The GCF Rate #primers

In General Collateral Financing (GCF) repo, dealers lend cash to other dealers, who pledge (almost) any type of security as collateral to secure the trade — “secure the trade” meaning that in the event of default, the lender receives the borrower’s collateral. The cash lender simply wants to lend cash and doesn’t care (within market rules) about the type of security they receive that secures the loan. Usually, this means the cash lender will receive a random Treasury bill/note with a random maturity as collateral.

GCF is a centrally-cleared, interdealer market run by the Fixed Income Clearing Corporation (FICC), which uses the BNYM as a triparty custodian. The GCF rate is the “volume-weighted average interest rate” of all repos starting on a given day in the FICC’s GCF Service. In English, this reflects the cost of borrowing cash raised by dealers from institutional investors that is lent to other dealers.

GCF is dominated by the Fed’s primary dealers and domestic U.S. banks, who borrow money from cash lenders in triparty at the TPR (triparty rate) and lend it to other primary dealers, non-primary dealers, and foreign banks at the GCF rate, thereby earning a spread. In the main infographic, you can see the flows in blue and green. (It is, of course, possible to fund GCF trades with cash from markets other than the popular choice of triparty repo.)

Transactions from this market are used to calculate some of the Fed’s reference rates.

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