CCP collateral regulation could limit procyclicality – BoE paper
Requiring CCPs to reinvest cash collateral can help reduce procyclicality during stress, authors find
Regulations that require central counterparties (CCPs) to reinvest the cash they receive as collateral can mitigate procyclicality, research published by the Bank of England finds.
Evangelos Benos, Gerardo Ferrara and Angelo Ranaldo note that CCPs’ margining requirements, which rise during periods of stress, can encourage market participants to hoard liquidity. This puts upward pressure on repo rates, worsening strains in money markets.
However, some of the cash posted as margin gets recycled
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