Preferred clearing and post-trade costs

Abstract

We study fee competition between an incumbent and entrant central counterparty (CCP) under two regimes: interoperability (trades clear at their own CCP) and preferred clearing (trades clear at the incumbent CCP unless both buyer and seller decide otherwise). Preferred clearing creates network effects, forcing the entrant to undercut fees more aggressively while allowing the incumbent to sustain higher profits. Preferred clearing generates wider fee spreads, higher average trading costs, and greater industry profits. Interoperability improves welfare, unless switching costs are high. The incumbent favors preferred clearing; the entrant favors interoperability. Our results inform ongoing policy debates about CCP market structure.

Marius Zoican

Associate Professor of Finance

I study the impact of (new) technology on securities exchanges and asset management, as well as how to leverage technological innovations to build a better market.