CCP Competition, Margins, and Crowding in US Treasury Market

ABSTRACT This paper presents a dynamic equilibrium model of US Treasury clearing that endogenizes explicit, VaR‐based initial margins, EWMA volatility updates, variation‐margin feedback, cross‐margining, and crowding effects within CCP competition. We cast clearing as a three‐stage stochastic game: CCPs commit to fees, margin multipliers, cross‐margin discounts, and volatility‐decay parameters; members allocate DV01 exposures in each period subject to funding‐cost feedback from margin calls; and CCPs incur tail‐risk, covariance, concentration, and infrastructure penalties over time. In the symmetric competitive equilibrium, stronger cross‐margining discounts, dynamically calibrated skin‐in‐the‐game buffers, concentration surcharges, and conservative margin‐and‐volatility regimes all reduce the joint default probability. We benchmark against a single‐CCP monopoly and demonstrate that only under extreme crowding does a well‐capitalized monopoly dominate. Our comparative‐statics yield a comprehensive policy toolkit—transparent margin formulas, volatility‐decay standards, feedback‐cap mechanisms, cross‐margin interoperability, and real‐time crowding metrics—to guide resilient Treasury clearing.