Repo Desk Risk, Hedging, and Funding

Summary

The document outlines how a repo desk might manage rate exposure and funding across longer-term and overnight transactions. For repos lasting from a week to several months, it names offsetting repos and interest-rate instruments, including fed funds futures or swaps and SOFR futures, as possible hedges. These approaches leave basis exposure between the repo rate and the hedge’s reference rate; the answer characterizes that spread as relatively stable without offering supporting data.

For overnight repos, the answer says intraday rate moves can matter, so traders consider supply and demand when choosing trade timing. Because the exposure lasts one day, it describes the impact of small rate changes as limited. On funding, it notes that unsecured parent-company funding can cost more than repo funding, and that a matched book of repos in both directions may operate without relying on parent funding. This is a brief desk-level overview, not a quantitative risk model or a complete account of regulation, capital, collateral, or internal transfer pricing.

Key ideas

• Longer-dated repo exposure can be hedged with offsetting repos or interest-rate futures and swaps.
• Hedges based on a different reference rate leave spread or basis risk against the repo rate.
• Overnight repo rates can move intraday, so trading time and market supply and demand matter.
• A matched book can reduce reliance on unsecured parent-company funding, which may be more expensive.

Tags

# Repo risk - how the desk operate


# Repo risk - how the desk operate












I am trying to understand how repo traders are being measured(pnl/risk). I understand the amount of repo that can be done is limited by regulation but want to dig deeper on how the performance is measured.

For long term repo of 1 week to 3 months, I understand there is market risk and pnl. What instruments would the trader use to hedge the risk?

For overnight repo for 1 day, where is the market risk? The repo rate changes duration the day and how can trader manage this risk. How will the funding be charged to the repo desk?

Thanks a ton, Fish

## Answer by dm63 (score 3)

https://quant.stackexchange.com/a/50150

Hedges for long dated repo contracts :

1) long dated repo going in the opposite direction

2) fed funds futures or swaps (leaving the desk with the repo/fed funds spread risk, which is fairly stable)

3) SOFR futures, which are becoming more liquid , are a more direct hedge since they are based on the overnight general collateral repo rate

Overnight repo risk : Yes it can change during the day , so the repo desk tries to optimize the best time to trade based on supply and demand. However it’s only one day, so the risk from small fluctuations is limited.

You ask about funding : repo desks like to operate with limited dependence on parent company funding, which is more expensive than repo rates since it is unsecured. Generically you don’t need funding to run a matched book with repos going in both directions.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.