Collateral cycles

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 11 March 2022

Staff Working Paper No. 966

By Evangelos Benos, Gerardo Ferrara and Angelo Ranaldo

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.

This version was updated in April 2023.  

Collateral cycles