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Settlement risk under gross and net settlement

Author

Listed:
  • Charles M. Kahn
  • James J. McAndrews
  • William Roberds

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 the portfolio 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.

Suggested Citation

  • Charles M. Kahn & James J. McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," FRB Atlanta Working Paper 99-10, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:99-10
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    References listed on IDEAS

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    Keywords

    Payment systems; Risk;

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