Optimal clearing arrangements for financial trades

Thorsten Koeppl, Cyril Monnet and Ted Temzelides

Journal of Financial Economics, 2012, vol. 103, issue 1, 189-203

Abstract: Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that participants clear periodically. We study efficient clearing arrangements for exchanges, where traders must clear with a clearinghouse, and for over-the-counter (OTC) markets, where traders can clear bilaterally. When clearing is costly, it can be efficient to subsidize OTC clearing by charging a higher clearing price for transactions conducted on exchanges. The clearinghouse then operates across both markets. Since clearinghouses offer credit, intertemporal incentives are needed to ensure settlement. When liquidity costs increase, concerns about default lead to a tightening of liquidity provision.

Keywords: Clearing; OTC vs. exchanges; Private information; Liquidity costs; Default (search for similar items in EconPapers)
JEL-codes: E42 G14 G23 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: Optimal Clearing Arrangements For Financial Trades (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:1:p:189-203

DOI: 10.1016/j.jfineco.2011.08.008

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