Determinants of intraday dynamics and collateral selection in centrally cleared and bilateral repos

Abstract

Using a novel dataset, we study intraday trades of overnight general collateral repurchase agreements (repos) on Italian government bonds. We focus both on repos cleared by central counterparties (CCPs) and traded bilaterally. Intraday bond supply, liquidity and duration significantly affect the spread of repo rates over the European Central Bank (ECB) deposit rate, but after the ECB quantitative easing interventions this impact is much reduced. During the European sovereign debt crisis, the increase in margins further deteriorates repo costs, creating a negative procyclical effect. Once we control for the impact of margin costs, CCP-based repos do not appear to be significantly cheaper than bilateral repos. We also show that bonds with lower liquidity and specialness, greater supply and longer duration are more likely to be selected as collateral.However, during the crisis, CCP-repo borrowers choose collateral bonds with higher liquidity and lower duration to reduce margin and repo trading costs.

Why Do Central Banks Make Public Announcements of Open Market Operations?

“…Gürkaynak and Wright (2013) recommend using short windows around events to minimise the possibility that news unrelated to the event affects the outcomes of interest. The relative sparsity of overnight repo trades post h o,t -more than 70% of repo trades are concluded before the scheduled time of the OMO announcement-as well as the presence of strong intraday patterns in funding costs (Dufour, Marra, and Sangiorgi, 2019) hampers our ability to isolate the information effect in short windows around h o,t . Our empirical setting also makes it difficult to infer the long-run effects of information revealed by OMOs.…”

Fundamental questions on central counterparties: A review of the literature

“…1. Dufour et al (2019) and Boissel et al (2017) analyze the Italian repo market, which trades on MTS, and interestingly has both CCP clearing (in CC&G, clearing circa 80% of total daily notional of EUR 6.1 bn) and bilateral clearing (20%) in the morning of each trading day. On the basis of hourly data from 2010 to 2015 incorporating the European Sovereign Debt Crisis, they find that in relatively normal times repo spreads against the ECB deposit rate of trades centrally cleared, are lower than those cleared bilaterally.…”

A risk model to compute the volatility and the need for collateral margins in energy futures contracts in Brazil

“…The Italian repo market was studied by Dufour et al (2019) and Boissel et al (2017), who found that the CCP had lower counterparty risk. CCP repo spreads, on the other hand, surged more than bilateral repo spreads during the European sovereign debt crisis, reversing the situation.…”