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The economics of collateral

Listed author(s):
  • Anderson, Ronald W.
  • Jõeveer, Karin

In this paper we study how the use of collateral is evolving under the influence of regulatory reform and changing market structure. We start with a critical review of the recent empirical literature on the supply and demand of collateral which has focussed on the issue of ‘collateral scarcity’. We argue that while limited data availability does not allow a comprehensive view of the market for collateral, it is unlikely that there is an overall shortage of collateral. However, it is quite possible that there may be bottlenecks within the system which mean that available collateral is immobilized in one part of the system and unattainable by credit-worthy borrowers. We then describe how these problems sometimes can be overcome by improved information systems and collateral transformation. We discuss how collateral management techniques differ between banks and derivatives markets infrastructures including, in particular, CCPs. In order to assess the impact of alternative institutional arrangements on collateral demand, we introduce a theoretical model of an OTC derivatives market consisting of investors and banks arrayed in several regions or market segments. We simulate this model under alternative forms meant to capture the implications of moving to mandatory CCP clearing and mandatory initial margin requirements for non-cleared OTC derivatives.

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File URL: http://eprints.lse.ac.uk/59295/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 59295.

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Length: 52 pages
Date of creation: 16 May 2014
Handle: RePEc:ehl:lserod:59295
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  1. Anouk Levels & Jeannette Capel, 2012. "Is Collateral Becoming Scarce? Evidence for the euro area," DNB Occasional Studies 1001, Netherlands Central Bank, Research Department.
  2. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
  3. Duffie, Darrell & Scheicher, Martin & Vuillemey, Guillaume, 2015. "Central clearing and collateral demand," Journal of Financial Economics, Elsevier, vol. 116(2), pages 237-256.
  4. Manmohan Singh, 2011. "Velocity of Pledged Collateral; Analysis and Implications," IMF Working Papers 11/256, International Monetary Fund.
  5. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
  6. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
  7. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters,in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148 National Bureau of Economic Research, Inc.
  8. Alexandra Heath & Gerard Kelly & Mark Manning, 2013. "OTC Derivatives Reform: Netting and Networks," RBA Annual Conference Volume,in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.
  9. Stacey Anderson & Jean-Philippe Dion & Héctor Pérez Saiz, 2013. "To Link or Not To Link? Netting and Exposures Between Central Counterparties," Staff Working Papers 13-6, Bank of Canada.
  10. Manmohan Singh, 2013. "The Changing Collateral Space," IMF Working Papers 13/25, International Monetary Fund.
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