The Netting Efficiencies of Marketwide Central Clearing

47 Pages Posted: 20 Apr 2021

See all articles by Michael J. Fleming

Michael J. Fleming

Federal Reserve Bank of New York

Frank M. Keane

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: April 2021

Abstract

Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 percent) when trading was at its highest. We also find that expanded central clearing would have substantially lowered settlement fails. The estimated benefits would likely be greater if dealers’ auction purchases were included in the analysis or if the increased central clearing included repo transactions.

Keywords: Treasury securities, central clearing, dealers, market structure, COVID-19

JEL Classification: G28, G18, G12

Suggested Citation

Fleming, Michael J. and Keane, Frank M., The Netting Efficiencies of Marketwide Central Clearing (April 2021). FRB of New York Staff Report No. 964, Available at SSRN: https://ssrn.com/abstract=3828150 or http://dx.doi.org/10.2139/ssrn.3828150

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

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HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Frank M. Keane

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6079 (Phone)
(212) 720-1941 (Fax)

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