On the Market Structure of Central Counterparties in the EU

New regulations promote the role of Central Counter-Parties (CCPs) as insurers of counterparty risk to stabilize derivative markets. Whereas the US favors monopolistic CCPs, the EU promotes the coexistence of several CCPs for a given asset class. In this paper, we shed light on the competition between CCPs. We start by reviewing their business model and gather public data to show how they differentiate on several dimensions: geographic, product line, and quality. We then study how pairs of dealers choose the CCP on which they clear a given transaction. For that, we use transaction data on three main CDS indices and focus on major dealers who are members of the two main CCPs clearing these indices. We find that differences in transaction size, two indicators of CCP's robustness quality, and market volatility affect this choice but not the collateral costs, proxied by the dealers' positions.