UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF
REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-05833
| T. Rowe Price Institutional International Funds, Inc. |
|
|
| (Exact name of registrant as specified in charter) |
| 100 East Pratt Street, Baltimore, MD 21202 |
|
|
| (Address of principal executive offices) |
| David Oestreicher |
| 100 East Pratt Street, Baltimore, MD 21202 |
|
|
| (Name and address of agent for service) |
Registrant’s telephone number, including area
code: (410) 345-2000
Date of fiscal year end: December
31
Date of reporting period: September 30, 2015
Item 1. Schedule of Investments
 |
|
Institutional International Funds |
September
30, 2015 |
| T. Rowe Price Institutional Emerging Markets Bond Fund |
|
|
Unaudited
The accompanying notes are an integral part of this Portfolio of Investments.
T. Rowe Price Institutional Emerging
Markets Bond Fund
Unaudited
Notes To Portfolio of Investments
T. Rowe Price Institutional International Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional Emerging Markets Bond Fund (the fund) is a nondiversified, open-end management investment company established by the corporation. The fund commenced operations on November 30, 2006. The fund seeks to provide high income and capital appreciation.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of
Preparation
The fund is an investment
company and follows accounting and reporting guidance in the Financial
Accounting Standards Board (FASB) Accounting
Standards Codification Topic 946 (ASC 946).
The accompanying Portfolio of Investments was prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP),
including but not limited to ASC 946. GAAP requires the use of estimates made by
management. Management believes that estimates and valuations are appropriate;
however, actual results may differ from those estimates, and the valuations
reflected in the Portfolio of Investments may differ from the values ultimately
realized upon sale or maturity.
Investment
Transactions
Investment transactions are
accounted for on the trade date.
Currency
Translation
Investments denominated in
foreign currencies are translated into U.S. dollar values each day at the
prevailing exchange rate, using the mean of the bid and asked prices of such
currencies against U.S. dollars as quoted by a major bank. Purchases and sales
of securities are translated into U.S. dollars at the prevailing exchange rate
on the date of the transaction.
New Accounting Guidance
In May 2015, FASB issued
ASU No. 2015-07, Fair Value Measurement (Topic
820), Disclosures for Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). The ASU
removes the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset value per share
practical expedient and amends certain disclosure requirements for such
investments. The ASU is effective for interim and annual reporting periods
beginning after December 15, 2015. Adoption will have no effect on the fund’s
net assets or results of operations.
NOTE 2 – VALUATION
The fund’s financial instruments are valued and its net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business.
Fair Value
The fund’s financial instruments are reported at fair value,
which GAAP defines as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. The T. Rowe Price Valuation Committee (the Valuation
Committee) has been established by the fund’s Board of Directors (the Board) to
ensure that financial instruments are appropriately priced at fair value in
accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the
Valuation Committee develops and oversees pricing-related policies and
procedures and approves all fair value determinations. Specifically, the
Valuation Committee establishes procedures to value securities; determines
pricing techniques, sources, and persons eligible to effect fair value pricing
actions; oversees the selection, services, and
performance of pricing vendors; oversees valuation-related business continuity
practices; and provides guidance on internal controls and valuation-related
matters. The Valuation Committee reports to the Board and has representation
from legal, portfolio management and trading, operations, risk management and
the fund’s treasurer.
Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value:
Level 1 – quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date
Level 2 – inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads)
Level 3 – unobservable inputs
Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values.
Valuation Techniques
Debt securities generally are traded in
the over-the-counter (OTC) market. Securities with remaining maturities of one
year or more at the time of acquisition are valued at prices furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers the yield or price of bonds of comparable quality,
coupon, maturity, and type, as well as prices quoted by dealers who make markets
in such securities. Securities with remaining maturities of less than one year
at the time of acquisition generally use amortized cost in local currency to
approximate fair value. However, if amortized cost is deemed not to reflect fair
value or the fund holds a significant amount of such securities with remaining
maturities of more than 60 days, the securities are valued at prices furnished
by dealers who make markets in such securities or by an independent pricing
service. Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
Investments in mutual funds are valued at the mutual fund’s closing NAV per share on the day of valuation and are categorized in Level 1 of the fair value hierarchy. Financial futures contracts are valued at closing settlement prices and are categorized in Level 1 of the fair value hierarchy. Forward currency exchange contracts are valued using the prevailing forward exchange rate and are categorized in Level 2 of the fair value hierarchy. Swaps are valued at prices furnished by independent swap dealers or by an independent pricing service and generally are categorized in Level 2 of the fair value hierarchy; however, if unobservable inputs are significant to the valuation, the swap would be categorized in Level 3.
Thinly traded financial instruments and those for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by the Valuation Committee. The objective of any fair value pricing determination is to arrive at a price that could reasonably be expected from a current sale. Financial instruments fair valued by the Valuation Committee are primarily private placements, restricted securities, warrants, rights, and other securities that are not publicly traded.
Subject to oversight by the Board, the Valuation Committee regularly makes good faith judgments to establish and adjust the fair valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of troubled or thinly traded debt instruments, the Valuation Committee considers a variety of factors, which may include, but are not limited to, the issuer’s business prospects, its financial standing and performance, recent investment transactions in the issuer, strategic events affecting the company, market liquidity for the issuer, and general economic conditions and events. In consultation with the investment and pricing teams, the Valuation Committee will determine an appropriate valuation technique based on available information, which may include both observable and unobservable inputs. The Valuation Committee typically will afford greatest weight to actual prices in arm’s length transactions, to the extent they represent orderly transactions between market participants; transaction information can be reliably obtained; and prices are deemed representative of fair value. However, the Valuation Committee may also consider other valuation methods such as a discount or premium from market value of a similar, freely traded security of the same issuer; discounted cash flows; yield to maturity; or some combination. Fair value determinations are reviewed on a regular basis and updated as information becomes available, including actual purchase and sale transactions of the issue. Because any fair value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions, and fair value prices determined by the Valuation Committee could differ from those of other market participants. Depending on the relative significance of unobservable inputs, including the valuation technique(s) used, fair valued securities may be categorized in Level 2 or 3 of the fair value hierarchy.
Valuation Inputs
The following table summarizes the fund’s financial
instruments, based on the inputs used to determine their fair values on
September 30, 2015:
There were no material transfers between Levels 1 and 2 during the period ended September 30, 2015.
Following is a reconciliation of the fund’s Level 3 holdings for the period ended September 30, 2015. Gain (loss) reflects both realized and change in unrealized gain/loss on Level 3 holdings during the period, if any. The change in unrealized gain/loss on Level 3 instruments held at September 30, 2015, totaled $0 for the period ended September 30, 2015.
NOTE 3 – DERIVATIVE INSTRUMENTS
The fund may invest in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust portfolio duration and credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. The fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover its settlement obligations under open derivative contracts. The fund values its derivatives at fair value, as described in Note 2.
Counterparty Risk and Collateral
The fund invests in derivatives in
various markets, which expose it to differing levels of counterparty risk.
Counterparty risk on exchange-traded and centrally cleared derivative contracts,
such as futures, exchange-traded options, and centrally cleared swaps, is
minimal because the clearinghouse provides protection against counterparty
defaults. For futures and centrally cleared swaps, the fund is required to
deposit collateral in an amount equal to a certain percentage of the contract
value (margin requirement) and the margin requirement must be maintained over
the life of the contract. Each clearing broker, in its sole discretion, may
adjust the margin requirements applicable to the fund.
Derivatives, such as bilateral swaps, forward currency exchange contracts, and OTC options, that are transacted and settle directly with a counterparty (bilateral derivatives) expose the fund to greater counterparty risk. To mitigate this risk, the fund has entered into master netting arrangements (MNAs) with certain counterparties that permit net settlement under specified conditions and, for certain counterparties, also provide collateral agreements. MNAs may be in the form of International Swaps and Derivatives Association master agreements (ISDAs) or foreign exchange letter agreements (FX letters).
MNAs govern the ability to offset amounts the fund owes a counterparty against amounts the counterparty owes the fund (net settlement). Both ISDAs and FX letters generally allow net settlement in the event of contract termination and permit termination by either party prior to maturity upon the occurrence of certain stated events, such as failure to pay or bankruptcy. In addition, ISDAs specify other events, the occurrence of which would allow one of the parties to terminate. For example, a downgrade in credit rating of a counterparty would allow the fund to terminate while a decline in the fund’s net assets of more than a certain percentage would allow the counterparty to terminate. Upon termination, all bilateral derivatives with that counterparty would be liquidated and a net amount settled. ISDAs typically include collateral agreements whereas FX letters do not. Collateral requirements are determined based on the net aggregate unrealized gain or loss on all bilateral derivatives with each counterparty, subject to minimum transfer amounts that typically range from $100,000 to $250,000. Any additional collateral required due to changes in security values is transferred the next business day.
Collateral may be in the form of cash or debt securities issued by the U.S. government or related agencies; securities posted by the fund are so noted in the accompanying Portfolio of Investments. For bilateral derivatives, collateral posted or received by the fund is held in a segregated account by the fund’s custodian. As of September 30, 2015, securities valued at $303,000 had been posted by the fund to counterparties for bilateral derivatives. As of September 30, 2015, collateral pledged by counterparties to the fund for bilateral derivatives consisted of $1,609,000 cash and securities valued at $691,000. As of September 30, 2015, cash of $25,000 had been posted by the fund for exchange-traded and/or centrally cleared derivatives.
Forward Currency Exchange
Contracts
The fund uses forward currency
exchange contracts (forwards) primarily to protect its non-U.S.
dollar-denominated securities from adverse currency movements and to gain
exposure to currencies for the purposes of risk management or enhanced return. A
forward involves an obligation to purchase or sell a fixed amount of a specific
currency on a future date at a price set at the time of the contract. Although
certain forwards may be settled by exchanging only the net gain or loss on the
contract, most forwards are settled with the exchange of the underlying
currencies in accordance with the specified terms. Forwards are valued at the
unrealized gain or loss on the contract, which reflects the net amount the fund
either is entitled to receive or obligated to deliver, as measured by the
difference between the forward exchange rates at the date of entry into the
contract and the forward rates at the reporting date. Risks related to the use
of forwards include the possible failure of counterparties to meet the terms of
the agreements; that anticipated currency movements will not occur thereby
reducing the fund’s total return; and the potential for losses in excess of the
fund’s initial investment.
Futures Contracts
The fund may enter into futures contracts to manage exposure
to interest rate and yield curve movements, security prices, foreign currencies,
credit quality, and mortgage prepayments; as an efficient means of adjusting
exposure to all or part of a target market; to enhance income; as a cash
management tool; or to adjust portfolio duration and credit exposure. A futures
contract provides for the future sale by one party and purchase by another of a
specified amount of a specific underlying financial instrument at an agreed upon
price, date, time, and place. The fund currently invests only in exchange-traded
futures, which generally are standardized as to maturity date, underlying
financial instrument, and other contract terms. Payments are made or received by
the fund each day to settle daily fluctuations in the value of the contract
(variation margin), which reflect changes in the value of the underlying
financial instrument. Risks related to the use of futures contracts include
possible illiquidity of the futures markets, contract prices that can be highly
volatile and imperfectly correlated to movements in hedged security values,
interest rates, or currency values; and potential losses in excess of the fund’s
initial investment.
Swaps
The fund may use swaps in an effort to manage exposure to changes in
interest rates, inflation rates, and credit quality; to adjust overall exposure
to certain markets; to enhance total return or protect the value of portfolio
securities; to serve as a cash management tool; or to adjust portfolio duration
and credit exposure. Swap agreements can be settled either directly with the
counterparty (bilateral swap) or through a central clearinghouse (centrally
cleared swap). For bilateral swaps, cash payments are made or received by the
fund on a periodic basis in accordance with contract terms. For centrally
cleared swaps, payments are made or received by the fund each day to settle the
daily fluctuation in the value of the contract (variation margin).
Credit default swaps are agreements where one party (the protection buyer) agrees to make periodic payments to another party (the protection seller) in exchange for protection against specified credit events, such as certain defaults and bankruptcies related to an underlying credit instrument, or issuer or index of such instruments. Upon occurrence of a specified credit event, the protection seller is required to pay the buyer the difference between the notional amount of the swap and the value of the underlying credit, either in the form of a net cash settlement or by paying the gross notional amount and accepting delivery of the relevant underlying credit. For credit default swaps where the underlying credit is an index, a specified credit event may affect all or individual underlying securities included in the index and will be settled based upon the relative weighting of the affected underlying security(s) within the index. Generally, the payment risk for the seller of protection is inversely related to the current market price or credit rating of the underlying credit or the market value of the contract relative to the notional amount, which are indicators of the markets’ valuation of credit quality. Risks related to the use of credit default swaps include the possible inability of the fund to accurately assess the current and future creditworthiness of underlying issuers, the possible failure of a counterparty to perform in accordance with the terms of the swap agreements, potential government regulation that could adversely affect the fund’s swap investments, and potential losses in excess of the fund’s initial investment.
NOTE 4 – OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Emerging and Frontier
Markets
The fund may invest, either
directly or through investments in T. Rowe Price institutional funds, in
securities of companies located in, issued by governments of, or denominated in or
linked to the currencies of emerging and frontier market countries; at
period-end, approximately 62% of the fund’s net assets were invested in emerging
markets and 31% in frontier markets. Frontier markets generally have economic
structures that are less diverse and mature, and political systems that are less
stable, than developed countries and emerging markets. These markets may be
subject to greater political, economic, and social uncertainty and differing
regulatory environments that may potentially impact the fund’s ability to buy or
sell certain securities or repatriate proceeds to U.S. dollars. Such securities
are often subject to greater price volatility, less liquidity, and higher rates
of inflation than U.S. securities. Investing in frontier markets is
significantly riskier than investing in other countries, including emerging
markets.
Noninvestment-Grade Debt
Securities
The fund may invest, either
directly or through its investments in T. Rowe Price institutional funds, in
noninvestment-grade debt securities, commonly referred to as “high yield” or
“junk” bonds. The noninvestment-grade bond market may experience sudden and
sharp price swings due to a variety of factors, including changes in economic
forecasts, stock market activity, large sustained sales by major investors, a
high-profile default, or a change in market sentiment. These events may decrease
the ability of issuers to make principal and interest payments and adversely
affect the liquidity or value, or both, of such securities.
Restricted
Securities
The fund may invest in
securities that are subject to legal or contractual restrictions on resale.
Prompt sale of such securities at an acceptable price may be difficult and may
involve substantial delays and additional costs.
NOTE 5 - FEDERAL INCOME TAXES
At September 30, 2015, the cost of investments for federal income tax purposes was $334,978,000. Net unrealized loss aggregated $25,760,000 at period-end, of which $6,382,000 related to appreciated investments and $32,142,000 related to depreciated investments.
NOTE 6 - RELATED PARTY TRANSACTIONS
The fund may invest in the T. Rowe Price Reserve Investment Fund, the T. Rowe Price Government Reserve Investment Fund, or the T. Rowe Price Short-Term Reserve Fund (collectively, the Price Reserve Investment Funds), open-end management investment companies managed by T. Rowe Price Associates, Inc. (Price Associates) and considered affiliates of the fund. The Price Reserve Investment Funds are offered as short-term investment options to mutual funds, trusts, and other accounts managed by Price Associates or its affiliates and are not available for direct purchase by members of the public. The Price Reserve Investment Funds pay no investment management fees.
| T. Rowe Price Institutional International Bond Fund |
|
|
Unaudited
The accompanying notes are an integral part of this Portfolio of Investments.
T. Rowe Price Institutional International
Bond Fund
Unaudited
Notes to Portfolio of Investments
T. Rowe Price Institutional International Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional International Bond Fund (the fund) is a nondiversified, open-end management investment company established by the corporation. The fund commenced operations on May 31, 2007. The fund seeks to provide high current income and capital appreciation.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of
Preparation
The fund is an investment
company and follows accounting and reporting guidance in the Financial
Accounting Standards Board (FASB) Accounting
Standards Codification Topic 946 (ASC 946).
The accompanying Portfolio of Investments was prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP),
including but not limited to ASC 946. GAAP requires the use of estimates made by
management. Management believes that estimates and valuations are appropriate;
however, actual results may differ from those estimates, and the valuations
reflected in the Portfolio of Investments may differ from the values ultimately
realized upon sale or maturity.
Investment
Transactions
Investment transactions are
accounted for on the trade date.
Currency
Translation
Investments denominated in
foreign currencies are translated into U.S. dollar values each day at the
prevailing exchange rate, using the mean of the bid and asked prices of such
currencies against U.S. dollars as quoted by a major bank. Purchases and sales
of securities are translated into U.S. dollars at the prevailing exchange rate
on the date of the transaction.
New Accounting Guidance
In May 2015, FASB issued ASU No. 2015-07,
Fair Value Measurement (Topic 820),
Disclosures for Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent). The ASU
removes the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset value per share
practical expedient and amends certain disclosure requirements for such
investments. The ASU is effective for interim and annual reporting periods
beginning after December 15, 2015. Adoption will have no effect on the fund’s
net assets or results of operations.
NOTE 2 – VALUATION
The fund’s financial instruments are valued and its net asset value (NAV) per share is computed at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day the NYSE is open for business.
Fair Value
The fund’s financial instruments are reported at fair value,
which GAAP defines as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date. The T. Rowe Price Valuation Committee (the Valuation
Committee) has been established by the fund’s Board of Directors (the Board) to
ensure that financial instruments are appropriately priced at fair value in
accordance with GAAP and the 1940 Act. Subject to oversight by the Board, the
Valuation Committee develops and oversees pricing-related policies and
procedures and approves all fair value determinations. Specifically, the
Valuation Committee establishes procedures to value securities; determines
pricing techniques, sources, and persons eligible to effect fair value pricing
actions; oversees the selection, services, and
performance of pricing vendors; oversees valuation-related business continuity
practices; and provides guidance on internal controls and valuation-related
matters. The Valuation Committee reports to the Board and has representation
from legal, portfolio management and trading, operations, risk management and
the fund’s treasurer.
Various valuation techniques and inputs are used to determine the fair value of financial instruments. GAAP establishes the following fair value hierarchy that categorizes the inputs used to measure fair value:
Level 1 – quoted prices (unadjusted) in active markets for identical financial instruments that the fund can access at the reporting date
Level 2 – inputs other than Level 1 quoted prices that are observable, either directly or indirectly (including, but not limited to, quoted prices for similar financial instruments in active markets, quoted prices for identical or similar financial instruments in inactive markets, interest rates and yield curves, implied volatilities, and credit spreads)
Level 3 – unobservable inputs
Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use to price the financial instrument. Unobservable inputs are those for which market data are not available and are developed using the best information available about the assumptions that market participants would use to price the financial instrument. GAAP requires valuation techniques to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. When multiple inputs are used to derive fair value, the financial instrument is assigned to the level within the fair value hierarchy based on the lowest-level input that is significant to the fair value of the financial instrument. Input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level but rather the degree of judgment used in determining those values.
Valuation Techniques
Debt securities generally are traded in
the over-the-counter (OTC) market. Securities with remaining maturities of one
year or more at the time of acquisition are valued at prices furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers the yield or price of bonds of comparable quality,
coupon, maturity, and type, as well as prices quoted by dealers who make markets
in such securities. Securities with remaining maturities of less than one year
at the time of acquisition generally use amortized cost in local currency to
approximate fair value. However, if amortized cost is deemed not to reflect fair
value or the fund holds a significant amount of such securities with remaining
maturities of more than 60 days, the securities are valued at prices furnished
by dealers who make markets in such securities or by an independent pricing
service. Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
Equity securities listed or regularly traded on a securities exchange or in the OTC market are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made. OTC Bulletin Board securities are valued at the mean of the closing bid and asked prices. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the closing bid and asked prices for domestic securities and the last quoted sale or closing price for international securities.
For valuation purposes, the last quoted prices of non-U.S. equity securities may be adjusted to reflect the fair value of such securities at the close of the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, the fund will adjust the previous quoted prices to reflect what it believes to be the fair value of the securities as of the close of the NYSE. In deciding whether it is necessary to adjust quoted prices to reflect fair value, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U.S. markets that represent foreign securities and baskets of foreign securities. The fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. The fund uses outside pricing services to provide it with quoted prices and information to evaluate or adjust those prices. The fund cannot predict how often it will use quoted prices and how often it will determine it necessary to adjust those prices to reflect fair value. As a means of evaluating its security valuation process, the fund routinely compares quoted prices, the next day’s opening prices in the same markets, and adjusted prices.
Actively traded domestic equity securities generally are categorized in Level 1 of the fair value hierarchy. Non-U.S. equity securities generally are categorized in Level 2 of the fair value hierarchy despite the availability of quoted prices because, as described above, the fund evaluates and determines whether those quoted prices reflect fair value at the close of the NYSE or require adjustment. OTC Bulletin Board securities, certain preferred securities, and equity securities traded in inactive markets generally are categorized in Level 2 of the fair value hierarchy.
Investments in mutual funds are valued at the mutual fund’s closing NAV per share on the day of valuation and are categorized in Level 1 of the fair value hierarchy. Financial futures contracts are valued at closing settlement prices and are categorized in Level 1 of the fair value hierarchy. Forward currency exchange contracts are valued using the prevailing forward exchange rate and are categorized in Level 2 of the fair value hierarchy. Swaps are valued at prices furnished by independent swap dealers or by an independent pricing service and generally are categorized in Level 2 of the fair value hierarchy; however, if unobservable inputs are significant to the valuation, the swap would be categorized in Level 3.
Thinly traded financial instruments and those for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by the Valuation Committee. The objective of any fair value pricing determination is to arrive at a price that could reasonably be expected from a current sale. Financial instruments fair valued by the Valuation Committee are primarily private placements, restricted securities, warrants, rights, and other securities that are not publicly traded.
Subject to oversight by the Board, the Valuation Committee regularly makes good faith judgments to establish and adjust the fair valuations of certain securities as events occur and circumstances warrant. For instance, in determining the fair value of troubled or thinly traded debt instruments, the Valuation Committee considers a variety of factors, which may include, but are not limited to, the issuer’s business prospects, its financial standing and performance, recent investment transactions in the issuer, strategic events affecting the company, market liquidity for the issuer, and general economic conditions and events. In consultation with the investment and pricing teams, the Valuation Committee will determine an appropriate valuation technique based on available information, which may include both observable and unobservable inputs. The Valuation Committee typically will afford greatest weight to actual prices in arm’s length transactions, to the extent they represent orderly transactions between market participants; transaction information can be reliably obtained; and prices are deemed representative of fair value. However, the Valuation Committee may also consider other valuation methods such as a discount or premium from market value of a similar, freely traded security of the same issuer; discounted cash flows; yield to maturity; or some combination. Fair value determinations are reviewed on a regular basis and updated as information becomes available, including actual purchase and sale transactions of the issue. Because any fair value determination involves a significant amount of judgment, there is a degree of subjectivity inherent in such pricing decisions, and fair value prices determined by the Valuation Committee could differ from those of other market participants. Depending on the relative significance of unobservable inputs, including the valuation technique(s) used, fair valued securities may be categorized in Level 2 or 3 of the fair value hierarchy.
Valuation Inputs
The following table summarizes the fund’s financial
instruments, based on the inputs used to determine their fair values on
September 30, 2015:
There were no material transfers between Levels 1 and 2 during the period ended September 30, 2015.
NOTE 3 – DERIVATIVE INSTRUMENTS
The fund may invest in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust portfolio duration and credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. The fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover its settlement obligations under open derivative contracts. The fund values its derivatives at fair value, as described in Note 2.
Counterparty Risk and Collateral
The fund invests in derivatives in
various markets, which expose it to differing levels of counterparty risk.
Counterparty risk on exchange-traded and centrally cleared derivative contracts,
such as futures, exchange-traded options, and centrally cleared swaps, is
minimal because the clearinghouse provides protection against counterparty
defaults. For futures and centrally cleared swaps, the fund is required to
deposit collateral in an amount equal to a certain percentage of the contract
value (margin requirement) and the margin requirement must be maintained over
the life of the contract. Each clearing broker, in its sole discretion, may
adjust the margin requirements applicable to the fund.
Derivatives, such as bilateral swaps, forward currency exchange contracts, and OTC options, that are transacted and settle directly with a counterparty (bilateral derivatives) expose the fund to greater counterparty risk. To mitigate this risk, the fund has entered into master netting arrangements (MNAs) with certain counterparties that permit net settlement under specified conditions and, for certain counterparties, also provide collateral agreements. MNAs may be in the form of International Swaps and Derivatives Association master agreements (ISDAs) or foreign exchange letter agreements (FX letters).
MNAs govern the ability to offset amounts the fund owes a counterparty against amounts the counterparty owes the fund (net settlement). Both ISDAs and FX letters generally allow net settlement in the event of contract termination and permit termination by either party prior to maturity upon the occurrence of certain stated events, such as failure to pay or bankruptcy. In addition, ISDAs specify other events, the occurrence of which would allow one of the parties to terminate. For example, a downgrade in credit rating of a counterparty would allow the fund to terminate while a decline in the fund’s net assets of more than a certain percentage would allow the counterparty to terminate. Upon termination, all bilateral derivatives with that counterparty would be liquidated and a net amount settled. ISDAs typically include collateral agreements whereas FX letters do not. Collateral requirements are determined based on the net aggregate unrealized gain or loss on all bilateral derivatives with each counterparty, subject to minimum transfer amounts that typically range from $100,000 to $250,000. Any additional collateral required due to changes in security values is transferred the next business day.
Collateral may be in the form of cash or debt securities issued by the U.S. government or related agencies; securities posted by the fund are so noted in the accompanying Portfolio of Investments. For bilateral derivatives, collateral posted or received by the fund is held in a segregated account by the fund’s custodian. As of September 30, 2015, securities valued at $314,000 had been posted by the fund to counterparties for bilateral derivatives. As of September 30, 2015, collateral pledged by counterparties to the fund for bilateral derivatives consisted of $480,000 cash and securities valued at $1,850,000. As of September 30, 2015, cash of $1,079,000 had been posted by the fund for exchange-traded and/or centrally cleared derivatives.
Forward Currency Exchange
Contracts
The fund uses forward currency
exchange contracts (forwards) primarily to protect its non-U.S.
dollar-denominated securities from adverse currency movements and to gain
exposure to currencies for the purposes of risk management or enhanced return. A
forward involves an obligation to purchase or sell a fixed amount of a specific
currency on a future date at a price set at the time of the contract. Although
certain forwards may be settled by exchanging only the net gain or loss on the
contract, most forwards are settled with the exchange of the underlying
currencies in accordance with the specified terms. Forwards are valued at the
unrealized gain or loss on the contract, which reflects the net amount the fund
either is entitled to receive or obligated to deliver, as measured by the
difference between the forward exchange rates at the date of entry into the
contract and the forward rates at the reporting date. Risks related to the use
of forwards include the possible failure of counterparties to meet the terms of
the agreements; that anticipated currency movements will not occur thereby
reducing the fund’s total return; and the potential for losses in excess of the
fund’s initial investment.
Futures Contracts
The fund may enter into futures contracts to manage exposure
to interest rate and yield curve movements, security prices, foreign currencies,
credit quality, and mortgage prepayments; as an efficient means of adjusting
exposure to all or part of a target market; to enhance income; as a cash
management tool; or to adjust portfolio duration and credit exposure. A futures
contract provides for the future sale by one party and purchase by another of a
specified amount of a specific underlying financial instrument at an agreed upon
price, date, time, and place. The fund currently invests only in exchange-traded
futures, which generally are standardized as to maturity date, underlying
financial instrument, and other contract terms. Payments are made or received by
the fund each day to settle daily fluctuations in the value of the contract
(variation margin), which reflect changes in the value of the underlying
financial instrument. Risks related to the use of futures contracts include
possible illiquidity of the futures markets, contract prices that can be highly
volatile and imperfectly correlated to movements in hedged security values,
interest rates, or currency values; and potential losses in excess of the fund’s initial
investment.
Swaps
The fund may use swaps in an effort to manage exposure to changes in
interest rates, inflation rates, and credit quality; to adjust overall exposure
to certain markets; to enhance total return or protect the value of portfolio
securities; to serve as a cash management tool; or to adjust portfolio duration
and credit
exposure. Swap agreements can be settled either directly with the counterparty
(bilateral swap) or through a central clearinghouse (centrally cleared swap).
For bilateral swaps, cash payments are made or received by the fund on a
periodic basis in accordance with contract terms. For centrally cleared swaps,
payments are made or received by the fund each day to settle the daily
fluctuation in the value of the contract (variation margin).
Credit default swaps are agreements where one party (the protection buyer) agrees to make periodic payments to another party (the protection seller) in exchange for protection against specified credit events, such as certain defaults and bankruptcies related to an underlying credit instrument, or issuer or index of such instruments. Upon occurrence of a specified credit event, the protection seller is required to pay the buyer the difference between the notional amount of the swap and the value of the underlying credit, either in the form of a net cash settlement or by paying the gross notional amount and accepting delivery of the relevant underlying credit. For credit default swaps where the underlying credit is an index, a specified credit event may affect all or individual underlying securities included in the index and will be settled based upon the relative weighting of the affected underlying security(s) within the index. Risks related to the use of credit default swaps include the possible inability of the fund to accurately assess the current and future creditworthiness of underlying issuers, the possible failure of a counterparty to perform in accordance with the terms of the swap agreements, potential government regulation that could adversely affect the fund’s swap investments, and potential losses in excess of the fund’s initial investment.
NOTE 4 – OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Emerging and Frontier
Markets
The fund may invest, either
directly or through investments in T. Rowe Price institutional funds, in
securities of companies located in, issued by governments of, or denominated in or
linked to the currencies of emerging and frontier market countries; at
period-end, approximately 25% of the fund’s net assets were invested in emerging
markets and 3% in frontier markets. Frontier markets generally have economic
structures that are less diverse and mature, and political systems that are less
stable, than developed countries and emerging markets. These markets may be
subject to greater political, economic, and social uncertainty and differing
regulatory environments that may potentially impact the fund’s ability to buy or
sell certain securities or repatriate proceeds to U.S. dollars. Such securities
are often subject to greater price volatility, less liquidity, and higher rates
of inflation than U.S. securities. Investing in frontier markets is
significantly riskier than investing in other countries, including emerging
markets.
Restricted
Securities
The fund may invest in
securities that are subject to legal or contractual restrictions on resale.
Prompt sale of such securities at an acceptable price may be difficult and may
involve substantial delays and additional costs.
NOTE 5 - FEDERAL INCOME TAXES
At September 30, 2015, the cost of investments for federal income tax purposes was $378,932,000. Net unrealized loss aggregated $27,890,000 at period-end, of which $6,179,000 related to appreciated investments and $34,069,000 related to depreciated investments.
NOTE 6 - RELATED PARTY TRANSACTIONS
The fund may invest in the T. Rowe Price Reserve Investment Fund, the T. Rowe Price Government Reserve Investment Fund, or the T. Rowe Price Short-Term Reserve Fund (collectively, the Price Reserve Investment Funds), open-end management investment companies managed by T. Rowe Price Associates, Inc. (Price Associates) and considered affiliates of the fund. The Price Reserve Investment Funds are offered as short-term investment options to mutual funds, trusts, and other accounts managed by Price Associates or its affiliates and are not available for direct purchase by members of the public. The Price Reserve Investment Funds pay no investment management fees.
Item 2. Controls and Procedures.
(a) The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-Q was recorded, processed, summarized, and reported timely.
(b) The registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 3. Exhibits.
Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
T. Rowe Price Institutional International Funds, Inc.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date November 24, 2015 | ||
Pursuant to the
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ Edward C. Bernard | |
| Edward C. Bernard | ||
| Principal Executive Officer | ||
| Date November 24, 2015 | ||
| By | /s/ Catherine D. Mathews | |
| Catherine D. Mathews | ||
| Principal Financial Officer | ||
| Date November 24, 2015 | ||