some international securities have no cusip/isin but never missing both

ISIN is used in Europe while U.S. uses cusip. A BAML collateral system dev told me some securities in his system have no cusip or no isin, but must have one of them.

I believe some international assets pledged as collateral could be missing one of them.

Japanese gov bond is a common repo asset — cross-currency repo. The borrower needs USD but uses Japanese bond as collateral.

In MS product reference database, I see these identifiers:

  • internal cusip
  • external cusip – used in U.S./Canada
  • cins – CUSIP International Numbering System, for “foreign” securities
  • isin – if you want to trade something inter-nationally
  • sedol
  • bloomberg id
  • Reuters RIC code, RT symbol and RT tick


IRS – off-balancesheet #T-bond repo

The LTCM case P12 illustrated (with an example) a key motivation/benefit of IRS — off balance sheet. The example is related to the swap spread trade briefly described in other posts.

For a simple T-bond purchase with repo financing, the full values (say $500m) of the bond and the loan appear on the balance sheet, increasing the fund’s leverage ratio. In contrast, if there’s no T-bond purchase, and instead we enter an IRS providing the same(?? [1]) interest rate exposure, then the notional $500m won’t appear on balance sheet, resulting in a much lower leverage ratio. Only the net market value of the existing IRS position is included, usually a small value above or below $0. (Note IRS market value is $0 at inception.)

[1] An IRS position receiving fixed (paying float) is considered similar to the repo scenario. The (overnight?) rollling repo rate is kind of floating i.e. determined at each rollover.

Other positions to be recorded off balance sheet ? I only know futures, FX swaps, …

##what asset classes are important to PB business

Prime brokers provide a wide range of services to hedge funds. What asset classes are important in the PB market? (Note this is subtly different from the question “what asset classes are important to hedge funds”)

#1 Equities
#2 FI

(In Eq and FI, clients get financing.)

#3 futures – no financing
FX is slightly less important

Financing is the most needed “service” and includes
* stock lending
* margin lending
* repo and reverse repo

The 2nd most valuable “service” might be technology
* low-latency direct-market-access (including FX)
* collocation in exchange data center

3 financing solutions PB offers hedge funds

To a hedge fund (HF), arguably the most valued service by a prime broker (PB) is financing. 2nd is probably execution. Brokers by definition provide access to liquidity, but at what speed? Both #1 and #2 give rise to white hot competitions among brokers, who often invest heavily to offer the most competitive “service” to attract the big hedge funds.

Besides the top 2, Book keeping, back office, accounting etc are essential services too.

I see 3 common financing schemes —

1) margin lending — hedge funds buying on margin is the most common form.
2) stock lending — hard-to-borrow will entail a heftier fee.
3) repo

In all 3 cases, PB earns a fee/interest proportional to the loan duration.

For (3), the PB can provide either repo or reverse-repo service to a hedge fund. Either collateral-out-cash-in or collateral-in-cash-out. I feel the cash-out version (PB-cash->HF) is what hedge funds need most. Overnight to 3 months, rarely longer.

FX swap – keywords

2 “legs”

opposite – the 2 legs are always opposites — HKD to CHF, then CHF to HKD but quantity will be slightly different due to interest differential.

bundle – both legs simultaneously agreed, as a bundle. Near date + far date.

spot – usually one of the 2 legs is a spot trade, but fwd-fwd FX swap is also common

repo – one way to understand the economic rationale (which is a bit convoluted) of FXSwap relies on an understanding of repo (i.e. overnight lending) assuming you find repo less convoluted than FXSwap. A borrower may need a mio USD for 24 hours and have no problem repaying. To demonstrate her repayment capability and to address lender’s concern, she pledges something as a collateral. This something could be a T-bond or some surplus JPY. Therefore, she _borrows_ USD by _buying_ USDJPY on near date, then on far date repays by selling USDJPY. is a good intro to the rationale of short-term loans.

bridge-loan — is another way to understand why people need short term loans. FXSwap is similar to a short term loan.

interest calculation – Only after you grasp the rationale above, should you look into the interest implication — even the tiniest amount of math can be hard for some beginners (like me). Both currencies accrue interest between near date and far date.

2 so-called Prices in a repo contract

The moment 2 parties agree on a repo, they finalize 2 numbers
– The Price is the amount paid for the security at the “opening” leg
– The Rate is the interest to be paid at the “closing” leg

For a common repo, the opening leg is a spot trade, so price is comparable to the market price of the security, but negotiable if it's illiquid.

A repo can also be forward-start. Price would be a forward price.

collateral risk, repo, margin call

Repo are sometimes open-ended, but overnight repo is most common. Overnight repo requires automatic (not semi-manual like in BofA) processing.

Margin call is usually daily, but can be intra-day. I don’t think there’s monthly margin call.A typical Collateral IT system supports mostly 3 main collateral assets – futures, options and repo

–Funding efficiency?
Q: If I have a combined 50b portfolio and I want to repo it with various lenders to borrow cash, then how much cash can I get?
A: depends on my asset “distribution”. Diversification — good; A few highly concentrated positions — bad. Why? If we pledge a gigantic 10% of IBM Corp’s entire outstanding shares as a single collateral, then lender worries about worst case i.e. borrower default. Lender must liquidate, but selling so many IBM shares means huge market impact.

–repo — Both cash-lender and cash-borrower need to worry about counter-party credit .
If borrower’s (pledged) collateral appreciates while on loan, then borrower is at risk of loss due to lender bankruptcy while holding the security. The asset we have lost is worth more than the cash we borrowed — we pledged too much

If collateral depreciates, obviously lender is worried.

Treasury algo quoting engine #CS

1) In market-making, a quoter engine is driven by a specific model (among many models), and trades using a model account. It reacts to market data [1], and based on inventory will publish/withdraw bids and offers – collectively known as quotes. In theory, a quoter could maintain quotes at different price levels, but more typically, a quoter maintains multiple small[2] quotes at the same price level, but why? [3]

2) Beside market-making, another model is RFQ or bid-wanted / offer-wanted. See post on [[2 ways to sell a security]]. In treasury market, a RFQ is often sent to a small number of dealers only.

3) In terms of alpha strategy, there are 2 main “views” of price movement – mean-reverting vs trending. These are “views” on the market.

Same system can trade T futures, but it’s more complex due to the basket.

[3] A: those different quotes will join the order queue at different queue-positions. They will execute at different times. You can withdraw them individually.
[1] interdealer – BrokerTec and eSpeed; dealer-customer markets like tradeweb; orders from private clients not on the open market,
[2] low quantity, low risk — fine grained

Since each treasury position ties up a large sum of money, automatic financing is important. No margin as far as I see.
– After you buy a bond, automatically the bond is lent out on the repo market, so trader can use that money to pay the counter party.
– After you short sell a bond to get $20M, automatically you borrow the bond on the repo market, using the $20M proceeds.

repos intuitively: resembles a pawn shop

Borrower (“seller”) needs quick cash, so she deposits her grandma’s necklace + IBM shares + 30Y T bonds .. with the lender i.e. buyer of the necklace. Unlike pawn shops, the 2 sides agree in advance to return the necklace “tomorrow”.

Main benefit to borrowers — repo rate is cheaper than borrowing from a bank.

haircut – the (money) lender often demands a haircut. Instead of lending $100m cash for a $100m collateral, he only hands out $99m.

requester – is usually the borrower. She needs money so she must compromise and accept the lender’s demand.

trader – is usually the borrower. Often a buy-side, who buys the security and needs money to pay for it. (The repo seller could be considered a trader too.)

Repo maturity is 1 day to 3M. Strictly a money market instrument.

Common collateral for most repos — Government securities are the main collateral for most repos, along with agency securities, mortgage-backed securities, and other money market instruments.

For every repo, someone has a “reverse-repo” position. In every repo deal, there’s a borrower and a lender; there’s a repo position on one side and a reverse-repo position on the other side of the fence.

Is repo part of credit business or rates business? Depends on the underlier. Part of the repo business is credit. Compare an ECN – can trade Treasuries and credit bonds.

UChicago Jeff’s assignment question is the most detailed numerical repo illustration I know of. Another good intro is

stock lending

There’s probably no “electronic market” to publish offerings. I’m a GS trader with good friends in MS and UBS, I will get weekly(!) inventory feeds from them, perhaps an ftp, a spreadsheet etc. Then we agree on the terms [1] over phone. No automatic agreement! After agreement, borrower can request to borrow over web/ftp.. and delivery can be automated.

At its core, SL system keeps inventory, stocks lent out, stocks borrowed.

[1] Unlike repo, market price isn’t relevant. If I borrow 100 IBM, i agree to return it x days later. No buying! Repo involves buying ie (temporary) change of ownership.

Above is for stocks. For futures and FI instruments, there are different systems.