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Is there a 'race to the bottom' in central counterparties competition?


  • Siyi Zhu


The European trade and post-trade industries have seen increased competition in the past few years. As a result of the intensifying competitive market pressure, a series of tariff reduction and alterations of risk management models have been implemented by some central counterparties (CCPs) in Europe, which raises the concern of overseers and regulators that the fi nancial soundness and risk mitigation capacity of CCPs could be threatened, leading to a "race to the bottom". To address the concern, this paper presents CCPs' competitive responses both in the fi eld of tariffs and risk management based on the practices of the three CCPs in European equity market-LCH.Clearnet SA, EMCF and EuroCCP. It concludes that, 1) competition in the pan-European equity clearing industry has given rise to CCPs' tariffs-cutting activities, which in part enhances market effi ciency; 2) there's no fi tfor-all risk management mechanism: the CCPs studied apply a common framework while they employ certain different specifi cations in modeling and loss sharing procedures; 3) no solid evidence implies that competition among CCPs has led to a deterioration in the robustness of CCPs' risk management.

Suggested Citation

  • Siyi Zhu, 2011. "Is there a 'race to the bottom' in central counterparties competition?," DNB Occasional Studies 906, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbocs:906

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    References listed on IDEAS

    1. Philipp Haene & Andy Sturm, 2009. "Optimal Central Counterparty Risk Management," Working Papers 2009-07, Swiss National Bank.
    2. Thorsten Koeppl & Cyril Monnet, 2006. "Central Counterparties," 2006 Meeting Papers 513, Society for Economic Dynamics.
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    Cited by:

    1. Radoslav Raykov, 2016. "To Share or Not to Share? Uncovered Losses in a Derivatives Clearinghouse," Staff Working Papers 16-4, Bank of Canada.

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    Central counterparty; competition; risk management; loss mutualization;

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