N°22-91: Collateral Cycles

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.