On the Choice 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. Focusing on the demand side, we investigate how pairs of dealers choose the CCP on which they clear a given transaction. We use transaction data on three main CDS indices and focus on major dealers who are members of the two EU CCPs. Descriptive analysis shows that dealers do not optimize their positions across CCPs. Then, we build and test a reduced form model of CCP's choice. Differences in transaction size, two indicators of CCP's robustness and activities, squared positions to account for dealers' risk aversion, and market volatility affect this choice, but not the collateral costs, proxied by the dealers' positions.