For a long time, the dominant tenors for money market and FX instruments were 6 months and 3 months, and banks slowly moved to commercial trades at those tenors but funding overnight. If this is a step in the direction of increasingly short-term funding as trade frequencies and volumes increase, could banks move to continuous funding? That is, the book would be continuously balanced, excess lent continuously and funding performed continuously, with a continuously indexed swap instead of an Overnight Indexed Swap (OIS)?

One can imagine an hourly or minute-to-minute fixing in FX already.

[Update Sep 2012]: Via Deus Ex Macchiato, this from the FSOC annual report:

Currently, triparty repo trades unwind every day, meaning that the clearing bank returns cash to the lender’s account and returns collateral to the borrower’s account. Trades are not settled until several hours later. For several hours each afternoon, dealers require funding of their entire triparty repo book that lenders do not provide. This $1.7 trillion funding need is provided by two clearing banks.

This is a potentially unstable situation.

This suggests that accounts are already balanced hourly or less.

  • 4
    $\begingroup$ I think they could but is there really a need? The back office mess from such a move seems potentially disastrous. $\endgroup$ – Tal Fishman Sep 1 '11 at 12:39
  • $\begingroup$ not with the amount of financial laws & regulations one would have to suffer youtube.com/watch?v=y0X0ZYbnHxA $\endgroup$ – user3232 Feb 15 '13 at 6:20

Overnight funding is made through an auction, a fixing as you name it and it is achieved successfully (usually, i.e. when Lehman Brothers doesn't go bankrupt) because of the huge amounts on BOTH sides of this auction (i.e. liquidity).

If you do an auction every minute, you will have more volatility as prices will potentially vary every minute and there will be less liquidity, this is definitely not something Back Office should handle (because it's basically Trading). I cannot really imagine the situation if we add arbitrageurs in the middle of this, things would get really messy.

  • $\begingroup$ OIS fixings, I think, are calculated based on the day's actual trades, weighted by volume, not on an auction. See the SONIA and RONIA specs - maybe it's only UK & EU that do it this way? $\endgroup$ – Phil H Apr 10 '12 at 9:48
  • $\begingroup$ @Phil H: I think the US does the same, it is called Fed Funds Rate en.wikipedia.org/wiki/Federal_funds_rate , it is even more liquid because there are monthly futures on this rate. $\endgroup$ – BlueTrin Sep 11 '12 at 16:47

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