Public Benefits and Public Concerns: An Economic Analysis of Regulatory Standards for Clearing Facilities
Issues in Financial Regulation WP95-12
Posted: 13 Oct 1995
Date Written: Undated
Multilateral netting offsets gross payment obligations among several counterparties with new transactions. By keeping a running total for monies owed between all participants, multilateral netting allows for three or more parties to reduce multiple transactions to a single pay or collect per member. Multilateral clearing facilities offer a myriad of services for a variety of contractual forms. The obligations entailed by these services must be carefully structured so as not to exacerbate any financial disruptions. The extension of clearing services to the derivative products market requires consideration of the unique risks involved in clearing these instruments. The benefits made accessible by multilateral netting facilities is material. Yet, absent appropriate structural characteristics, such facilities can increase the fragility of the financial system by concentrating risk in a single entity. Thus, the design of these facilities is important. In November, 1990, a committee of representatives from the Bank for International Settlements and from the central banks of the G10 nations published minimum regulatory standards for facilities clearing foreign exchange. The six standards of the Lamfalussy Report guide regulatory oversight of clearing facilities. Attempts apply those standards to all types of multilateral netting have not been uniformly satisfactory. The application of the standards to facilities differing from the original target of the study has led to interpretative inconsistencies. The current environment requires more comprehensive standards which extend the analysis to clearing of all financial products and raise the minimum operating standards to a higher level. Our paper offers an analysis and proposes a new set of standards.
JEL Classification: G20
Suggested Citation: Suggested Citation