Download this Paper Open PDF in Browser

Dealers' Competition and Control of a Central Counterparty: When Lower Risk Increases Profit

39 Pages Posted: 17 Mar 2012 Last revised: 26 Jul 2013

Hector Perez Saiz

Bank of Canada, Financial Stability Department, Financial Studies Division

Jean-Sebastien Fontaine

Bank of Canada

Joshua Slive

Bank of Canada

Date Written: June 1, 2013

Abstract

Central counterparties (CCPs) are becoming central to over-the-counter (OTC) markets. A CCP limits counterparty risk but raises entry barriers. We analyze the trade-off between dealers’ equilibrium default risk and competition in an OTC market with imperfect competition and endogenous default probability. We find that (i) CCP members favor entry restrictions and binding risk controls as a device to commit to less competition, (ii) restricting entry maximizes welfare when dealers’ transfer risk efficiently relative to their market power, and (iii) free entry reaches the first-best welfare if the CCP can limit risk-taking.

Keywords: Clearing, Central Counterparty, Default, Competition, membership requirements

JEL Classification: G21, G28, G32, G34

Suggested Citation

Perez Saiz, Hector and Fontaine, Jean-Sebastien and Slive, Joshua, Dealers' Competition and Control of a Central Counterparty: When Lower Risk Increases Profit (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2022439 or http://dx.doi.org/10.2139/ssrn.2022439

Hector Perez Saiz (Contact Author)

Bank of Canada, Financial Stability Department, Financial Studies Division ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
+1 613 782 7184 (Phone)

Jean-Sebastien Fontaine

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

HOME PAGE: http://www.jean-sebastienfontaine.com

Joshua Slive

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Paper statistics

Downloads
128
Rank
188,768
Abstract Views
967