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June 4, 2013

Cost of Clearing | New Study

A new Sapient Global Markets study analyses the costs of clearing due to mandatory central-clearing through CCPs. The study measures the impact of centrally-clearing hedge derivatives on buy-side portfolio performance, in terms of the alpha drag on returns. "Alpha drag" is defined as the difference in cumulative returns (since inception) between hedging the modified duration (MD) of a bond-portfolio using bilateral IR swaps in a pre-2008 environment, and hedging the MD of a bond portfolio in a post-Dodd Frank, centrally-cleared environment over a range of post-Dodd Frank back tests. Those back tests are:

  1. Hedging using IR swaps cleared through LCH.Clearnet SwapClear
  2. Hedging using Eris Standard IR swap-futures cleared through CME
  3. Hedging using bilateral IR swaps in a proposed BCBS/IOSCO environment (set to come into effect over 2015)

The press release is printed on the WSJ website here. A copy of the study itself can be accessed from here.  


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