Concentration risk and the optimal number of central counterparties for a single asset

We model the central counterparty (CCP) clearing of a single asset traded over-the-counter by two groups of banks in two currencies. We compare a variety of different clearing set-ups involving one or two CCPs according to their ability to withstand a combined market and banking crisis. Using stress testing, the model shows that the question of the optimal clearing set-up for a specifi c asset is complex and depends on many parameters such as the level of funding available to the CCP(s), the degree of integration between the different groups of participants and the particular risk profiles of these different groups. On the whole, however, a single CCP solution appears less resilient than a two-CCP arrangement when the magnitude of the crisis is large and only more resilient when the magnitude of the crisis is small in relation to the clearing fund of the CCP(s). Another interesting outcome is that the two-CCP set-ups perform better than the single CCP set-up for low levels of participation.