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Collateral cycles

Author

Listed:
  • Benos, Evangelos

    (University of Nottingham)

  • Ferrara, Gerardo

    (Bank of England)

  • Ranaldo, Angelo

    (University of St. Gallen)

Abstract

Using supervisory data from UK central counterparties (CCPs), we study a collateral cycle in which market participants raise liquidity in the repo markets to meet CCPs margin calls, before CCPs reinvest the liquidity through reverse repos as well as bond purchases. In the first leg, we find that increases in the cost of repo funding precede increases in CCP cash margin as market participants anticipate increased margin requirements. However, this effect is moderated by the return leg, where cash margin received by CCPs is returned to market participants via the repo and bond markets. The additional cash being recycled by CCPs via the repo markets alongside the increased demand for safe bonds, create counter‑cyclical effects that lower repo rates, especially at times of stress.

Suggested Citation

  • Benos, Evangelos & Ferrara, Gerardo & Ranaldo, Angelo, 2022. "Collateral cycles," Bank of England working papers 966, Bank of England, revised 24 Oct 2022.
    • Handle: RePEc:boe:boeewp:0966
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Central clearing; margin procyclicality; repo rates;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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