Optimal clearing arrangements for financial trades

Arbeitspapier

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 increase in 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Queen's Economics Department Working Paper ; No. 1222

Classification and Topics

• Classification: Wirtschaft ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Information and Market Efficiency; Event Studies; Insider Trading ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Subject: Clearing ; OTC vs Exchanges ; Private Information ; Liquidity Costs ; Default ; Finanzmarkt ; Wertpapierhandel ; Kreditgeschäft ; Verrechnungsverkehr ; OTC-Handel ; Liquiditätseffekt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Koeppl, Thorsten ; Monnet, Cyril ; Temzelides, Ted
• Event: Veröffentlichung
• (who): Queen's University, Department of Economics
• (where): Kingston (Ontario)
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/67750
• Last update: 10.03.2025, 11:45 AM CET