Collateral Competition: Evidence from Central Counterparties

We analyze competition and risk management at central counterparties (CCPs) using a granular transaction-level dataset, and find that CCPs decrease collateral in response to lower collateral at their competitors, an effect that becomes stronger as the correlation between positions increases.

To interpret our findings, we derive a model in which collateral is driven by risk and CCP competition. Our results are consistent with the model and suggest that a single monopolistic CCP would require more collateral. We also show that amid the substantial increase in collateral during the Covid-19 pandemic, the probability of a margin breach did not significantly change.