Hi, Can someone familiar with this product explain what financial institutions besides banks use OIS to manage interest rate risk and liquidity risk? I read online that some commercial banks use these swaps to lock in an interest rate on their surplus funds, or in other words, use these swaps to speculate on the future levels of effective fed funds rate. It also states that these banks can only lend, not borrow using OIS, unless the borrow transaction is used to close out the lend position. Who takes the borrow side of the trade then? Primary dealers? Are OIS used in lieu of lending/borrowing REAL cash flow at Libor thereby eliminating liquidity risk? Could regular institutional investors transact in this product? For example, I see that the 9*12 OIS FRA is currently 2.60, implying 60bps of rate hikes by the Fed by next June. For those with a view that the Fed is on hold long-term at best, can an investor simply sell the 9*12 FRA betting that 3M Fed Funds will be below 2.60 when the FRA settles in 9 months? Thanks.
“It also states that these banks can only lend, not borrow using OIS, unless the borrow transaction is used to close out the lend position.” What does that mean? A commercial bank can take either side of the transaction, AFAIK. Regular institutional investors transact this product all the time. In particular, lots of corporations who can raise money by issuing various term paper can fund using overnight rates this way. I’m sure there are plenty of hedge funds using them to make bets or fix their own funding costs. Edit: And what’s an OIS FRA? Are you talking about a Fed Funds FRA? If so, sure you could do that if you are big enough. Much cleaner is just using the Fed funds futures contract.