Basis Risks are a second-order effect of the business of market-making Interest Rate Swaps. Under normal circumstances, their prices tend to be relatively stable.

Over time, dealers can accumulate large exposures in different basis risks from their client flow activity. And because the basis price is so stable, these exposures can grow to be quite large.

But what happens when things blow up? From time to time major market events can turn the tables on the Basis market and leave dealers struggling to unwind these risks. 

For instance, the default of a buy-side firm that is overexposed in a given basis would cause these exposures to disappear from the market, leaving dealers exposed. A large amount of time and effort would be needed to source new counterparties and hedges. In worst-case scenarios, dealers would have to accept a significant hit to their PnL. In this scenario, basis prices can move from a few basis points to 20 or 50 basis points, and that can put dealers in a highly precarious situation. 

Aside from a handful of strategic positions, the objective for most dealers should be to keep their books clean and streamlined, and easy to deal with should an unexpected event occur. They look to be able to easily distinguish between trades they want to keep, trades they want to ditch, and “random noise” trades that have accumulated over time and then deal with them accordingly. Though this has been largely a manual process to date.

Our Risk Netting Service enables dealers to easily clean up their books. This automated, digital service pools counterparties with naturally occurring offsets. Where you have a long position, our Service finds a corresponding short. By doing so, we help dealers reduce exposures at mid-market, in bulk, and across their portfolios. 

When things go wrong, liquidity can dry up fast, leaving dealers struggling to square their books. With Wematch, you can prepare in advance and keep a lid on basis  risks.

To learn more, Contact us.