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Comparing the pre-settlement risk implications of alternative clearing arrangements

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  • John P Jackson
  • Mark J Manning
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    Abstract

    In recent years, there has been a marked expansion in the range of products cleared through central counterparty clearing houses, accompanied by a trend towards consolidation in the clearing infrastructure. The financial stability implications of these developments are of considerable policy interest. In this paper, we use a simulation approach to analyse, in a systematic way, the potential pre-settlement cost and risk implications of these developments. Our results point towards substantial risk-reduction benefits from multilateral clearing arrangements, arising from multilateral netting and mutualisation. The paper also examines individual incentives to join multilateral clearing arrangements. We suggest that arrangements with restricted direct participation and tiered membership may be a natural response to the uneven distribution of total pre-settlement costs when agents are of heterogeneous credit quality and it is costly to individually tailor margin.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP321.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 321.

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    Date of creation: Apr 2007
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    Handle: RePEc:boe:boeewp:321

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    1. James T. Moser, 2002. "The immediacy implications of exchange organization," Working Paper Series WP-02-09, Federal Reserve Bank of Chicago.
    2. Gemmill, Gordon, 1994. "Margins and the safety of clearing houses," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 979-996, October.
    3. Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany.
    4. Tapking, Jens & Yang, Jing, 2004. "Horizontal and vertical integration and securities trading and settlement," Working Paper Series 0387, European Central Bank.
    5. Kroszner, Randall S, 1999. "Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearinghouses and Recent Over-the-Counter Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 596-618, August.
    6. Robert R. Bliss & George Kaufman, 2005. "Derivatives and systemic risk: netting, collateral, and closeout," Working Paper Series WP-05-03, Federal Reserve Bank of Chicago.
    7. James T. Moser, 1998. "Contracting innovations and the evolution of clearing and settlement methods at futures exchanges," Working Paper Series WP-98-26, Federal Reserve Bank of Chicago.
    8. Johan Devriese & Janet Mitchell, 2005. "Liquidity risk in securities settlement," Working Paper Research 72, National Bank of Belgium.
    9. Thorsten Koeppl & Cyril Monnet, 2006. "Central Counterparties," 2006 Meeting Papers 513, Society for Economic Dynamics.
    10. Herbert L. Baer & Virginia G. France & James T. Moser, 2001. "Opportunity cost and prudentiality: an analysis of collateral decisions in bilateral and multilateral settings," Working Paper Series WP-01-26, Federal Reserve Bank of Chicago.
    11. Randall Kroszner, 1999. "Can the financial markets privately regulate risk? The development of derivatives clearinghouses and recent over-the-counter innovations," Proceedings, Federal Reserve Bank of Cleveland, pages 596-623.
    12. Baltensperger, Ernst, 1974. "The Precautionary Demand for Reserves," American Economic Review, American Economic Association, vol. 64(1), pages 205-10, March.
    13. Randall S. Kroszner, 1999. "Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearing Houses and Recent Over-the Counter Innovations," CRSP working papers 493, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    Cited by:
    1. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    2. Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.
    3. Neuner, Stefan & Schäfer, Klaus, 2011. "Zentrale Gegenparteien für den außerbörslichen Derivatehandel in der Praxis," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2011-02, University of Bayreuth, Chair of Finance and Banking.

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