grade foreign currency sovereign debt rating based on an arithmetic average of Moody’s, S&P and Fitch, and (iv) must not be subject to EU or US sanctions on its internal or external borrowing. Currently Cuba, Iran, Myanmar, North Korea, Syria and Sudan are considered to be on the sanction list. Country criteria are reviewed annually and changes resulting from the annual review take place on the 31 October rebalancing date. The total face value measured as part of the annual review includes outstanding debt that meets all qualifying criteria for the index as of July 31 and is converted into USD using the average of the London closing FX rates on the last business day of May, June and July. The country rating criterion is also reviewed monthly and a country is removed from the index at the end of the month in which it falls below investment grade; however, upgraded countries are only added to the index on October 31. If a country becomes subject to EU or US sanctions on its internal or external borrowing, it will be removed from the index at the end of the month it is added to such sanction lists. If a country is removed from the st sanction lists, it will be reviewed for re-entry to the index on October 31 . The adoption of capital controls by a country can manifest in many ways. The committee will review the impact of capital controls adopted by a country on the investability of a country’s bonds. If the capital controls implemented lead to a removal of the country from the index, the removal will occur at the end of the month following the committee review. Should the capital controls that led to a country’s exclusion from the index be removed or relaxed, the country will be considered for inclusion on October 31st. 4.5.2

Eligible bond criteria

The index only includes fixed rate or zero coupon, non-callable, local currency denominated central government debt with a minimum remaining time to maturity of 12 months and at least 18 months time to maturity at time of issuance that meet the minimum size filters established for each country. Inflation-linked bonds and bonds issued by central banks, other than where the central bank is acting as the primary issuing agent for the central government, are excluded from

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules the index. Minimum bond size filters, stated in local currency terms, are listed at the end of this section.

4.5.3

Sample bond selection

The number of bonds selected for a country depends on the total size of the eligible bond universe for that country. A maturity profile is used to select the bonds. For countries with less than USD500bn outstanding face value of qualifying bonds as the July 31 annual review date, the number of bonds selected is limited to 15. The following maturity bands are used in the selection process:  >=1 year and =5 years and =10 years and =15 years and =20+ years

For markets of USD500bn or more outstanding face value of qualifying bonds as of the annual review date, the number of bonds selected is 50. The following maturity bands are used in the selection process:      

>=1 year and =3 years and =5 years and =10 years and =15 years and =20+ years

If more bonds are eligible than the maximum number permitted, the bonds are selected according to the percentage weight of all potentially qualifying bonds across each of the maturity bands. The percentage weight for a given band is multiplied by the total number of bonds to be selected for the country and rounded to the nearest integer to determine the number of bonds to be selected from that maturity band, with the following adjustments: 1. If the aggregate number of bonds for a country, after rounding maturity bands to the nearest integer, is not equal to its target number of bonds, the largest cells (based on the calculated market capitalization percentage weights) are adjusted in descending order of size by one each until the aggregate number matches the target number. 2. The minimum number of bonds from a maturity band is 1, provided that there is at least one eligible bond. 3. The maximum number of bonds from a maturity band is limited to the number of eligible bonds in that maturity band. 4. If the number of bonds in a maturity band is higher or lower than its original number due to adjustments 1 or 2 above, the number of bonds in the larger of the two adjacent maturity bands is adjusted in the opposite direction provided the number of bonds in the adjacent maturity bands has at least 2 bonds in case of reduction and less than total number of available bonds in case of an increase. 5. If the total number of bonds is higher or lower than 15 (or 50), the number of bonds in the largest maturity bands is adjusted by 1 each until the total number of bonds is 15 (or 50) bonds, unless there are fewer than 15 (or 50) qualifying bonds, in which case all qualifying bonds are selected.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules Once the number of bonds for a maturity band has been determined, selections are made as follows: 1. The eligible bonds within each maturity band are divided into two groups. The first group contains all bonds with an original maturity (measured from first settlement date to final maturity date) of no more than one year above the upper limit of the maturity band (e.g. 6 years for the 1-5 years maturity band), the second group contains all remaining bonds. 2. Within each group, the bonds are ordered according to their face value (descending), first settlement date (descending), time to maturity (descending), identifier (ascending). 3. The bonds are selected starting with the bonds in the first group until the relevant number of  bonds has been selected.  The USD500bn threshold used to determine the limit on the number of bonds to be selected is based on the total outstanding face value of index qualifying debt as of 31 July converted into USD using the average of the London closing FX rates on the last business day of July, August and September. The limit on the number of bonds for each country as of April 30, 2012 appears in Table 1. 4.5.4

Country and bond weights

Within the Emerging Markets Internal Bond component, country and region weights are set annually, on 31 October of each year, to the ratio of its average world GDP weight over the last five years to the total of the same for all other countries in the index. Therefore, if a country does not qualify for inclusion, its weight is redistributed to all other qualifying countries on a pro-rata basis. The new weights are published during September using the most recently available GDP data. Every quarter (on 31 January, 30 April and 31 July) country weights are reset to the prior 31 October levels. In between annual/quarterly reset dates, country weights float based on their relative total return performances. The annual source of the GDP data is the April edition of the World Economic Outlook published by the IMF. The calculation uses the GDP expressed at current prices in USD. If a country has no qualifying bonds for a given month, or falls below investment grade, it is removed from the index on the next monthly rebalancing date and its weight is redistributed to all other qualifying countries within the same region on a pro-rata basis. Once removed, a country cannot be considered for re-entry until the next annual review. Country weights within the Emerging Markets Internal Bond component, as of October 31, 2012, are provided below.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules

Country Brazil Colombia Czech Republic Hong Kong Indonesia Israel Malaysia Mexico Poland Russia Singapore South Africa South Korea Taiwan Thailand

4.6

Bond size filter (local terms) 1bn 500bn 20bn 0.5bn 5tn 1bn 1bn 5bn 2bn 10bn 1bn 5bn 1tn 10bn 10bn

10/31/2012 weight 10.0% 4.0% 3.2% 3.5% 9.4% 3.2% 3.5% 16.4% 7.4% 10.0% 3.3% 5.1% 10.0% 6.5% 4.5%

Emerging Markets External Bonds

The index contains EUR and USD denominated bonds from emerging market counties. There are two requirements for a country to qualify for the index: (i) the country must have an investment grade foreign currency long term sovereign bond rating based on an arithmetic average of Moody’s, S&P and Fitch, and (ii) the country must have at least EUR1.0bn or USD1.0bn in eligible bonds in order to be included in each respective currency. For example, if a country has EUR750mn and USD750mn in outstanding debt it is not included in the index. But if the country has EUR750mn and USD1bn in outstanding debt, its USD-denominated debt is included in the index but its EUR-denominated debt is not. The country quality and size criteria are reviewed annually based on data as of July 31 and changes resulting from the annual review take place on the 31 October rebalancing date. The country rating criterion is also reviewed monthly and a country is removed from the index at the end of the month in which it falls below investment grade; however, upgraded countries are only added to the index on October 31. The size criterion is not examined in between annual reviews. A list of qualifying countries as of October 31, 2012, by currency, is presented below. Only fixed rate non-callable bullet bonds or sinking funds issued by central governments with an amount outstanding of 500mn in its currency of denomination or higher and at least one year remaining time to maturity are eligible for the index. In addition, the bonds must be available in the international market. This is determined via ISIN assigned to the bond, which must be an International ISIN, or from a country of Western Europe, the US, Canada, Japan, Australia or New Zealand.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules EM External USD qualifying countries UAE Bulgaria Brazil Chile China Israel South Korea Mexico Malaysia Peru Poland Qatar Russia South Africa Bahrain Colombia Hong Kong Croatia Indonesia Lithuania Latvia Panama Romania

EM External EUR qualifying countries China Czech Republic Croatia Israel Lithuania Morocco Mexico Poland Romania

4.7 Emerging Markets Currencies The index contains a basket of deliverable or non-deliverable (NDF) currency forwards versus the US dollar of different standard maturities for qualifying emerging market countries. To qualify for inclusion in the currency basket an emerging markets country must have a minimum GDP of USD75bn for three out of the last five years. In addition, the country must have an investment grade short-term local sovereign bond rating from S&P. If S&P does not publish a short-term local sovereign rating, an arithmetic average of the Moody’s, S&P and Fitch long-term local sovereign rating is used. The country rating criteria is reviewed monthly and a country is removed from the index at the end of the month in which it falls below investment grade. If a country is upgraded to investment grade it can only re-enter the index on an October 31 annual rebalancing date. Deliverable forwards are preferred but NDFs are used for currencies without sufficiently liquid forward markets. For currencies without active forward or NDF markets, the most recently issued 3 month T-Bill replaces the forward instruments. Currency markets without an active forward or T-Bills market are not eligible for the indices, even if they otherwise qualify. A currency index using derivatives is comprised of a basket 3-month forwards/NDFs purchased at each monthly rebalancing and held to maturity. Therefore, at any re-balancing, the index consists of three forwards: a new 3-month forward, a 3-month forward that is one month old (and has two more months to maturity), and a two month old 3-month forward.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules Currently, the following currencies qualify for the index: Country Brazil Chile China Colombia Czech Republic Hong Kong SAR India Israel Korea Kuwait Malaysia Mexico Peru Poland Russia Saudi Arabia Singapore South Africa Taiwan Province of China Thailand Turkey United Arab Emirates

Forward type NDF NDF NDF NDF Deliverable Deliverable NDF Deliverable NDF Deliverable NDF Deliverable NDF Deliverable NDF Deliverable Deliverable Deliverable NDF Deliverable Deliverable Deliverable

10/31/2012 weight 10.0 1.7 10.0 2.3 1.8 2.0 10.0 1.8 8.8 1.2 2.0 9.1 1.2 4.2 10.0 4.0 1.8 2.9 3.7 2.6 6.2 2.7

4.8 Hedged Indices The PIMCO Global Advantage Bond Index, and all of its sub-indices, is available hedged into 36 different base currencies, including EUR, GBP, JPY and USD. In addition, the PIMCO Global Advantage Bond Index is available partially hedged into 36 different base currencies. For the partially hedged index the Emerging Markets Internal Bond and Emerging Markets Currency components are unhedged and all other components are hedged into the relevant base currency. Also, a custom hedged version of the PIMCO Global Advantage Bond Index is published where the return is equal to the JPY partially hedged return, calculated as described above, plus the return generated on a USD/JPY 1-month forward contract in an amount equal to the combined percentage weights of the Emerging Markets Internal Bond and Emerging Markets Currency components at the beginning of the month.

Refer to important disclosures at the end of the document

The Bank of America Merrill Lynch Global Bond Index Rules

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