New Study Shows a Significant Impact on Buy-Side Portfolio Returns due to Post Dodd-Frank Costs of Clearing

  New Study Shows a Significant Impact on Buy-Side Portfolio Returns due to
  Post Dodd-Frank Costs of Clearing

 Sapient Global Markets Study Compares the Overall Portfolio Performance of a
           Fixed-Income Fund under Four Different Hedging Scenarios

Business Wire

BOSTON -- June 4, 2013

Sapient Global Markets, a division of Sapient (NASDAQ: SAPE), today announced
the release of the first in-depth study into how new central clearing mandates
will impact investment performance for buy-side firms. The research
demonstrates significant drag on portfolio returns in the new regulatory
environment. The drop in return ranges from between ~0.20% to ~0.62% for
cleared hedges, up to almost 1.00% for traditional uncleared bilateral
over-the-counter (OTC) trades.

The Sapient Global Markets “Cost of Clearing: A Buy-Side Investigation” study
quantifies and compares the costs of a typical buy-side portfolio hedging
strategy in terms of drag on portfolio returns. The study compares the overall
portfolio performance of a typical fixed-income fund using four different
hedging instruments over a fixed historical period: uncleared swaps subject to
pre-2008 margin requirements; uncleared swaps subject to the Basel Committee
on Banking Supervision (BCBS) and International Organization of Securities
Commissions (IOSCO) guidelines for margining (effective after 2015); swaps
cleared through LCH.Clearnet SwapClear; and Eris Standard swap-futures
(cleared through CME).

“Because of the significant impact on performance these results demonstrate,
as well as the June 10^th timeline set by regulators, it is apparent that
portfolio managers must examine their own hedging strategy based on expected
cost of clearing with a renewed urgency,” said Ben Larah, manager, Sapient
Global Markets, “Once the post-Dodd-Frank and BCBS/IOSCO recommended treatment
for uncleared derivatives takes effect, using standardized and centrally
cleared instruments will be the cheapest available option.”

On March 11, 2013, firms categorized as swap dealers, major swap participants
and active funds were required to centrally clear several types of interest
rate swaps - across four currencies - and certain credit default swap index
trades. On June 10, 2013, “Category 2 Entities,” including securitization
vehicles, insurers, investment funds and non-swap dealer financial
institutions must begin mandatory clearing. In order to comply with complying
with regulations, firms need to make informed decisions about how to invest
and where to clear.

“Recent regulations mandating central clearing of OTC derivatives creates
performance challenges for all investment firms and their bank counterparties
alike,” said Kevin Samborn, vice president, Sapient Global Markets. “Sapient
Global Markets’ experience in developing diverse OTC clearing and collateral
solutions help firms effectively address these latest challenges while at the
same time help to evaluate the cost of central clearing on their current
strategy and develop solutions to retain maximum returns moving forward.”

The results of the study show that cumulative portfolio returns are highest
when hedging is performed using uncleared swaps in a pre-2008 environment, and
lowest when hedging is performed using uncleared swaps in a BCBS/IOSCO
recommended environment. These results serve to show the significance of the
impact of Dodd-Frank/BCBS legislation on clearing costs; once the BCBS/IOSCO
recommendations take effect the use of customized, uncleared swaps will jump
from being the cheapest way to the most expensive way to hedge.

Sapient Global Markets conducted this study with support from LCH Clearnet and
Eris Exchange. LCH.Clearnet SwapClear provided access to the LCH.Clearnet
SMART Tool and Eris Exchange provided the Initial Margin (IM) percentages for
the Eris Standard contracts. Additional models were developed using the FINCAD
F3 analytics package to build an internal historical value at risk model in
order to calculate IM according to the BCBS/IOSCO guidelines.

The full study can be downloaded here.

About Sapient Global Markets

Sapient Global Markets, a division of Sapient® (NASDAQ: SAPE), is a leading
provider of services to today’s evolving financial and commodity markets. We
provide a full range of capabilities to help our clients grow and enhance
their businesses, create robust and transparent infrastructure, manage
operating costs, and foster innovation throughout their organizations. We
offer services across Advisory, Analytics, Technology, and Process, as well as
unique methodologies in program management, technology development, and
process outsourcing. Sapient Global Markets operates in key financial and
commodity centers worldwide, including Boston, Chicago, Houston, New York,
Calgary, Toronto, London, Amsterdam, Düsseldorf, Geneva, Munich, Zurich,
Frankfurt and Singapore, as well as in large technology development and
operations outsourcing centers in Bangalore, Delhi, and Noida, India. For more
information, visit

Sapient is a registered service mark of Sapient Corporation.


Sapient Global Markets
Matt Pennacchio, +1-646-520-2737
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