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Externalities in securities clearing and settlement: Should securities CCPs clear trades for everyone?

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  • Sam Schulhofer-Wohl

Abstract

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 these costs 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 but brokerages may refuse to allow investors to trade. Both effects were evident during the recent volatility in GameStop stock. Alternative approaches for clearing customer trades that are used in derivatives markets would eliminate the externality. I examine the potential benefits and costs of different approaches for clearing customer securities trades as well as implications for the U.S. Treasury market, where there have been calls to investigate the costs and benefits of expanded clearing of customer trades, and the relationship to faster equities settlement.

Suggested Citation

  • Sam Schulhofer-Wohl, 2021. "Externalities in securities clearing and settlement: Should securities CCPs clear trades for everyone?," Policy Discussion Paper Series PDP-2021-02, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhpd:91897
    DOI: 10.21033/pdp-2021-02
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    References listed on IDEAS

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    1. Robert Cox & Robert Steigerwald, 2017. "A CCP Is a CCP Is a CCP," Policy Discussion Paper Series 93561, Federal Reserve Bank of Chicago.
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    More about this item

    Keywords

    central counterparties; securities settlement; externalities;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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