S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Government Investment PoolVariable Net Asset Value (NAV) Pool Volatility Ratings DefinitionsA bond fund/variable net asset value (NAV) pool volatility ratings is a current opinionof a fixed-income fund’s sensitivity to changing market conditions relative tothe risk of a portfolio composed of government securities and denominated in thebase currency of the fund. Volatility ratings evaluate the fund’s sensitivity to interest-ratemovement, credit risk, investment diversification or concentration,liquidity, leverage and other factors.S1Bond funds that possess low sensitivity to changing market conditions are ratedS1. These funds possess an aggregate level of risk that is less than or equal to thatof a portfolio comprised of government securities* maturing within one to threeyears and denominated in the base currency of the fund. Within this category, certainfunds are designated with a plus sign (+). This indicates the fund’s extremelylow sensitivity to changing market conditions. These funds possess an aggregatelevel of risk that is less than or equal to that of a portfolio comprised of the highestquality fixed-income instruments with an average maturity of one year or less.S2Bond funds that possess low to moderate sensitivity to changing market conditionsare rated S2. These funds possess an aggregate level of risk that is less than orequal to that of a portfolio comprised of government securities maturing withinthree to sevenS3Bond funds that possess moderate sensitivity to changing market conditions arerated S3. These funds possess an aggregate level of risk that is less than or equalto that of a portfolio comprised of government securities maturing within seven to10 years and denominated in the base currency of the fund.S4Bond funds that possess moderate to high sensitivity to changing market conditionsare rated S4. These funds possess an aggregate level of risk that is less thanor equal to that of a portfolio comprised of government securities maturing beyond10 years and denominated in the base currency of the fund.S5Bond funds that possess high sensitivity to changing market conditions are ratedS5. These funds may be exposed to a variety of significant risks including highconcentration risks, high leverage, and investments in complex structured and/orilliquid securities.S6Bond funds that possess the highest sensitivity to changing market conditions arerated S6. These funds include those with highly speculative investment strategieswith rated S6. These funds include those with highly speculative investment strategieswith multiple forms of significant risks, with little or no diversification benefits.* Government securities (for S1 through S4 categories) are intended to signify the mostliquid, highest quality securities issued by a sovereign government. The ratings arebased on current information furnished by the fund to Standard & Poor’s or obtained byStandard & Poor’s from other sources it considers reliable. Standard & Poor’s doesnot perform an audit in connection with any rating, and may rely on unauditedfinancial information. The ratings may be changed, suspended, or withdrawn as a resultof changes in, or unavailability of, such information, or based on other circumstances.The rating is not a recommendation to purchase, sell, or hold any security held or issuedby the fund, inasmuch as it does not comment on market price, yield, or suitability for aparticular investor.market transactions with credit rated and volatilityrated funds.These market transactions may include, but arenot limited to repurchase agreements (repos),reverse repos, forward purchases, forward exchangecontracts, swaps and other hedging positions. Acounterparty’s failure to meet its obligations contractedwith a fund may impair the successful outcomeof its intended objectives. Due to this risk,Standard & Poor’s criteria calls for a counterparty’sminimum rating to be no less than one full ratingcategory below the fund’s rating for transactionsspanning one year or longer. For example, ‘AAAf’and rated funds would need to use ‘AA’ or betterrated entities for transactions equal to or greaterthan one year. Counterparty Criteria for all ratingcategories are as follows:■ AAAf—Long-term transactions (i.e., one year orlonger)-AA or better. Short-term (i.e., less thanone year): A-2 or better for overnight transactions;A-1 or better for longer than overnight.■ AAf-Long-term transactions (i.e.,one year orlonger)-A or better. Short-term (i.e., less than oneyear): A-2 or better for overnight transactions;A-1 or better for longer than overnight.■ Af—Long-term transactions (i.e., one year orlonger)-BBB or better. Short-term (i.e., less thanone year): A-2 or better.■ BBBf—Long-term transactions (one year orlonger)-BBB or better. Short-term (i.e., less thanone year): A-3 or better.Volatility ratings analysisStandard & Poor’s volatility ratings are designed torank or designate bond funds or variable NAVpools according to the degree to which they areexposed to the factors that ultimately lead to shareprice and return volatility. The volatility ratingsscale, which ranges from ‘S1’ (lowest sensitivity) to‘S6’ (highest sensitivity), expresses Standard &Poor’s current opinion of a fixed-income fund’s sensitivityto changing market conditions. The volatilityprofiles of the first four categories (‘S1’ through‘S4’) are measured and expressed on a relative basisto established government indices with differentmaturity bands (see Variable Net Asset (NAV) PoolVolatility Ratings Definitions), to provide investorswith market benchmarks for risk and return comparisons.Standard & Poor’s evaluation of funds forvolatility ratings includes:■ Portfolio risk analysis■ Historical risk analysis■ Management assessmentwww.standardandpoors.com321