An analysis of systemic risk in alternative securities settlement architectures
AbstractThis paper compares securities settlement gross and netting architectures. It studies settlement risk arising from exogenous operational delays and compares settlement failures between the two architectures as functions of the length of the settlement interval under different market conditions. While settlement failures are non monotonically related to the length of settlement cycles under both architectures, there is no clear cut ranking of which architecture delivers greater stability. We show that while, on average, netting systems seem to be more stable than gross systems, rare events may lead to contagious defaults that could affect the all system. Furthermore netting system are very sensitive to the number and initial distribution of traded shares. JEL Classification: C6, D4, G20, O33
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0404.
Date of creation: Nov 2004
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Find related papers by JEL classification:
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- D4 - Microeconomics - - Market Structure and Pricing
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-CFN-2005-10-04 (Corporate Finance)
- NEP-FIN-2005-10-04 (Finance)
- NEP-FMK-2005-10-04 (Financial Markets)
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