Settlement risk under gross and net settlement

Charles M. Kahn, James McAndrews, William Roberds

Research output: Contribution to journalReview articlepeer-review

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 their portfolios 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 can prevent certain gridlock situations, which may arise in gross settlement in the absence of delivery versus payment requirements. In addition, we show that net settlement can economize on collateral requirements and avoid trading delays.

Original languageEnglish (US)
Pages (from-to)591-608
Number of pages18
JournalJournal of Money, Credit and Banking
Volume35
Issue number4
DOIs
StatePublished - Aug 2003

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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