Is there a 'race to the bottom' in central counterparties competition?

The European trade and post-trade industries have seen increased competition in the past few years. As a result of the intensifying competitive market pressure, a series of tariff reduction and alterations of risk management models have been implemented by some central counterparties (CCPs) in Europe, which raises the concern of overseers and regulators that the fi nancial soundness and risk mitigation capacity of CCPs could be threatened, leading to a "race to the bottom". To address the concern, this paper presents CCPs' competitive responses both in the fi eld of tariffs and risk management based on the practices of the three CCPs in European equity market-LCH.Clearnet SA, EMCF and EuroCCP. It concludes that, 1) competition in the pan-European equity clearing industry has given rise to CCPs' tariffs-cutting activities, which in part enhances market effi ciency; 2) there's no fi tfor-all risk management mechanism: the CCPs studied apply a common framework while they employ certain different specifi cations in modeling and loss sharing procedures; 3) no solid evidence implies that competition among CCPs has led to a deterioration in the robustness of CCPs' risk management.