# Block 012 — SOFR / OIS / repo mechanics

**Status:** ✓ done
**Phase:** Phase 1 (Rates)
**Closed:** 2026-07-07 (Session 19)

## Topic scope

Funding layer under rates trading. SOFR-OIS-Treasury basis. How QT affects repo. Standing Repo Facility mechanics. SOFR transition retrospectives.

## Plan

**Prerequisite:** Block 00a (rubric), Block 00b (anti-patterns). Repo and basis trades are sized to specific risk budgets per `risk-framework.md` v0.3.

## Carry-forward to next block

**Pre-block probes (6 vocabulary + 1 transition probe, plain text, no countdown):**
- Q1 (SOFR construction): User flagged pre-read gap — ARRC Closing Report doesn't cover construction. Full teach delivered: volume-weighted median of overnight Treasury-repo rates (tri-party + GCF + FICC-cleared bilateral), published by NY Fed ~8am ET. Secured, overnight, Treasury-collateralized only.
- Q2 (OIS structure): User nailed it — fixed-for-floating on geometric-average overnight rate, used for discounting because credit risk on overnight loans is near zero. Precision add: geometric vs arithmetic compounding matters (compounding makes floating leg economically equivalent to rolling overnight loans).
- Q3 (repo mechanics): User had the right economic sense but blurred two things — what's received upfront is CASH (not "a return"), and the unwind is symmetric. Correction noted. Anki-card candidate.
- Q4 (GC vs specific + tri-party vs bilateral): User asked what GC means. Full teach. Two orthogonal axes: GC vs specific = collateral flexibility; tri-party vs bilateral vs FICC-cleared = settlement mechanics. SOFR includes all three repo types but excludes noisy specific-special rates.
- Q5 (SOFR-OIS basis): User direction right, two precision gaps. Basis measures TERM-UNSECURED-BANK-FUNDING premium over riskless. The "credit risk" framing is wrong — both legs are near-zero credit. It's a tenor spread. The credit-spread read is term-unsecured-minus-OIS. Anki-card candidate.
- Q6 (transition probe — why SOFR replaced LIBOR): User said LIBOR had liquidity/manipulation issues. Refined: post-2008 interbank unsecured market dried up (Basel III / LCR); LIBOR became survey-based and manipulable (2012-13 scandal). Replaced by SOFR. ~26bp spread adjustment (5y median LIBOR-OIS) compensates for embedded term-unsecured credit premium SOFR lacks. Anki-card candidate.

**Main material delivered:**
- **SOFR as discount layer for Block 011 basis trade:** Trade leg carry = MBS yield − matched Treasury yield (Block 011). Funding leg carry = repo on short − term SOFR on long. Net carry = sum. SOFR-OIS basis is the funding-layer read, not the trade-layer read.
- **Repo specialness:** Specific collateral "on special" (CTD, off-the-run rich) can repo at NEGATIVE rates. Cash lender PAYS the dealer for the privilege of borrowing. The basis-trade economy is a function of which issues are on special on a given day.
- **SOFR-OIS basis as live read on bank-funding stress:** Historical 2008: 350bp+; March 2020: 130bp+; normal: 0-15bp. Post-LIBOR, you read the same signal off 3m term SOFR-OIS, or BGCR-SOFR. Signal: when the term-unsecured-bank-funding spread to OIS widens, banks are charging each other more for term money → credit conditions tightening.
- **Block 011 → Block 012 hand-off:** basis-trade carry decomposition now has a clean funding-leg formula. Long funded at term SOFR (or rolls overnight), short at repo. Net carry decomposable into trade + funding.

**Live-data probe:** DEFERRED to next session (user choice, 2026-07-07 close). Will pull current SOFR, term SOFR, OIS, repo and tie back to the Block 011 basis carry in the next session's tail.

**Anki cards generated (Session 19):** 5 atomic cards (4 forward + 1 with the SOFR construction as foundational). Pushed via AnkiConnect + synced. Tags: `block-012 sofr repo sofr-ois-basis libor-transition` + `rates`. Note IDs: 1783441333317 → 1783441333786.

**Status transitions:**
- **Rates — SOFR construction (NEW):** Untested → **Working**
- **Rates — OIS structure (NEW):** Untested → **Working**
- **Rates — repo mechanics + GC/specific (NEW):** Untested → **Working**
- **Rates — SOFR-OIS basis + tenor-vs-credit distinction (NEW):** Untested → **Working+** (precision locked: tenor risk only, NOT credit)

**Process changes filed this session:**
- None new. Session within established convention (pre-read at session open, pre-block probes, sync gate, post-block artifact).
- Confirmed: pre-read-compliance gate worked — pre-reads checked at session open, not deferred.

**Post-block practice artifact:** `~/Obsidian-Macro/03-research/deep/daily-rates-funding-routine.md` — 5-minute daily read on the funding layer. Companion to `daily-vol-routine.md` (Block 010) and `daily-mbs-routine.md` (Block 011). Run all three back-to-back for a 15-minute full rates-microstructure + funding-layer read. All sources free, all URLs documented in the routine's source-URL card.

**Pre-read for Block 013 (assigned at this session close, per protocol):**
- **Hull Ch. 5 (Determination of Forward and Futures Prices) — inflation-forwards section** (~15 min, cost-of-carry framework applied to inflation-linked bonds)
- **D'Amico-Kim-Wei (2018) — "Tips from TIPS: The Information Content of Treasury Inflation-Protected Security Prices"** (read the abstract + Section 2 on inflation risk premium decomposition; ~20 min)
- **FRED T10YIE, T5YIFR, T10Y2Y, DFII10, DFII30** (just bookmark — these are the 5 free series that drive the breakeven math; ~5 min to read the methodology pages)
- **Skip:** detailed TIPS futures / options mechanics (Block 058, Phase 2 instrument dossier). Skip: full DKW appendix (only need the 3-component decomposition framework).

**Pointer:** `_meta/current-block.md` updated. Block 012 → done. Block 013 → current.