How Fast Should Trades Settle?

Management Science, Forthcoming

56 Pages Posted: 8 Dec 2016 Last revised: 24 May 2019

See all articles by Mariana Khapko

Mariana Khapko

University of Toronto - Finance Area; Swedish House of Finance

Marius Zoican

University of Toronto - Rotman School of Management; University of Toronto at Mississauga - Department of Management

Date Written: May 22, 2019

Abstract

Recent regulatory and industry initiatives aim to streamline post-trade infrastructures. Does faster settlement benefit markets? We build a model of intermediated trading with imperfectly competitive securities lending. Faster settlement benefits impatient traders but increases borrowing needs. We find that flexible failure-to-deliver penalties reduce this tension, disciplining security lender competition and allowing for real-time settlement. Optimal penalties resemble put options on the lending market: They protect traders against high settlement costs, but do not eliminate failures-to-deliver. Mandating automatic security borrowing to prevent failures-to-deliver triggers a toxic settlement rat race to lock in low borrowing costs.

Keywords: Market design, trade settlement, security lending, counterparty risk

JEL Classification: D43, D47, G10, G20

Suggested Citation

Khapko, Mariana and Zoican, Marius, How Fast Should Trades Settle? (May 22, 2019). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2881331 or http://dx.doi.org/10.2139/ssrn.2881331

Mariana Khapko

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm
Sweden

Marius Zoican (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.org

University of Toronto at Mississauga - Department of Management ( email )


Canada

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