Swap dealers look internally to ease SOFR basis headaches
Traders are using their own banking units as a new outlet for reducing SOFR-versus-term SOFR risk
Some swap dealers have found a novel way to eliminate the basis risk between interest rate swaps referencing the term and overnight versions of the US dollar risk-free rate: using their parent bank’s lending arm.
Large dealers facilitating swaps referencing the term version of the US secured overnight financing rate are barred from hedging in the same instrument, so they have to use the ubiquitous overnight SOFR benchmark. The one-way flow of term SOFR swaps – mainly receive-fixed from US
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