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8. What is general collateral (GC)?
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GC or general collateral is a set or basket of security issues which trade in the repo market at the same or a very similar repo rate, which is called the GC repo rate. GC securities can therefore be substituted for one another without changing the repo rate much, if at all. In other words, the buyer in a GC repo is indifferent to which of the GC securities he will receive. The fact that GC securities can be substituted for one another means that the driver of the GC repo rate is not the supply and demand of particular issues of securities, but of cash. For this reason, GC repo is sometimes called cash-driven repo. As a measure of the cost of borrowing cash, the GC repo rate is highly correlated with unsecured money market interest rates.

The basket of security issues that form a particular GC repo market belong to the same class (eg government bonds) or sub-class (eg government bonds with no more than five years remaining to maturity). This is why they can be substituted for each other without changing the GC repo rate. There is usually only one GC basket in each currency and this is typically of government bonds. However, it is possible to have several classes of GC in the same currency. For example, in the US, there is Treasury GC, Agency Debt GC and Agency MBS GC.

In the eurozone, the Great Financial Crisis which erupted in 2007 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, an Italian GC market and so on, but there is no longer a eurozone GC market.

Because the buyer in a GC repo is indifferent to which of the securities in a GC basket he will receive, the choice is the seller’s (although subject to the buyer's consent) and is left until the end of a negotiation. It can also be delegated to an automated tri-party repo management system.

GC baskets have traditionally emerged through tacit market consensus. However, it is possible to formally create a GC basket for the purposes of facilitating trading. A formal GC basket is a basket 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 such 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 net delivery instructions by the CCP. Where a GC basket is defined by an ATS and no tri-party agent is involved, sellers decide which of the eligible issues they will deliver and the buyer cannot reject their choice.


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