General Collateral Financing Trades (GCF)

Defining General Collateral Financing Trades

General Collateral Financing (GCF) trades are the repurchase agreement (repo) types that get executed without designating any certain securities in the form of collateral until the trading day ends.

Basically, GCF trades use a variety of inter-dealer brokers, acting as intermediaries for trades. These trades enable both lenders and borrowers in the repo Market to decrease their costs and reduce the intricacy of regulating securities and transferring funds for repo agreements.

Explaining General Collateral Financing Trades

Repo trades, or repurchase agreements, are fundamentally short-term loans that are generally made between two banks or between a corporation (holding a massive amount of government Bonds, cash, corporate bonds, or all) and a Bank.

The notion behind these trades is simplified; however, the execution can be intricated. In simple words, a lending institute or a bank has a massive amount of cash and would like to lend out at any rates that it can grab.

Considering that banks get to lend on reserves, they can convert a minimal rate of interest into a significant one in case they provide short-term loans against assets with high quality. Banks or corporations holding a significant amount of high-quality bonds could be in the position to make a significant profit; if they can increase short-term cash.

Furthermore, repurchase agreements enable both of these parties to acquire benefits. The bondholder gets to use the bonds in the form of collateral to acquire cash through this repurchase agreement.

Simply, it acts as a loan, keeping in mind that this agreement specifies that the bondholder will be paying more to repurchase his assets than what he had sold them for. Herein, the counterparty (which is generally a bank) gets a guaranteed profit as long as the transactions don’t get defaulted.

Since these trades take place between banking institutions or banks, the initiating party can suppose that the counterparty has a substantial amount of qualitative assets on hand, and thus, can enter into the transaction with no worry for the asset details that are being used as collaterals.

This is specifically valuable if there is an open transaction that gets closed before the day ends. General collateral has liquid assets of high quality that are close substitutes to each other; thus, they get humped together with a name tag of general collateral.

Treasury bills, bonds, and notes can be accepted in the form of GC, and so do securities issued by enterprises that have been sponsored by the government.