GC repo and Gearing: Difference between pages

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(Create page. Source: ICMA https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/8-what-is-general-collateral-gc/)
 
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''Reference rates''.
1.
''Financial gearing'' measures the relative amount of debt in a firm's capital structure.


GC repo is an abbreviation for General Collateral repo rate.
Gearing ratios can be calculated in several different ways, so consistency of approach is important.


Two essential bases to define are:


International Capital Market Association commentary:
i. The use of book or market values.
ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D/[D+E].


:'GC or general collateral is a set 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.  
Historically, use of the D/E version of the measure was more common in the UK.


:GC securities can therefore be substituted for one another without changing the repo rate much, if at all.  
With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.
Practitioners may also adjust the Equity figure, for example to exclude intangible assets.


:In other words, the buyer in a GC repo is indifferent to which of the GC securities they receive.  
2.
''Operational gearing'' relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.


: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.  
3.
 
'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.
:For this reason, GC repo is sometimes called cash-driven repo.  
The intention of gearing up is to improve expected net results. The consequence of gearing up is normally to increase risk.
 
:As a measure of the cost of borrowing cash, the GC repo rate is highly correlated with unsecured money market interest rates.'


Many financial disasters have been a consequence of gearing up (or leveraging) in this way in earlier periods.


== See also ==
== See also ==
* [[Collateral]]
* [[Debt equity ratio]]
* [[EONIA]]
* [[Debt to equity ratio]]
* [[European Central Bank]]
* [[Intangible assets]]
* [[International Capital Market Association]] (ICMA)
* [[Leverage]]
* [[Over night index average rate]]
* [[Leveraged]]
* [[Overnight indexed swap]]
* [[Leveraged takeover]]
* [[Reference rate]]
* [[Levered]]
* [[Repo]]
* [[Off-balance sheet finance]]
* [[Repo rate]]
* [[Ungeared]]
* [[Security]]
* [[Ungeared cash flow]]
 
 
[https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/8-what-is-general-collateral-gc/ ICMA Frequently Asked Questions on Repo]


[[Category:Financial_products_and_markets]]

Revision as of 14:19, 23 October 2012

1. Financial gearing measures the relative amount of debt in a firm's capital structure.

Gearing ratios can be calculated in several different ways, so consistency of approach is important.

Two essential bases to define are:

i. The use of book or market values. ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D/[D+E].

Historically, use of the D/E version of the measure was more common in the UK.

With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions. Practitioners may also adjust the Equity figure, for example to exclude intangible assets.

2. Operational gearing relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.

3. 'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation. The intention of gearing up is to improve expected net results. The consequence of gearing up is normally to increase risk.

Many financial disasters have been a consequence of gearing up (or leveraging) in this way in earlier periods.

See also


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