econintersect .com

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 07 May 2016

Why Dealers Trade In GCF Repo - Part Three Of Four

from Liberty Street Economics

-- this post authored by Marco Cipriani and Adam Copeland

In this post, the third in a series on GCF Repo, we describe dealers' trading strategies. We show that most dealers exhibit highly regular strategies, using the GCF Repo service either to borrow or to lend, on net, on almost all the days in which they are active. Moreover, dealers' strategies are highly persistent over time: Dealers that use GCF Repo to borrow (or to lend) in a given quarter are highly likely to continue to do so in the following quarter. Understanding how dealers trade in the GCF Repo market may provide insight about the role of the repo market more generally and about how recent regulations and market reforms can affect dealers' trading strategies.


The GCF Repo service, offered by the Fixed Income Clearing Corporation (FICC), allows dealers to exchange government securities for cash among themselves anonymously, with FICC as a central counterparty.

Dealers enter into GCF Repo contracts for various reasons, including raising funds, obtaining collateral, and providing transactional liquidity in the repo market. A previous LSE post describes dealers' strategies at an aggregated level, showing that dealers affiliated with a bank holding company act differently, as a group, than unaffiliated dealers; in contrast, our work focuses on individual dealers, and the persistence of their GCF Repo market trading strategy.

Borrowers and Lenders

Using confidential GCF Repo data from the first half of 2015, we study whether dealers are consistently borrowing or lending cash (against securities) on net. We label dealers as "borrowers" if they are net borrowers of cash on at least 95 percent of the days in which they are active. Similarly, dealers are labeled as "lenders" if they are lending cash, on net, on at least 95 percent of the days in which they are active. Dealers that don't fit into either category, and so have a mix of borrowing and lending, are labeled as "mixed."

As seen in the table below, of the fifty-seven dealers active in GCF Repo over our sample period, eleven are classified as borrowers and twenty-nine as lenders. Only seventeen dealers pursued mixed strategies, where their net positions varied between borrowing and lending cash.

Borrowers and Lenders in GCF Repo

To measure the importance of a dealer's net position to its total gross activity, we compute each dealer's net-to-gross ratio and take the average for each group of dealers. Net activity is the sum of cash borrowed (a negative number) and cash loaned (a positive number) by a dealer in a day, and gross activity is the sum of the absolute value of cash borrowed and cash loaned. Borrowers' mean net-to-gross ratio is -0.8, which means that 80 percent of borrowers' total activity in GCF Repo is attributable to borrowing. By this measure, then, borrowers' other strategies in GCF Repo take a backseat to raising funds. Similar results are found with lenders - 66 percent of lenders' activity is attributable to lending.

Finally, we measure the size of borrowers and lenders and find that these two groups account for the majority of GCF Repo gross activity; borrowers' share of total gross activity is 21.5 percent and lenders' share is 44 percent.

To better understand the strategies of the seventeen dealers classified as mixed, we repeat our analysis above for a given asset class. We focus on the two that dominate GCF Repo activity - U.S. Treasuries, and Fannie Mae and Freddie Mac fixed-rate mortgage-backed securities. For each of these asset classes, we find that all dealers are classified as either borrowers or lenders (see the first column of the table below). In other words, those dealers that do not consistently borrow or lend in the GCF Repo market overall, labeled as "mixed" in our initial table, are persistent borrowers or lenders with respect to a given asset class; these dealers use the GCF Repo platform mainly to perform collateral swaps - in other words, to borrow against Treasuries and lend against Fannie Mae and Freddie Mac fixed-rate mortgages.

Borrowers and Lenders in GCF Repo, within an Asset Class

Persistence of Funding Strategy

We now turn to examining the persistence of dealers' trading strategies in GCF Repo. The table below reports the frequency with which a borrower remains a borrower, becomes a lender, or becomes unclassified (mixed) between two given quarters during the period October 2012 to August 2015. As the first row of the table shows, 80 percent of borrowers in a given quarter remain borrowers in the following quarter; analogously, 92 percent of lenders remain lenders and 64 percent of mixed remain mixed. In other words, over our sample period, we find that dealers follow highly persistent strategies. Strikingly, borrowers never switched to become lenders from one quarter to the next and, similarly, lenders switched and became borrowers only 0.4 percent of the time.

The Persistence of Borrowing and Lending Activity


We show that the majority of individual dealers follow consistent strategies in GCF Repo, where dealers are net borrowers or lenders on almost every day that they are active. We infer that the minority of dealers that switch between being net borrowers and net lenders consistently pursue collateral swapping strategies. Moreover, dealers' strategies are highly persistent over time: Dealers that use the facility to borrow (or to lend) one quarter are very likely to do so the next.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.


About the Authors

Marco CiprianiMarco Cipriani is an officer in the Federal Reserve Bank of New York's Research and Statistics Group.

Adam CopelandAdam Copeland is also an officer in the Group.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.

Econintersect Contributors

Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

 navigate econintersect .com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2018 Econintersect LLC - all rights reserved