Examining GCF Repo
December 21, 2015

A new Federal Reserve Bank of New York report provides a detailed look at the clearance and settlement of the General Collateral Finance Repo (GCF Repo®), a financial service provided by the Fixed Income Clearing Corporation. It also examines how the service is used among dealers. The report, which is divided into an introduction and two separate but complementary articles, aims to provide market participants, regulators, and academics the ability to fully understand the financial infrastructure underpinning GCF Repo and its interactions with the tri-party repo market.

In the first article, the authors describe the ways that intraday credit was used to facilitate the settlement of trades before reforms to the tri-party repo settlement system. In particular, they focus on two main processes: the end-of-day settlement and the morning unwind. The authors then describe why this extension of intraday credit by the clearing banks is problematic, specifically pointing to concerns that a clearing bank may not be able to absorb the impact of a failing dealer. The authors also discuss various reforms to the tri-party repo settlement process, which, they note, are likely to influence the costs of settling GCF Repo transactions.

The second article examines how dealers use the GCF Repo service. It begins by explaining the strategies that dealers employ when trading GCF Repo and then uses empirical analysis to quantify the predominance of these strategies. Looking across all dealers and all days, the study finds that on an average day, at least 23 percent of dealers focus on strategies to raise cash and at least 20 percent focus on managing their inventory of securities. This activity involves using GCF Repo to both exclusively source collateral and perform collateral swaps.

The first article is authored by Paul Agueci, an associate in the Bank’s Financial Institution Supervision Group (FISG); Leyla Alkan, a senior associate in FISG; Adam Copeland, an officer in the Research and Statistics Group, as well as Kate Pingitore, Caroline Prugar and Tyisha Rivas.

The second article is authored by Adam Copeland; Antoine Martin, a vice president in the Research and Statistics Group and Isaac Davis.

Both articles can be read in full in the latest Economic Policy Review.

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