Settlement Risk under Gross and Net Settlement - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Settlement Risk under Gross and Net Settlement

September 1999Number 86

JEL classification: E58, G21, G28

Authors: Charles M. Kahn, James McAndrews, and William Roberds

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 systems avoid certain gridlock situations, which may arise in gross settlement in the absence of delivery versus payment requirements. In addition, net settlement can economize on collateral requirements and avoid trading delays.

Available only in PDF PDF

34 pages / 205 kb

For a published version of this report, see Charles M. Kahn, James McAndrews, and William Roberds, "Settlement Risk under Gross and Net Settlement," Journal of Money, Credit, and Banking 35, no. 4 (August 2003): 591-608.

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