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 cycles, clearing members utilise repurchase agreements (repos) to provide cash to CCPs so as to meet their margin requirements. This pattern is procyclical, intensifying with market volatility and driving up repo rates. In the backward phase, CCPs comply with regulations by safely investing their cash holdings primarily in reverse repos, followed by safe bonds and, to a lesser extent, central bank deposits. The return of cash by CCPs, back to financial markets via reverse repos and bond purchases, exerts downward pressure on repo rates. Overall, our findings demonstrate that CCPs have become important non‑bank entities, impacting funding markets, with significant implications for financial stability and policymaking.
This version was updated in December 2024.
Collateral cycles