The Future of Financial Analytics

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FINCAD white papers bring you the latest analysis from FINCAD financial experts and industry knowledge leaders, providing comprehensive insight into exchange traded and OTC derivatives, risk management, current regulation and compliance issues.

Founded in 1990, FINCAD provides software and services supporting the valuation and risk management of cross-asset class derivatives and fixed income securities to banks, corporate treasuries, asset management and insurance firms, auditors, hedge funds, and governments. FINCAD is the industry standard for financial analytics used by more than 4,000 organizations in over 80 countries.

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The Cost of Clearing: A Buy-Side Investigation

How does clearing affect alpha? How will central clearing affect performance?

Questions along these lines are heard time and again in buy-side events, but answers are harder to find. Sapient Global Markets embarked on an in-depth study to get some answers, leveraging FINCAD technology to compare the effects of various clearing methods. The results - and answers - are available in the white paper The Cost of Clearing: A Buy-Side Investigation.

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Sapient Gobal Markets developed, ran and compiled the study. It measured the portfolio performance of a fixed income fund hedged under four different methods: pre-crisis uncleared swaps, post-crisis uncleared swaps (using BCBS/IOSCO guidelines), swaps cleared through LCH.Clearnet SwapClear and Eris Standard swap-futures (cleared via the CME).

It won’t shock anyone to hear that there is significant drag on portfolio returns when comparing the pre-crisis environment with centrally cleared models and again with uncleared models under the new regulatory environment. It might come as a surprise, though, to see just how different the variance was between the models.

The findings will help buy-side firms evaluate their clearing strategies and better understand the impacts of central clearing on their business.