The customer settlement risk externality at US securities central counterparties

The architecture of securities clearing and settlement in the United States creates an externality: investors do not always bear the full cost of settlement risk for their trades and can impose some of this cost on the brokerages where they are customers. When markets are volatile and settlement risk is high, this externality can result in too much or too little trading relative to the efficient level, because investors ignore trading costs, while brokerages may refuse to allow investors to trade. Both effects were evident during the volatility in GameStop stock in 2021. Alternative approaches for clearing customer trades that are used in derivatives markets would eliminate the externality. We examine the potential benefits and costs of different approaches for clearing customer securities trades.