Margin procyclicality and the collateral cycle

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), 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.

Margin procyclicality and the collateral cycle

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