Collateral Cycles

45 Pages Posted: 4 May 2022 Last revised: 26 Apr 2023

See all articles by Evangelos Benos

Evangelos Benos

University of Nottingham

Gerardo Ferrara

Bank of England

Angelo Ranaldo

University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen

Date Written: November 21, 2022

Abstract

Using supervisory data from UK central counterparties (CCPs), our paper uncovers persistent collateral cycles in which cash goes back and forth from financial markets to CCPs. In the onward phase of the cycle, clearing members provide cash to CCPs to meet margin requirements. This pattern is procyclical as the pledged collateral increases with market volatility and places upward pressure on repurchase agreement (repo) rates. In the backward phase, CCPs return the cash to the financial markets via reverse repos and bond purchases, in compliance with regulation that requires CCPs to invest their cash holdings in safe assets. The cash given back by CCPs generates downward pressure on repo rates in a countercyclical manner.

Keywords: Central clearing, Collateral, Margin procyclicality, Repurchase agreement, Regulation.

JEL Classification: G10, G12, G14

Suggested Citation

Benos, Evangelos and Ferrara, Gerardo and Ranaldo, Angelo, Collateral Cycles (November 21, 2022). Bank of England Working Paper No. 966, Swiss Finance Institute Research Paper No. 22-91, Available at SSRN: https://ssrn.com/abstract=4083127 or http://dx.doi.org/10.2139/ssrn.4083127

Evangelos Benos

University of Nottingham ( email )

Room C38, South Building, Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Gerardo Ferrara (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Angelo Ranaldo

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

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