What Is General Collateral Financing Trades?

General collateral financing (GCF) trades are a type of repurchase agreement (repo) that is executed without the designation of specific securities as collateral until the end of the trading day. GCF trades utilize several inter-dealer brokers, who act as intermediaries for the GCF trades. GCF trades allow both borrowers and lenders in the repo market to reduce their costs and decrease the complexity of handling securities and fund transfers for repo agreements.

Understanding General Collateral Financing Trades (GCF)

General collateral (GC) comprises high quality, liquid assets that are close substitutes to one another — hence, 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 other securities issued by government-sponsored enterprises. Because these forms of collateral are virtually cash, there is greater market liquidity and repo transactions are facilitated without the need to negotiate individual collateral agreements between lending and borrowing dealers. Moreover, participants benefit from lower costs, as GCF trades are based on rates close to money market rates such as LIBOR and EURIBOR.

The delay granted in specifying the exact collateral for the repo is advantageous for borrowers, who are then able to utilize the securities they have on hand to clear other, unrelated trades as necessary throughout the day. This avoids the time-consuming process of swapping collateral if it becomes needed by the borrower. GCF trades are also advantageous in that the use of the inter-dealer broker allows borrowers and lenders to net out all of their GCF repo obligations at the end of each trading day, greatly decreasing the number of costly securities and fund transfers that must take place.