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Collateral Cycles

Author

Listed:
  • Evangelos Benos

    (University of Nottingham)

  • Gerardo Ferrara

    (Bank of England)

  • Angelo Ranaldo

    (University of St. Gallen; Swiss Finance Institute)

Abstract

Using supervisory data from UK clearinghouses (CCPs), we document the presence of a collateral cycle in which cash goes back and forth from financial markets to CCPs. In the onward phase, clearing members provide cash to CCPs to meet margin requirements. This pattern is procyclical as the pledged collateral increases with market volatility and puts 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 them to collateralise their cash holdings. The cash given back by CCPs generates downward pressure on repo rates in a counter-cyclical manner.

Suggested Citation

  • Evangelos Benos & Gerardo Ferrara & Angelo Ranaldo, 2022. "Collateral Cycles," Swiss Finance Institute Research Paper Series 22-91, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2291
    as

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    References listed on IDEAS

    as
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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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