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Net Settlement and Counterparty Risk: Evidence from the Formation of the New York Stock Exchange Clearing House in 1892

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  • BERNARD MCSHERRY
  • BERRY K. WILSON
  • JAMES J. MCANDREWS

Abstract

The securities settlement literature indicates that centralized settlement can reduce monitoring incentives and lead to excessive risk‐taking and inefficient risk‐sharing. This paper examines broker‐failure rates and counterparty losses surrounding the transition from bilateral to multilateral settlement facilitated by the NYSE. Study results provide evidence that net settlement reduced failures without diminishing risk constraining incentives. The study constructs a controlled comparison of broker failures through data collected from the NYSE and the Consolidated Stock Exchange, which traded identical securities settled under different systems. The results suggest that multilateral settlement is advantageous when financial markets are highly stressed.

Suggested Citation

  • Bernard Mcsherry & Berry K. Wilson & James J. Mcandrews, 2017. "Net Settlement and Counterparty Risk: Evidence from the Formation of the New York Stock Exchange Clearing House in 1892," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(6), pages 1273-1298, September.
    • Handle: RePEc:wly:jmoncb:v:49:y:2017:i:6:p:1273-1298
    DOI: 10.1111/jmcb.12417
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    References listed on IDEAS

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    6. Acharya, Viral & Bisin, Alberto, 2014. "Counterparty risk externality: Centralized versus over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 149(C), pages 153-182.
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    Cited by:

    1. Bernard McSherry & Berry K. Wilson, 2020. "Margin practices and requirements during the National Banking Era: An early example of macro‐prudential regulation," Review of Financial Economics, John Wiley & Sons, vol. 38(S1), pages 210-225, March.
    2. Hattori, Takahiro, 2023. "The premium and settlement of CCPs during the financial crisis: Evidence from the JGB market," Journal of International Money and Finance, Elsevier, vol. 132(C).

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