The traditional method of hedging interest rate risk in repos is no longer viable in today’s European market, according to Francois-Xavier Bouillet, managing director, repo trading at Goldman Sachs. The risk is usually hedged with an overnight swap index such as Eonia, which is deemed the benchmark for shortterm financing and risk management in Europe.

This is an “imperfect hedge” as it only transfers interest rate risk into a spread of a basis risk between the secured funding level and Eonia, said Bouillet. There is an alternative way to hedge interest rate risk in the US. “Another way would be to hedge this risk with a product called the GC future.”

The future, which is based on a secured funding index linked to the GC repo markets, was launched by Nyse Liffe in 2012. It is similar to GC pooling but is an overnight centrally-cleared transaction solely for US treasuries.

“This future could be used as a proxy for hedging interest rate risk. GC can fix around the depot rates, while by definition Eonia will trade at a spread with depot rates.”

He said GC would lead the way above Eonia if the ECB conducted quantitative easing in the future. “In this environment, if there was a GC future equivalent in Europe, I would buy loads of it,” he added. Eurex will launch euro-secured funding futures on November 12 in response to increased demand from repo desks, said Frank Odendall, product development at Eurex.