For
OTC swaps, any upfront premiums paid and any upfront fees received are shown as
swap premiums paid and swap premiums received, respectively, in the Statements
of
Assets and Liabilities and amortized over the term of the contract. The daily
fluctuation in market value is recorded as unrealized appreciation
(depreciation) on OTC swaps
in the Statements of Assets and Liabilities. Payments received or paid are
recorded in the Statements of Operations as realized gains or losses,
respectively. When an
OTC swap is terminated, a realized gain or loss is recorded in the Statements of
Operations equal to the difference between the proceeds from (or cost of) the
closing transaction
and the Funds’ basis in the contract, if any. Generally, the basis of the
contract is the premium received or paid.
In
a centrally cleared swap, immediately following execution of the swap agreement,
the swap agreement is novated to a central counterparty (“CCP”) and the CCP
becomes
the Fund's counterparty on the swap. Each Fund is required to interface
with the CCP through a broker. Upon entering into a centrally cleared swap, each
Fund is
required to deposit initial margin with the broker in the form of cash or
securities in an amount that varies depending on the size and risk profile of
the particular swap. Securities
deposited as initial margin are designated on the Schedule of Investments and
cash deposited is shown as cash pledged for centrally cleared swaps on the
Statements
of Assets and Liabilities. Amounts pledged, which are considered restricted
cash, are included in cash pledged for centrally cleared swaps in the Statements
of
Assets and Liabilities. Pursuant to the contract, each Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
market value of
the contract (“variation margin”). Variation margin is recorded as unrealized
appreciation (depreciation) and shown as variation margin receivable (or
payable) on centrally cleared
swaps in the Statements of Assets and Liabilities. Payments received from
(paid to) the counterparty are amortized over the term of the contract and
recorded as realized gains
(losses) in the Statements of Operations, including those at
termination.
Swap
transactions involve, to varying degrees, elements of interest rate, credit and
market risks in excess of the amounts recognized in the Statements of Assets and
Liabilities.
Such risks involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to
perform or disagree as to the meaning of the contractual terms in the
agreements, and that there may be unfavorable changes in interest rates and/or
market values associated
with these transactions.
Master
Netting Arrangements: In order to
define its contractual rights and to secure rights that will help mitigate its
counterparty risk, a Fund may enter into an International Swaps
and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or
similar agreement with its derivative contract counterparties. An ISDA Master
Agreement
is a bilateral agreement between a Fund and a counterparty that governs certain
OTC derivatives and typically contains, among other things, collateral posting
terms
and netting provisions in the event of a default and/or termination event. Under
an ISDA Master Agreement, a Fund may, under certain circumstances, offset with
the counterparty
certain derivative financial instruments’ payables and/or receivables with
collateral held and/or posted and create one single net payment. The provisions
of the
ISDA Master Agreement typically permit a single net payment in the event of
default including the bankruptcy or insolvency of the counterparty. However,
bankruptcy or insolvency
laws of a particular jurisdiction may impose restrictions on or prohibitions
against the right of offset in bankruptcy, insolvency, or other
events.
For
derivatives traded under an ISDA Master Agreement, the collateral requirements
are typically calculated by netting the mark-to-market amount for each
transaction under such
agreement, and comparing that amount to the value of any collateral currently
pledged by a fund and the counterparty.
Cash
collateral that has been pledged to cover obligations of the Funds and cash
collateral received from the counterparty, if any, is reported separately in the
Statements of
Assets and Liabilities as cash pledged as collateral and cash received as
collateral, respectively. Non-cash collateral pledged by the Funds, if any, is
noted in the Schedules
of Investments. Generally, the amount of collateral due from or to a
counterparty is subject to a certain minimum transfer amount threshold before a
transfer is required,
which is determined at the close of business of the Funds. Any additional
required collateral is delivered to/pledged by the Funds on the next business
day. Typically,
the counterparty is not permitted to sell, re-pledge or use cash and non-cash
collateral it receives. A fund generally
agrees not to use non-cash collateral that it receives
but may, absent
default or certain other circumstances defined in the underlying ISDA Master
Agreement, be permitted to use cash collateral received. In such cases,
interest may be paid pursuant to the collateral arrangement with the
counterparty. To the extent amounts due to the Funds from the counterparty are
not fully collateralized,
each Fund bears the risk of loss from counterparty non-performance. Likewise, to
the extent the Funds have delivered collateral to a counterparty and stand
ready
to perform under the terms of their agreement with such counterparty, each Fund
bears the risk of loss from a counterparty in the amount of the value of the
collateral in the event
the counterparty fails to return such collateral. Based on the terms of
agreements, collateral may not be required for all derivative
contracts.
For
financial reporting purposes, each Fund does not offset derivative assets and
derivative liabilities that are subject to netting arrangements, if any, in the
Statements of Assets and
Liabilities.
6. INVESTMENT
ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Investment
Advisory Fees: Pursuant to
an Investment Advisory Agreement with the Company, BFA manages the investment of
each Fund’s assets. BFA is a California corporation
indirectly owned by BlackRock, Inc. (“BlackRock”). Under the
Investment Advisory
Agreement, BFA is responsible
for substantially all expenses of the Funds, except
(i) interest and taxes; (ii) brokerage commissions and other expenses connected
with the execution of portfolio transactions; (iii) distribution fees; (iv) the
advisory fee payable to
BFA; and (v) litigation expenses and any extraordinary expenses (in each case as
determined by a majority of the independent trustees).
For
its investment advisory services to each of the following Funds, BFA will be
paid a management fee from the Funds based on a percentage of each Fund’s
average daily net assets as
follows:
|
|
|
Emerging
Markets Bond Active |
|
Global
Government Bond USD Hedged Active |
|
Expense
Waivers: BFA has
contractually agreed to waive a portion of its management fees to each Fund in
an amount equal to the aggregate Acquired Fund Fees and Expenses,
if any, attributable to investments by each Fund in other equity and
fixed-income mutual funds and ETFs advised by BFA or its affiliates through June
30, 2027.
