In today’s market environment, several key factors exist that serve to make the effect of convexity on a MBS
portfolio especially pronounced. This article will briefly review two principal issues that mortgage portfolio
managers are currently focused on – volatility in the US Treasury market and options for hedging – together with
the corresponding impact on fixed income analytic systems (such as Yield Book, POINT or Blackrock).

MARKET VOLATILITY First, the USD Treasury market presently illustrates a level of volatility consistent
with historical, non-crisis highs. As the current pricing of implied volatility for a basket of at-the-money options on
liquid, benchmark off-the-run Treasuries demonstrates, the bond market is clearly communicating expectations for
continued high volatility in the near & intermediate term. As various pieces of positive global macroeconomic news
are unveiled, and investors consider the asymmetrical risk associated with a 2.50% 30-year UST, the potential for a
sharp V-shaped move higher in US interest rates remains only a catalyst (or two) away.

With mortgage portfolios, however, rising rates introduces a self-feeding reinforcement mechanism as PMs sell
duration (principally via USTs and interest rate swaps) to hedge the portfolio lengthening impact of convexity,
which causes rates to go higher which causes PMs to sell more duration and so forth. This increases both the
severity and speed of a rate environment adjustment due to every mortgage PM having the same predictable
problem. Due to the enormous growth in the size of the MBS market over the past decade, the hedging
requirements (on an absolute basis) are commensurate and issues with liquidity in certain Treasury instruments
quickly emerge. These yield short-term pricing distortions unquestionably result in a higher cost of convexity
hedging which can act as a material drag on overall portfolio performance.

RISING RATES Second, significant uncertainty exists coming from the unprecedented record prolonged low
nominal mortgage rates.. It is simply unknown how sharply prepays will fall if (or, perhaps more aptly, when)
rates revert to their long-term “normalized” trend line which exist in the stratosphere somewhere perhaps ~200
to 300 bp above current levels of a 1.50% 10-year UST. While research resources at firms such as Citi (Yield
Book) and Barclay’s (POINT) have no doubt been working diligently to model the impact of rates experiencing
a lasting regression to the mean, the absence of historical experience or analyzable data makes this ultimately an
academic exercise. With refi activity encompassing almost 80% of the MBA’s Market Composite Index, however,
it unquestionably will have a generational influence on the mortgage market. Mortgage investors everywhere will
feel this uncertainty, volatility and potential lack of reliability with existing prepayment models, and with particular
emphasis on those mortgage instruments that exhibit outsized dynamic price behavior with even modest changes in
market parameters.

IMPACT ON APPLICATIONS Let’s now transition to the impact of these factors on a buy-side firm’s
fixed income analytic platform. While the process for accommodating prepayment assumptions on a bond-
level basis almost certainly exists for pricing within any batch processing structure, the uncertainty surrounding
the performance of existing prepayment models has no doubt put MBS traders, quants and PMs in a position of
needing to potentially make substantial changes to the speeds at which various MBS instruments are priced. Buy-
side firms with a substantial exposure to MBS will need to review the process by which prepayment assumptions
for pricing are generated (such as through a IO/PO Breakeven model, for example) and consider structural reform,
if necessary. Furthermore, a pertinent, logical question remains as to how all of these moving parts will affect
mortgage benchmark duration. For the FI Applications Manager, now is the time to be evaluating and enhancing
existing processes, not once the market fireworks have begun.

Secondly, the recent volatility witnessed in both global Treasury rates and risk spreads communicates quite clearly
to the Head of Analytics (or FI Financial Engineering / FI Technology) at every buy-side firm the absolutely
critical nature of ensuring that any problem with processes associated with Yield Book, Blackrock and POINT
be proactively addressed by support staff. In an environment where 10 to 20+ basis point shifts in benchmark
US Treasury rates can be repeatedly seen on a daily basis, it is simply unacceptable to front office FI resources
to be asked to rely on day-old data – or data available at 11:00 a.m. – should any vital production process break
down. The absence of current FI analytic data is one of the fastest ways to hamstring an organization’s trading and
portfolio management operations.

Left unresolved, these issues can end up costing a firm in several different critical ways. In a more volatile
investment environment, it becomes increasingly difficult to rely on day-old data should problems occur which
result in traders, portfolio managers and analysts needing to spend valuable time manually calculating current-day
values prior to taking action. Additionally, with the expected variability and uncertainty in prepayment model cash
flow projections, not having a sufficiently developed process for generating daily prepayment-speeds for MBS
holdings could result in poor portfolio performance, inaccurate risk forecasts and duration mismatch between
portfolio and benchmark. Put together, both of these problems can have material negative impacts – both explicit
and implicit – that justify the economics of allocating resources towards taking proactive steps to resolve them.

HOW ADEPTYX CAN HELP At Adeptyx, our Fixed Income Analytics Consulting practice offers expertise
in both of these crucial areas: DEVELOPMENT and SUPPORT. Whether your needs encompass updating your
existing Fixed Income Analytic infrastructure to address the types of issues outlined above – or simply ensuring
that your POINT, Blackrock or Yield Book setup delivers reliable, consistent results every night of the week – we
have the unique resources to solve your most complex and challenging problems. Our Fixed Income Analytics
Consulting practice brings highly experienced, hard-to-find skill sets bringing together expertise in:

• Understanding esoteric bond structures and analytic / risk calculations
• Conceptualizing how FI analytic applications such as Yield Book / POINT / Blackrock interact with
  other fundamental systems such as accounting, trade order management, client reporting and performance
  attribution
• Enabling communication between FI Technology and Trading / Research / Portfolio Management / Risk

Contact Mark Bredesen (markbredesen (at) adeptyx.com) or Ari Fuad (arifuad (at) adeptyx.com) to begin a collaborative
discussion on how Adeptyx can benefit your firm.

Adeptyx Announces Expansion into Fixed Income Analytics Consulting

April 2nd, 2012

Adeptyx Consulting Inc., a provider of consulting and operational support to the institutional asset management business, today announced an expansion of the company’s consulting offerings into fixed income analytics.  As a natural extension to Adeptyx’s existing expertise in trading systems, investment operations and similar functions, the growth into fixed income analytics will allow Adeptyx to meet the needs of our clients’ most complex, complicated fixed income data environments.

With the expansion into fixed income analytics, Adeptyx will bring a wealth of knowledge and experience into such industry standard platforms as Yield Book, POINT, Blackrock, and Bloomberg.  Based on the feedback received from clients, Adeptyx expects to initially focus on three specific areas within the fixed income analytics space:

• Development Projects – with constant change, growth and evolution in the bond market – innovative security types being introduced, new methodologies to interpret risk exposure, and so forth – clients demand the latest transformations in managing risk and achieving consistent outperformance.  With every firm striving to generate the ever-illusive alpha, in order for an asset manager to keep up with its competitors, it is absolutely critical that their fixed income analytic technology infrastructure reflects the firm’s commitment to success.  Adeptyx now has the expertise to manage projects ranging from smaller efforts spanning a few weeks to support the newest fixed income derivative to larger, firm-wide initiatives geared towards a major enhancement or implementation of Yield Book, POINT, Blackrock or Bloomberg.
• Support Optimization – as clients process several thousand portfolio and index holdings on a nightly basis to generate fixed income analytic and risk metrics, there are a large collection of support issues that inevitably need to be managed. Most of the time, clients end up with a piecemeal, haphazard approach to support that results in missing / inaccurate data, delays in meeting production service levels, lack of confidence from the user base, and the wrong personnel mismatched with inadequate tools so that issues cannot be quickly fixed.  Adeptyx can build an automated, results-driven solution to comprehensively address the multitude of support issues that a client faces each and every day, resulting in production service levels being met, reduced overall support costs, and a happy collection of users.
• Cost Structure Enhancement – with providers such as Yield Book charging clients on a per-CPU minute basis, running unnecessary, inefficient or duplicative calculations can end up costing thousands of dollars a year.  A comprehensive review of a client’s Yield Book overnight batch coding can potentially unveil substantial and immediate cash savings tied to a lower monthly invoice.  Engaging Adeptyx to perform an analysis of a client’s batch coding offers a superior cost/reward profile together with a quick way to benefit from a prompt, material impact with existing production processes.

To support this expansion into fixed income analytics consulting, Adeptyx announced today that they have partnered with Mark Bredesen, to add a deep level of proficiency within the fixed income analytics space.  During a 6+ year consulting engagement at one of the world’s leading asset management firms, Mr. Bredesen developed the largest single implementation of Yield Book with 30+ licenses supporting a variety of overnight batch processes providing information to the firm’s fixed income portfolio managers, traders, and quantitative research analysts.  To bolster the firm’s fixed income performance, the firm build a standardized data environment to provide its fixed income team members access to consistent, reliable data paired with cutting edge interest rate, volatility and prepayment risk models.  Information from Yield Book was fed into a collection of downstream systems including Risk Management, Client Reporting, Portfolio Construction and Compliance.

“Mark’s consistent track record of success with the most extensive implementations of fixed income analytic systems such as Yield Book and POINT will translate into an even stronger product offering for our existing client base,” said Ari Fuad, President, Adeptyx Consulting. “Furthermore, firms that have historically not benefitted from Adeptyx’s expertise due to the absence of a fixed income analytics offering will now have the opportunity to gain from our proficiency across several critical areas within an asset management firm.

Mr. Bredesen brings more than a decade of experience in managing complex projects associated with analyzing, implementing, testing and supporting highly advanced fixed income analytics systems.  He will be responsible for working with Mr. Fuad to grow the new fixed income analytics business, in addition to consulting directly for asset managers that can gain from having their difficult, systematic problems solved.

“Adeptyx represents the perfect venue to effectively utilize the fixed income analytics skill set I have built over the past 10+ years,” said Mr. Bredesen. “Expanding into fixed income analytics and data warehousing is a logical evolution of the Adeptyx approach to offering comprehensive solutions to the variety of problems faced by today’s institutional asset managers, mutual funds, hedge funds, pensions, endowments, banks and insurance companies.”

Mr. Bredesen has held a variety of senior-level positions within the investment banking and asset management industry, including blue chip firms such as Salomon Brothers (NYC), Putnam Investments (Boston), Wells Fargo (Minneapolis and San Francisco) and Dain Bosworth (Minneapolis).  He started his career in the Quantitative Fixed Income Research group at Salomon Brothers as an Analyst in the Yield Book group.  He holds a degree in Quantitative Economics from the University of Wisconsin – Madison.