General Collateral Financing Trades (GCF)
What Are General Collateral Financing Trades?
General collateral financing (GCF) trades are a type of repurchase agreement (repo) that is executed without the assignment of specific securities as collateral for the rest of the trading day. GCF trades use several inter-dealer brokers, who act as intermediaries for the GCF trades. GCF trades permit the two borrowers and lenders in the repo market to reduce their costs and reduction the complexity of dealing with securities and fund transfers for repo agreements.
Understanding General Collateral Financing Trades (GCF)
Repurchase agreements, or repo trades, are basically short-term loans generally made between banks or among banks and different corporations that hold a large amount of corporate bonds, government bonds, cash or both. The thought behind these trades is very simple, however the execution of them can be complex.
Fundamentally, a bank or other lending institution has a large amount of cash and might want to loan it out at anything that rates it can get. Since banks are able to loan on reserves, they can transform a negligible interest rate into something substantially better on the off chance that they can make short-term loans on high quality assets. Corporations or banks who hold a substantial amount of high-quality bonds might be in a position to create a substantial gain, if by some stroke of good luck they can raise short-term cash.
Repurchase agreements permit both of these gatherings to benefit. The bondholders utilize the bonds as collateral to help cash through a repurchase agreement. It acts like a loan on the grounds that the agreement specifies that the bondholders will pay more to repurchase the assets than they sold them for. The counterparty (generally a bank) is guaranteed a profit inasmuch as the transaction isn't defaulted. The GCF trade is a variant of this that smoothes out the cycle.
Special Considerations
Since GCF trades are frequently between banks or banking institutions, the starting party can expect the counterparty has a lot of high-quality assets close by, and can go into the transaction with little worry for the subtleties of the assets being utilized for collateral. This is especially valuable assuming the transaction is open and closed before the day's end.
General collateral (GC) contains high quality, liquid assets that are close substitutes to each other — consequently, they are lumped together as "general" collateral. U.S. Treasury bills, notes, and bonds are accepted as GC, as are U.S. Treasury Inflation Protected Securities (TIPS), mortgage-backed securities, and different securities issued by government-sponsored undertakings.
Since these forms of collateral are basically cash, there is greater market liquidity and repo transactions are worked with without the need to arrange individual collateral agreements among lending and borrowing dealers. In addition, participants benefit from lower costs, as GCF trades depend on rates close to money market benchmark rates like LIBOR and EURIBOR.
The postponement allowed in determining the exact collateral for the repo is profitable for borrowers, who are then able to use the securities they have close by to clear other, unrelated trades as important over the course of the day. This stays away from the tedious course of trading collateral assuming it becomes required by the borrower. GCF trades are likewise worthwhile in that the utilization of the inter-dealer broker permits borrowers and lenders to net out all of their GCF repo obligations toward the finish of each trading day, extraordinarily decreasing the number of exorbitant securities and fund transfers that must occur.
Highlights
- GCF trades are collateralized repurchase agreements in which the assets utilized for collateral are not determined for the rest of the day.
- These sorts of transactions are generally achieved between banks or institutions that have a huge inventory of high-quality assets, for example, government bonds.
- In the event the trade can be opened and closed in the span of one day, this sort of trade makes the transaction significantly more streamlined than standard repurchase agreements.
