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Settlement risk under gross and net settlement

  • Charles M. Kahn
  • James J. McAndrews
  • William Roberds

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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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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  1. Charles M. Kahn & William Roberds, . "Payment System Settlement and Bank Incentives," Center for Financial Institutions Working Papers 97-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Marvin Goodfriend, 1989. "Money, credit, banking and payments system policy," Working Paper 89-03, Federal Reserve Bank of Richmond.
  3. Green, Edward-J, 1997. "Money and Debt in the Structure of Payments," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(1), pages 63-87, May.
  4. 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.
  5. Xavier Freixas & Bruno Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
  6. Freixas, Xavier & Parigi, Bruno, 1998. "Contagion and Efficiency in Gross and Net Interbank Payment Systems," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 3-31, January.
  7. William R. Emmons, 1995. "Interbank netting agreement and the distribution of bank default risk," Working Papers 1995-016, Federal Reserve Bank of St. Louis.
  8. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
  9. William R. Emmons, 1997. "Recent developments in wholesale payments systems," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 23-43.
  10. Kobayakawa, Shuji, 1997. "The Comparative Analysis of Settlement Systems," CEPR Discussion Papers 1667, C.E.P.R. Discussion Papers.
  11. 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.
  12. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers 193, Banca Italia - Servizio di Studi.
  13. Charles M. Kahn & William Roberds, 1999. "Real-time gross settlement and the costs of immediacy," FRB Atlanta Working Paper 98-21, Federal Reserve Bank of Atlanta.
  14. James J. McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York.
  15. Herbert L. Baer & Virginia G. France & James T. Moser, 1995. "Determination of collateral deposits by bilateral parties and clearinghouses," Proceedings 473, Federal Reserve Bank of Chicago.
  16. John A. Weinberg, 1997. "The organization of private payment networks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 25-44.
  17. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
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