FRA-OIS demise leaves hole in bank treasury risk management

Banks now face ‘greater downside’ to widening credit spreads

Credit: montage

For years, a basis swap market known as FRA-OIS has served as a useful, reliable and liquid way for US bank treasury teams to manage their funding risk.

The package, a combination of a US dollar forward rate agreement (FRA) and an overnight index swap (OIS), captured the spread over the risk-free rate attributable to bank credit risk, which ultimately affects the cost of funding for dealers.

But the impending demise of US dollar Libor at the end of June has killed off this market, as FRAs

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