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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.

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    $\begingroup$ I think they could but is there really a need? The back office mess from such a move seems potentially disastrous. $\endgroup$ Sep 1, 2011 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, 2013 at 6:20

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Probably not.

The first question, why? Why would banks do that? Would you this attract more clients and business? Or would it be irrelevant?

How? Continuous (or at least intraday funding) would require a big update in banking infrastructure. Also, how would be the 1/100th of 1/10th of cent would be registered in the books? Ok, both are not big problems, but should be solved, anyway.

Why overnight? Banks pays overnight rate because during the day balance sheets can be not netted. You can buy something and not pay until the end of the day, or even two days later. Banks borrow and lend in the overnight, because they legally can't have "negative" money in the end of the day (which can happen intraday), they might have to pay fines if this happens. It's cheaper to borrow money from banks that have surplus.

By arbitrage argument, the rest of the market follows the overnight rate convention.

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