What Are General Collateral Financing Trades?
GCF transactions are a repurchase agreement (repo) that does not need particular securities as collateral until the conclusion of the trading day. Several inter-dealer brokers serve as intermediates for GCF trading. GCF trades minimize costs and complexity for repo market borrowers and lenders when transferring securities and funds.
Understanding General Collateral Financing (GCF) Trades
Repo transactions are short-term loans between banks or firms with many corporate bonds, government bonds, cash, or both. The concept of these trades is simple, but execution is complex.
Essentially, a bank or other lender has a lot of cash and wants to lend it at any rate. Because banks may lend on reserves, they can improve a low-interest rate by making short-term loans on high-quality assets. Corporations or banks with many high-quality bonds might make a lot of money if they can raise short-term financing.
Repurchase agreements benefit both sides. Repurchase agreements allow bondholders to obtain cash with their bonds. This deal functions like a loan since bondholders must pay more than they sold the assets to buy them. Default-free transactions guarantee the counterparty (typically a bank) a profit. The GCF trade simplifies this.
Since GCF deals are commonly between banks, the starting party can presume the counterparty has a lot of high-quality assets and can engage in the transaction without worrying about the collateral. This is important for transactions that start and close before the day ends.
GC is high-quality, liquid assets near substitutes—hence, “general” collateral. GC includes U.S. Treasury bills, notes, bonds, TIPS, mortgage-backed securities, and other government-sponsored enterprise assets.
These kinds of collateral are effectively cash, increasing market liquidity and facilitating repo transactions without separate collateral agreements between lending and borrowing dealers. Participants benefit from cheaper costs as GCF trades use rates similar to money market benchmarks like LIBOR and EURIBOR.
The delay in identifying repo collateral benefits borrowers, who can use their assets to settle additional deals during the day. It saves time if the borrower needs to switch collateral. Using the inter-dealer broker allows borrowers and lenders to net out all of their GCF repo commitments after each trading day, reducing the amount of expensive securities and cash transfers.
- Global collateralized repurchase agreements (GCF transactions) specify collateral assets after the day.
- Banks with extensive inventories of high-quality assets, like government bonds, generally conduct these transactions.
- If launched and concluded in one day, this deal is more efficient than regular repurchase agreements.