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.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 591-608
Launched on MUSE
2003-07-17
Open Access
No
Archive Status
Archived 2007
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