April 30, 2012

BNY Mellon White Paper Spotlights Unfunded Total Return Swaps as Attractive Hedging Strategy for Non-Qualified Deferred Compensation Plan Liabilities


Research paper explains how unfunded swaps allow plan sponsors to reduce volatility, decrease operating expenses and improve capital management

NEW YORK, April 30, 2012 — A new research paper from BNY Mellon detailing current approaches to hedging non-qualified deferred compensation (NQDC) plan liabilities cites the use of unfunded total return swaps as a potentially attractive strategy that can deliver lower levels of volatility, decreased operating expense and better capital management.

Now available on the BNY Mellon Web site, the new white paper is entitled: "Hedging Nonqualified Deferred Compensation Plans." Prepared in collaboration with deferred compensation specialists at Analect Benefit Finance LLC (ABF), a leading provider of NQDC plan analytics and administration services, the paper provides an in-depth analysis from both human resources and finance perspectives of various alternatives available to plan sponsors for hedging market-based NQDC plan liabilities.

Traditionally, NQDC plan sponsors have either foregone hedging altogether, or limited risk by purchasing company owned life insurance (COLI) or taxable mutual funds. The paper notes drawbacks with both approaches.

A no-hedging strategy exposes plan sponsors to potential risk and volatility. Hedging can dampen risk and volatility, but imposes costs that must be assessed and incorporated into the plan sponsor's understanding of the risks of hedging investments. The hedges most frequently employed — COLI and taxable mutual funds — are accounted for as below-the-line assets, and hence do not offset NQDC expense before the calculation of net operating revenue. Also, because those two types of hedges are "funded," they require capital outlays at initiation. Unfunded total return swaps hedges are accounted for as above-the-line assets that directly offset the NQDC plan's operating expense. This allows the plan sponsor to show operating revenue without the impact of the hedge as a non-operating expense. Furthermore, because they are unfunded, total return swaps allow the plan sponsor to use, for other business purposes, cash that would otherwise be unavailable with a funded hedge.

BNY Mellon collaborated with ABF on the white paper as part of a joint marketing agreement that combines the capital markets expertise of BNY Mellon Capital Markets and the financial strength of The Bank of New York Mellon as a swaps counterparty with ABF's capabilities as a leading provider of analytical and program administration services. "This is a timely research offering, and reflects our commitment to providing treasurers and CFOs with the latest thinking on innovative capital management strategies," said Gary Strumeyer, president of BNY Mellon Capital Markets, LLC.

More information on "Hedging Nonqualified Deferred Compensation Plans" is available at www.bnymellon.com/foresight/blank.html.

BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $26.6 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.9 trillion in outstanding debt and processes global payments averaging $1.4 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com or follow us on Twitter@BNYMellon.

NQDC hedging activities are marketed by BNY Mellon Global Markets. BNY Mellon Global Markets includes the Derivatives business of The Bank of New York Mellon as well as the business of BNY Mellon Capital Markets, LLC (member FINRA, SIPC), a non-bank, full-service broker-dealer subsidiary of The Bank of New York Mellon Corporation, and an affiliate of The Bank of New York Mellon, the swap counterparty. Together, these businesses provide products for corporate, institutional and high net worth individuals to access liquidity, execute investment and hedging requirements, conduct offerings and manage risk.

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