Q&A
Cost
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At present the pricing of most equity CCPs in Europe is more typical of a transaction processing service with unit fees, than a risk-taking service with ad-valorem fees. Generally, equity CCPs charge a fee per trade guaranteed irrespective of the value of the trade.
CCP users incur several costs which could be less visible: funding costs associated with securities collateral provided to a CCP, opportunity costs of cash collateral (for-profit CCPs take a spread on the cash), and penalty fees for late settlement over which users have no effective control but which could be a quite substantial amount.
MoreHow do CCPs price their services? – more information
There is a wide variety of CCP pricing models in Europe, such as:
- “Free”, as CCP services are bundled with an exchange’s trading fees;
- Flat fee per trade;
- Flat fee per trade plus a penalty for failed settlement;
- Flat fee per trade plus an ad-valorem fee;
- Flat fee per order;
- Flat fee plus a fee payable to a central depository that carries out part of the clearing function;
- Flat fee per trade plus a fee per security cleared plus an ad-valorem fee on the net open position after netting weighted by the credit rating of the user;
- Ad-valorem fee with floor and cap.
It may seem counter-intuitive that a CCP charges a flat fee per trade regardless of the value of the guarantee extended. A CCP’s pricing model is a business decision and partly determined by competitive practice. A user, on the other hand, does incur costs relative to the value of the guarantee it receives, in the form of funding costs for the amount of collateral required by the CCP which is proportional to the exposure it creates for the CCP.
CCPs’ fee schedules are posted on their websites and some provide fee calculators for different types of users and / or usage levels. Because there is a large variety of pricing, discount and rebate models, fee schedule transparency does not equal fee level comparability.
A EuroCCP study in 2008 on CCP pricing is still useful to illustrate the variety of approaches. Click Here. Some CCPs disputed the conclusion on their average unit prices, but none has responded to EuroCCP’s invitation to put in writing what the right price should be, how to calculate it and where to obtain the necessary data from a public source.
HideEquity CCPs have three main revenue streams: clearing fees, penalty fees on late settlement, and net interest earnings on collateral supplied by users. The latest publicly available figures show that equity CCPs typically derive about 80% of revenues from fees and 20% from net interest earnings.
CCPs that clear fixed income and derivative instruments have a significantly higher portion of revenues, over 40%, from net interest earnings because of the much higher amount of collateral supplied by users for these asset classes.
MoreHow do CCPs make money? – more information
CCPs in Europe that have investor shareholders and operate on a for-profit basis are very profitable. Publicly available 2008 financials show the average profit margin ranged from 33% to 79%, with the median being 53%.
Users are particularly keen that penalty fees should not be used as a source of profit, but should be recycled back into service improvements. Most CCPs provide assurances that penalties are not set at levels that will increase profitability, although the figures are generally not available in published financial statements.
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