IDEAS home Printed from https://ideas.repec.org/p/qed/wpaper/1222.html
   My bibliography  Save this paper

Optimal Clearing Arrangements For Financial Trades

Author

Listed:
  • Cyril Monnet

    (DG Research, European Central Bank)

  • Ted Temzelides

    (Department of Economics, University of Pittsburgh)

  • Thorsten V. Koeppl

Abstract

Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that is periodically cleared by participants. We study efficient clearing arrangements for formal exchanges, where traders must clear with a clearinghouse, and for over-the-counter (OTC) markets, where trades can be cleared bilaterally. When clearing is costly, we show that it can be efficient to subsidize the clearing process for OTC transactions by charging a higher price for the clearing of transactions in exchanges.This necessitates a clearinghouse that operates across both markets. As a clearinghouse offers credit, intertemporal incentives are needed in order to ensure settlement. An increasein the costs of liquidity provision worsens the incentives to settle. Hence, when liquidity costs increase, concerns about default must lead to a tightening of liquidity provision.

Suggested Citation

  • Cyril Monnet & Ted Temzelides & Thorsten V. Koeppl, 2009. "Optimal Clearing Arrangements For Financial Trades," Working Paper 1222, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1222
    as

    Download full text from publisher

    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1222.pdf
    File Function: First version 2009
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin, Antoine & McAndrews, James, 2008. "Liquidity-saving mechanisms," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 554-567, April.
    2. Dimitri Vayanos & Pierre‐Olivier Weill, 2008. "A Search‐Based Theory of the On‐the‐Run Phenomenon," Journal of Finance, American Finance Association, vol. 63(3), pages 1361-1398, June.
    3. Darrell Duffie & Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Valuation in Over-the-Counter Markets," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1865-1900, November.
    4. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. "Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
    5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    6. Darrell Duffie, 2012. "Over-The-Counter Markets," Introductory Chapters, in: Dark Markets: Asset Pricing and Information Transmission in Over-the-Counter Markets, Princeton University Press.
    7. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 133-151.
    8. Aiyagari, S. Rao & Williamson, Stephen D., 2000. "Money and Dynamic Credit Arrangements with Private Information," Journal of Economic Theory, Elsevier, vol. 91(2), pages 248-279, April.
    9. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-870.
    10. Antoine Martin & James J. McAndrews, 2008. "An economic analysis of liquidity-saving mechanisms," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 25-39.
    11. Martin, Antoine & McAndrews, James, 2010. "A study of competing designs for a liquidity-saving mechanism," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1818-1826, August.
    12. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2008. "A dynamic model of settlement," Journal of Economic Theory, Elsevier, vol. 142(1), pages 233-246, September.
    13. Hiroshi Fujiki & Edward J. Green & Akira Yamazaki, 1999. "Sharing the risk of settlement failure," Working Papers 594, Federal Reserve Bank of Minneapolis.
    14. Temzelides, Ted & Williamson, Stephen D., 2001. "Payments Systems Design in Deterministic and Private Information Environments," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 297-326, July.
    15. Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996. "A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 696-732, November.
    16. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 401-424, March.
    17. Enghin Atalay & Antoine Martin & James J. McAndrews, 2008. "The welfare effects of a liquidity-saving mechanism," Staff Reports 331, Federal Reserve Bank of New York.
    18. Kahn, Charles M. & Roberds, William, 2001. "Real-time gross settlement and the costs of immediacy," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 299-319, April.
    19. Monnet, Cyril & Roberds, William, 2008. "Optimal pricing of payment services," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1428-1440, November.
    20. Michael J. Fleming & Kenneth D. Garbade, 2002. "When the back office moved to the front burner: settlement fails in the treasury market after 9/11," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(Nov), pages 35-57.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lester Benjamin, 2009. "Settlement Systems," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-35, May.
    2. 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.
    3. Benjamin Lester, 2006. "A Model of Interbank Settlement," 2006 Meeting Papers 282, Society for Economic Dynamics.
    4. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2007. "A dynamic model of the payment system," Working Papers 07-22, Federal Reserve Bank of Philadelphia.
    5. Ball, Alan & Denbee, Edward & Manning, Mark & Wetherilt, Anne, 2011. "Financial Stability Paper No 11: Intraday Liquidity - Risk and Regulation," Bank of England Financial Stability Papers 11, Bank of England.
    6. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Staff Working Papers 07-28, Bank of Canada.
    7. Monticini, Andrea & Ravazzolo, Francesco, 2014. "Forecasting the intraday market price of money," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 304-315.
    8. Puriya Abbassi & Falko Fecht & Johannes Tischer, 2017. "Variations in Market Liquidity and the Intraday Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(4), pages 733-765, June.
    9. Adam Ashcraft & James Mcandrews & David Skeie, 2011. "Precautionary Reserves and the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 311-348, October.
    10. Christian Pfister, 2018. "(Real-)Time Is Money," Working papers 675, Banque de France.
    11. Shaun Byck & Ronald Heijmans, 2020. "How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada's large-value payment system Shaun Byck," Working Papers 682, DNB.
    12. Julio J. Rotemberg, 2011. "Minimal Settlement Assets in Economies with Interconnected Financial Obligations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 81-108, February.
    13. Thor Koeppl & Cyril Monnet & Ted Temzelides, 2007. "Payments and Mechanism Design," Working Paper 1124, Economics Department, Queen's University.
    14. Biliana Alexandrova Kabadjova & Anton Badev & Saulo Benchimol Bastos & Evangelos Benos & Freddy Cepeda- Lopéz & James Chapman & Martin Diehl & Ioana Duca-Radu & Rodney Garratt & Ronald Heijmans & Anne, 2023. "Intraday liquidity around the world," BIS Working Papers 1089, Bank for International Settlements.
    15. Pedro Gomis-Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, June.
    16. Lagos, Ricardo, 2010. "Asset prices and liquidity in an exchange economy," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 913-930, November.
    17. Trejos, Alberto & Wright, Randall, 2016. "Search-based models of money and finance: An integrated approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 10-31.
    18. Hitoshi Hayakawa, 2020. "Liquidity in Financial Networks," Computational Economics, Springer;Society for Computational Economics, vol. 55(1), pages 253-301, January.
    19. Bruno Biais & Pierre-Olivier Weill, 2009. "Liquidity Shocks and Order Book Dynamics," NBER Working Papers 15009, National Bureau of Economic Research, Inc.
    20. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 10(3), pages 211-234, December.

    More about this item

    Keywords

    Clearing; OTC vs Exchanges; Private Information; Liquidity Costs; Default;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1222. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Babcock (email available below). General contact details of provider: https://edirc.repec.org/data/qedquca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.