Eurex | Eurex Clearing | Eurex Repo
GC Pooling was launched in 2005 and quickly developed into a highly liquid market for collateralized financing in EUR, USD, CHF and GBP. Its participants benefited from anonymous electronic trading via a central counterparty (CCP) with a real-time collateral management system. After GC Pooling had taken a bit of a back seat in recent years due to extraordinary funding provided by the ECB, recent and upcoming market developments indicate that the need for market-driven funding will once again increase. The Eurex GC Pooling product is a highly effective and efficient tool to address these rising liquidity needs for treasury desks on both the sell and buy side. We spoke to Frank Gast, Managing Director and Member of the Management Board of Eurex Repo, and Carsten Hiller, Head of Central Europe Funding & Financing – FIC Sales, about the past, present and possible future of Eurex’s GC Pooling product.
Frank, tell us why GC Pooling was such a fast success?
After its successful launch in 2005, GC Pooling was initially used by the German securities financing and money market community. This quickly changed with the financial crisis following the default of Lehman Brothers in 2008, when the unsecured money market dried up and credit lines in the interbank market were massively reduced. In addition, treasury and money market managers appreciated the possibility to reuse collateral received in a reverse repo for other GC Pooling repo transactions and margin requirements at Eurex Clearing for repos and derivatives, as well as to collateralize central bank exposures.
The automated allocation of collateral to predefined, standardized baskets of liquid assets and Clearstream’s integrated collateral management system proved to be a reliable and robust tool in these turbulent times. In March 2020, with the outbreak of the Coronavirus pandemic, GC Pooling again proved to be right for short-term cash management. While some participants were able to close longer-term transactions to secure long-term funding, others rolled over huge liquidity balances in euro on a daily basis.
Carsten, why has it faded a little into the background in recent years?
After peaking in June 2014 with a record volume of €203.7 billion outstanding daily volume,
GC Pooling volumes came under pressure from the ECB’s interest rate cuts and the start of quantitative easing, while excess liquidity steadily increased. The central bank became the “lender of first resort”, which almost obliterated all money market activity. The phenomenon accelerated when the ECB introduced supportive measures during the Coronavirus pandemic with the targeted longer-term refinancing operation (TLTRO) III.4 and a record allocation of €1.3 trillion in June 2020. Excess liquidity reached a record high of €4.5 trillion, pushing short-term money market and GC Pooling rates below the deposit facility rate of -0.50 percent. However, even though volume levels have been low over recent years, the tool has demonstrated its power in situations with increasing liquidity needs. In the example already mentioned by Frank, activity picked up very quickly in March 2020 and again demonstrated its power as a reliable liquidity management tool.
What has changed in the market, Carsten?
We already saw an increase in GC Pooling forwards in the fourth quarter of last year, which was due to year-end cover activities. However, volumes remained at a low level for short maturities such as overnight or one-week. Term business continued to increase significantly as the ECB’s wording hinted at possible interest rate hikes later in the year, and signs gathered that inflation was no longer temporary. In 12-month maturities in particular, we recorded brisk business with various customers due to the steeper yield curve. It is also very encouraging that several customers who have not actively used GC Pooling in recent years due to ECB policies have returned to the GC Pooling market in recent months, even for short-term maturities such as overnight. It looks like more and more customers are preparing for the big revival of GC Pooling.
With the increasing participation of public institutions and pension funds in the GC Pooling market, this diversification of active participation can only strengthen Eurex’s position as the leading European secured funding market infrastructure.
Frank, what is now fueling the comeback of GC Pooling and how does Eurex see the further development for GC Pooling?
As interest rates continue to rise in the Eurozone and more collateral will return to the market with the end of Quantitative Easing, it will become increasingly important for banks to be prepared and have all relevant collateralized financing/money market instruments available. For GC Pooling and short-term GC repo, it still depends on how quickly the excess liquidity is reduced. This would likely push short-term rates towards the deposit rate. Once short-term GC Pooling rates start trading at a premium to the ECB Deposit rate, we expect to see a significant increase in GC Pooling volumes and an increasing number of our 160+ customers across Europe re-engaging in this market.
The outstanding TLTRO tranches, on the other hand, have fixed expiration dates, with the flagship TLTRO III.4 tranche expiring in June 2023. Unlike the Asset Purchase Program and the Pandemic Emergency Purchase Program, the TLTRO is a “demand-driven” source of excess liquidity. With more than €1.3 trillion in repayments expected by next summer, it is unlikely that such a substantial reduction in demand-driven excess liquidity will pass without a major impact on European funding markets. With some market commentators predicting a “liquidity cliff” next summer, there is no better time to be prepared and re-familiarize yourself with GC Pooling and Eurex’s repo services.
In addition, Clearstream’s state-of-the-art Collateral Mobility project will increase the efficiency of the collateral management system for GC Pooling, allowing our customers to reuse features and benefit from new collateral as well as improved netting possibilities, e.g. across repo and GC Pooling in central bank money.
Since funding needs and requirements are highly likely to increase, Eurex stands ready with its successful tried and tested tool set to meet the challenges expected to come up over the next three to nine months.
GC Pooling is just one example of how we mastermind the most efficient derivatives landscape by pioneering innovative products and infrastructures as well as by incorporating 'smart' into technology. True to our mission to create better markets, we offer a broad range of international benchmark products, operate the world's most liquid fixed income markets and feature open and low-cost electronic access.
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