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11. What is general collateral (GC) repo?
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General collateral or GC is the range of assets that are accepted as collateral by the majority of intermediaries in the repo market, at any particular moment, at the same or a very similar repo rate --- the GC repo rate. In other words, the repo market as a whole is indifferent between general collateral securities. They are close substitutes for each other. GC assets are high quality and liquid, but none is subject to exceptional specific demand compared with very similar assets. The GC repo rate is therefore driven purely by the supply of and demand for cash (not by the supply of and demand for individual assets). In other words, GC repo can be said to be cash-driven. As such, the GC repo rate should be closely correlated to other money market rates, eg LIBOR, EURIBOR, etc, although trading at a spread representing the lower credit and liquidity risks in repo.

In practice, there will often be a narrow band of several repo rates for securities which all qualify as GC. The differences between these rates is due to operational features such as the method of custody and settlement ('hold-in-custody or HIC repos pay higher rates) and whether there is an agreed right of substitution (in which case, there should also be a higher repo rate). The convention is to take the highest repo rate for comparable collateral as the GC repo rate.

When negotiating GC repos, parties agree the term, size and price of such transactions first and the collateral last. The seller has some choice about which security to deliver as collateral.

In the eurozone, the financial crisis which erupted in 2007 has fragmented the GC repo market in government bonds by causing investors to differentiate between the credit of issuers in core and peripheral eurozone countries. There is consequently a German GC market, a French GC market and so on, but there is no longer a eurozone GC market, except for one-day repos, where credit risk is minimal.

It is possible to create ‘GC baskets’ for the purposes of facilitating trading. A GC basket is a list of security issues prescribed by an automatic repo trading system (ATS) or a central clearing counterparty (CCP) which users of those systems are able to trade with each other. Trading a GC basket means that users have to accept that, when they are (net) buyers, the (net) sellers have the right to deliver any of the issues in the GC basket. This allows negotiations between users to be restricted to term, amount and price, which simplifies and speeds up trading. In ‘GC financing’ or ‘GC pooling’ systems, the GC basket is defined by a CCP and the selection of security issues for delivery is automated and managed by a tri-party repo agent, which is given delivery instructions by the CCP. Where a GC basket is defined by an ATS, sellers decide which issues they deliver.

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