Two Way Dealing
Match book trading has allowed the repo desk to move from being just a support desk for other trading desks to being a profit centre in its own right. Match book repo traders make two-way dealing prices in repo on various securities of the firm's underlying position. Thus, the repo desk has its own trading positions. This is done to provide customers with a continuous financing service for long and short positions and for proprietary trading profit.
Match book trading has led to a significant increase in repo activity and thus demand for repo.
The term 'match book' is generally a misnomer; most match books are deliberately mismatched. Repo traders mismatch positions in order to take advantage of a combination of two factors:
- Short term interest rate movements
- Anticipated supply/demand in the underlying bond
EXAMPLE: UBS reverses in securities for three months at 5.25% and repos out securities for two months at 5%, both transactions having the same start value date. UBS has therefore lent cash for three months at 5.25%, and simultaneously borrowed cash for two months at 5%. The mismatch exposure in two to three months is known as the tail. UBS has locked in a 25 bps profit for two months, therefore it would have to lose 50 bps or more in the last month in order to lose money on the trade. Therefore, the break-even on the tail of the trade is 5.75%. Only if interest rates were to rise significantly could UBS lose money. Alternatively, if the bonds were trading special and interest rates remained at 6% for three months, UBS would lose money unless they could put the bonds out during the tail period for at least 25 bps.
Given the wide ranging use of repo as a financial instrument, there is hardly an institution that is not or should not be involved in this market.
Repo customers fall into several categories:
Other clients include insurance companies and corporations.
See a statistical breakdown of UBS's repo transactions in terms of counterparty type.
