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The Netting Efficiencies of Marketwide Central Clearing



Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 percent) when trading was at its highest. We also find that expanded central clearing would have substantially lowered settlement fails. The estimated benefits would likely be greater if dealers’ auction purchases were included in the analysis or if the increased central clearing included repo transactions.

Suggested Citation

  • Michael J. Fleming & Frank M. Keane, 2021. "The Netting Efficiencies of Marketwide Central Clearing," Staff Reports 964, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:90934

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    References listed on IDEAS

    1. Adam Copeland & Michael J. Fleming & Frank M. Keane & Radhika Mithal, 2018. "Do You Know How Your Treasury Trades Are Cleared and Settled?," Liberty Street Economics 20180912, Federal Reserve Bank of New York.
    2. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.
    3. Kenneth D. Garbade & Frank M. Keane & Lorie Logan & Amanda Stokes & Jennifer Wolgemuth, 2010. "The introduction of the TMPG fails charge for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, vol. 16(Oct), pages 45-71.
    4. Michael J. Fleming & Frank M. Keane & Antoine Martin & Michael McMorrow, 2014. "What Explains the June Spike in Treasury Settlement Fails?," Liberty Street Economics 20140919a, Federal Reserve Bank of New York.
    5. Andreas Schrimpf & Hyun Song Shin & Vladyslav Sushko, 2020. "Leverage and margin spirals in fixed income markets during the Covid-19 crisis," BIS Bulletins 2, Bank for International Settlements.
    6. Michael J. Fleming & Kenneth D. Garbade, 2004. "Repurchase agreements with negative interest rates," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Apr).
    7. James Collin Harkrader & Michael Puglia, 2020. "Principal Trading Firm Activity in Treasury Cash Markets," FEDS Notes 2020-08-04, Board of Governors of the Federal Reserve System (U.S.).
    8. Doug Brain & Michiel De Pooter & Dobrislav Dobrev & Michael J. Fleming & Peter Johansson & Frank M. Keane & Michael Puglia & Tony Rodrigues & Or Shachar, 2018. "Breaking Down TRACE Volumes Further," FEDS Notes 2018-11-29, Board of Governors of the Federal Reserve System (U.S.).
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Optimal Settlement Speed
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2021-05-03 13:20:03


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    Cited by:

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    2. Eisenbach, Thomas M. & Kovner, Anna & Lee, Michael Junho, 2022. "Cyber risk and the U.S. financial system: A pre-mortem analysis," Journal of Financial Economics, Elsevier, vol. 145(3), pages 802-826.

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    More about this item


    Treasury securities; central clearing; dealers; market structure; COVID-19;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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