Repo risk - how the desk operate

Question

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 1

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.