Accurate RFR hedges face liquidity trade-off, participants say

Isda AGM: Aligning swaps with assorted cash market conventions requires users to weigh liquidity cost


Firms planning to use non-standard swaps to accurately hedge cash instruments linked to overnight risk-free rates (RFRs) may need to account for the cost of low liquidity, market participants have warned.

While derivatives markets have embraced compounding in arrears for creating Libor terms in successor RFRs, cash markets have adopted a baffling array of conventions, threatening borrowers and lenders with hedging mismatches as they move away from Libor.

Chirag Dave, head of sterling interest

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