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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
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    References listed on IDEAS

    as
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    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

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