Settlement Risk Under Gross and Net Settlement

34 Pages Posted: 9 Oct 2006

See all articles by Charles M. Kahn

Charles M. Kahn

University of Illinois, Urbana-Champaign; Bank of Canada; Federal Reserve Bank of Saint Louis

James McAndrews

Wharton Financial Institutions Center

William Roberds

Federal Reserve Bank of Atlanta

Date Written: September 1999

Abstract

Previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements, and on the incentives for participants to alter the risk of the portfolio under net settlement. By modeling the trading economy that generates the demand for payment services, we are able to show some largely unexplored advantages of net settlement. We find that net settlement systems avoid certain gridlock situations, which may arise in gross settlement in the absence of delivery versus payment requirements. In addition, net settlement can economize on collateral requirements and avoid trading delays.

Keywords: clearing, settlement, settlement risk

JEL Classification: E58, G21, G28

Suggested Citation

Kahn, Charles M. and McAndrews, James and Roberds, William, Settlement Risk Under Gross and Net Settlement (September 1999). FRB of New York Staff Report No. 86, Available at SSRN: https://ssrn.com/abstract=935333 or http://dx.doi.org/10.2139/ssrn.935333

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Federal Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

James McAndrews (Contact Author)

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
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Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

William Roberds

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8970 (Phone)
404-498-8956 (Fax)