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Settlement risk under gross and net settlement

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  • Charles M. Kahn
  • James McAndrews
  • William Roberds

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 86.

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Date of creation: 1999
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Handle: RePEc:fip:fednsr:86

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Keywords: Payment systems ; Trade ; Monetary policy;

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  1. Kobayakawa, Shuji, 1997. "The Comparative Analysis of Settlement Systems," CEPR Discussion Papers 1667, C.E.P.R. Discussion Papers.
  2. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  3. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  4. Charles M. Kahn & William Roberds, 1999. "Real-time gross settlement and the costs of immediacy," Working Paper 98-21, Federal Reserve Bank of Atlanta.
  5. John A. Weinberg, 1997. "The organization of private payment networks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 25-44.
  6. Marvin Goodfriend, 1989. "Money, credit, banking and payments system policy," Working Paper 89-03, Federal Reserve Bank of Richmond.
  7. Charles M. Kahn & William Roberds, 1996. "Payment system settlement and bank incentives," Working Paper 96-10, Federal Reserve Bank of Atlanta.
  8. Dirk Schoenmaker & Peter M. Garber & D. F. I. Folkerts-Landau, 1996. "The Reform of Wholesale Payment Systems and its Impacton Financial Markets," IMF Working Papers 96/37, International Monetary Fund.
  9. Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
  10. Xavier Freixas & Bruno Parigi, 1996. "Contagion and efficiency in gross and net interbank payment systems," Economics Working Papers 176, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 1996.
  11. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
  12. James McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Working Paper 99-11, Federal Reserve Bank of Atlanta.
  13. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers 193, Banca Italia - Servizio di Studi.
  14. Herbert L. Baer & Virginia Grace France & James T. Moser, 1995. "Determination of collateral deposits by bilateral parties and clearinghouses," Proceedings 473, Federal Reserve Bank of Chicago.
  15. William J. Hanley & Karen McCann & James T. Moser, 1995. "Public benefits and public concerns: an economic analysis of regulatory standards for clearing facilities," Working Paper Series, Issues in Financial Regulation 95-12, Federal Reserve Bank of Chicago.
  16. William R. Emmons, 1997. "Recent developments in wholesale payments systems," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 23-43.
  17. William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
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