BIS: The impact of CCPs' margin policies on repo markets

05 October 2015

This paper quantifies the impact on the cost of funding in repo markets of the initial margins applied by central clearing counterparties.

In the paper, contract-level data on the general collateral) segment of Italy's MTS Repo market between January 2011 and April 2014 is used. The analysis shows that the initial margins, paid by all participants, had a positive and significant effect on the cost of funding. Such an impact is consistent across different model specifications and data subsamples.

In this paper, the impact of CCPs' initial margin policies on the cost of funding is investigated, showing the existence of a theoretical positive relationship between these two variables which is confirmed by empirical evidence. Drawing on an extensive transaction-level data set on the Italian MTS Repo market (the GC segment) available at the Bank of Italy for supervisory purposes for the period 2011-2014, the paper demonstrates that initial margins, paid by all participants, have significantly and positively affected the cost of funding observed on GC MTS Repo Italy; on average, the impact is equal to about 3 basis points for each 1 percentage point variation in the margin. Among the other variables playing a role, the authors found that credit and liquidity risks, as well as variables capturing potential idiosyncratic pressures in liquidity needs exert a significant and upward impact on the cost of funding. Variables linked to the level of excess liquidity in the euro area have instead a negative effect. This paper thus represents a first attempt at identifying causal relationships in CCP-cleared repo markets in times of stress.

Full paper

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