Using Term OIS to Hedge Long-Dated Repo Financing

Summary

This exchange discusses how a repo trader financing a longer-term securities position might manage exposure when term repo funding is difficult to secure. The answer says that repos beyond a few months can tie up a bank’s balance sheet, making them challenging in the regulatory environment described. Traders may instead use the more liquid overnight indexed swap market to lock in term financing costs, for example by paying a fixed rate on a term OIS.

The response links that practice to repo trading above OIS, despite the theoretical expectation that collateralized repo might trade below it. This is a short explanation rather than a full hedge design: it does not specify contract maturities, basis risks, position sizing, or how the hedge behaves as rates and collateral conditions change. Its statements describe a market context and rationale, not a universal pricing rule.

Key ideas

• Long-dated repo financing can be difficult because it ties up bank balance sheet capacity.
• A trader may use term OIS to help lock in financing costs.
• The described hedge involves paying fixed on a term OIS.
• Repo can trade at a positive spread to OIS despite the theoretical collateral argument.
• The exchange does not detail basis risk or a complete hedge structure.

Tags

# How do Repo traders use OIS and Fed fund rates


# How do Repo traders use OIS and Fed fund rates












I would like to know how do Repo traders use FED Fund rates and OIS to cover themselves. For example assuming the repo trader bought paper(borrwed paper/lent cash) in the 1 year. How do they cover themselves? Do they do repo on open? or 3 month repos? and do they use FF rate and OIS to their advantage.

I am new to such product so your knowledge ins appreciated

## Answer by VanillaCall (score 1)

https://quant.stackexchange.com/a/46593

It's difficult to repo more than 3 months. Essentially a bank would be locking up their balance sheet over this time period which is difficult in this post crisis regulatory environment. So traders use OIS which is relatively more liquid to lock in financing by paying fixed on term OIS for example. That's why repo trades at a positive spread to OIS, while theoretically it should trade through because repo is collateralized.

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