Dealer banks often refer to a balance sheet where repurchase agreements finance offsetting reverse repurchase agreements as a "matched book" The dealer bank's business model relies on optimizing its uses and sources of collateral.
Dealers can run a matched book using various types of transactions.
However, a matched book does not always involve executing offsetting repurchase and reverse repurchase agreements that are "perfectly matched" in terms of the final maturity date or the credit quality of the involved counterparties.
Similar to the concept of matched book, opportunities to "internalize" can arise via the provision of funds by the dealer bank collateralized by client securities.
Differences between Internalization and Matched Book
Both of these external transactions would resemble our example of matched book, in that the dealer bank would seek to earn a small spread based on its superior access to repo and securities borrowing markets.
A second substantive difference from matched book lies in the dealer bank's ability to finance its own positions with 10 client activity.
In sum, this proxy estimates all collateral received from reverse repo and securities borrowing transactions, a portion of which will be delivered into repo and securities lending transactions to form a "matched book."
Then, to further reduce the impact of changing rates on the company's portfolio, Thornburg Mortgage borrows funds that have maturities closely matching the interest rate adjustment period of its loans--essentially what's called a "matched book." Thornburg Mortgage estimates its traditional ARMs get repriced in a year or less so these would be funded with short-term borrowing.
"In the past year you could make money by not running a matched book," says Thornburg, "but when interest rates move--and they move fast--you cannot reset your portfolio to make up the difference.