GSD's GCF Netting and Settlement service facilitates efficient settlement and risk management for the GCF Repo® Service. Select a tab to read more about Netting & Settlement for the GCF Repo Service.
Trades that are submitted to RTTM® are then aggregated and matched on a multi-lateral basis for each Member. Once trading ends, trades are totaled and netted by the Generic GCF CUSIP to create a single net receive or deliver obligation for each member. The netting process combines each Dealer’s new GCF activity eligible for settlement with the dealer’s carry-over activity, including previous term and previously submitted forward-starting activity that have reached its start leg settlement date. Once the netting processing is completed, GSD releases the netting output to the clearing banks and participating Members. Several electronic output options for netting results are available to Members, including Machine-Readable Output (MRO), print image reports and on-line inquiry via the RTTM Web application. The clearing banks use the output to create Tri-Party shells within their respective Tri-Party mechanisms to facilitate the settlement of the underlying GCF allocations for their Members.
Let’s take a look at an example of GCF Repo Netting.
In this example, a Dealer Member has seven (7) trades in the same Generic GCF CUSIP settling the same day. Four (4) are repo trades totaling 10 million in par value and three (3) are reverse repo trades totaling 12 million in par value. The repo and reverse repo trades are netted down to create a single net short (reverse repo obligation) position of 2 million in that Generic GCF CUSIP.
Settlement occurs after GSD has informed its Netting Members of their respective obligations. Settlement occurs via GSD’s two clearing banks, the BNY Mellon and JP Morgan* through their Tri-party mechanisms. The interest on overnight GCF Repo trades is settled through the Start of Day Funds-Only Settlement (FOS) process the next day. For term GCF Repo trades interest is passed each day until the settlement date.
Let’s take a look at an example of GCF Repo Settlement. Click the image to enlarge.
Here are the transactions details for in this example, Dealer A and Dealer B have negotiated anonymously through an Inter-Dealer Broker (IDB). The trade is an overnight trade on a generic CUSIP representing Treasuries. The principal amount is 1 Billion. The rate is 10 basis points and there is no haircut.
Based on the transactions details in this example the following will occur:
On trade date, which for this example is also the submission date, the Inter-Dealer Broker submits the transaction details to GSD on a locked-in basis for settlement tomorrow. The trade novates and GSD becomes the legal counterparty to both Dealer A and Dealer B. Also on trade date, Dealer A sends 1 million in U.S. Treasuries to GSD in return for $1 billion in cash. GSD then sends the 1 billion in U.S. Treasuries to Dealer B in return for $1 billion in cash. On T+1 the following business day, the flows are reversed. The U.S. Treasuries are returned to Dealer A and the cash plus interest is returned to Dealer B, with GSD acting as intermediary settling the interest through the Start of Day Funds-Only Settlement process.
*JP Morgan has recently announced its plans to exit the government bond clearance business.