Pledged Collateral Market's Role in Transmission to Short-Term Market Rates

May 17, 2019

Preview Citation

Format: Chicago

Manmohan Singh, and Rohit Goel. Pledged Collateral Market's Role in Transmission to Short-Term Market Rates, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In global financial centers, short-term market rates are effectively determined in the pledged collateral market, where banks and other financial institutions exchange collateral (such as bonds and equities) for money. Furthermore, the use of long-dated securities as collateral for short tenors—or example, in securities-lending and repo markets, and prime brokerage funding—impacts the risk premia (or moneyness) along the yield curve. In this paper, we deploy a methodology to show that transactions using long dated collateral also affect short-term market rates. Our results suggest that the unwind of central bank balance sheets will likely strengthen the monetary policy transmission, as dealer balance-sheet space is now relatively less constrained, with a rebound in collateral reuse.

Subject: Banking, Bonds, Central bank balance sheet, Central banks, Collateral, Financial institutions, Financial statements, Public financial management (PFM), Securities

Keywords: Balance sheet, Bonds, Central bank, Central bank balance sheet, Central banks balance sheet, Collateral, Collateral market, Collateral velocity, Excess reserves, Financial statements, Global, Market, Market rate, Monetary policy transmission, Overnight market rate, Policy rate hike, Rate, Reverse repo, Securities, Securities lender, Securities lending, Short-term market rate, Transmission mechanism, Utility value, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/106
Stock No:

WPIEA2019106
ISBN:

9781498312790
ISSN:

1018-5941

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