Abstract

https://ssrn.com/abstract=2022439
 
 

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


Hector Perez Saiz


Bank of Canada, Financial Stability Department, Financial Studies Division

Jean-Sebastien Fontaine


Bank of Canada

Joshua Slive


Bank of Canada

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.

Number of Pages in PDF File: 39

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

JEL Classification: G21, G28, G32, G34


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Date posted: March 17, 2012 ; Last revised: July 26, 2013

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

Contact Information

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
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