Net Settlement and Counterparty Risk: Evidence from the Formation of the New York Stock Exchange Clearing House in 1892

Bernard McSherry, Berry K. Wilson and James McAndrews

Journal of Money, Credit and Banking, 2017, vol. 49, issue 6, 1273-1298

Abstract: The securities settlement literature indicates that centralized settlement can reduce monitoring incentives and lead to excessive risk‐taking and inefficient risk‐sharing. This paper examines broker‐failure rates and counterparty losses surrounding the transition from bilateral to multilateral settlement facilitated by the NYSE. Study results provide evidence that net settlement reduced failures without diminishing risk constraining incentives. The study constructs a controlled comparison of broker failures through data collected from the NYSE and the Consolidated Stock Exchange, which traded identical securities settled under different systems. The results suggest that multilateral settlement is advantageous when financial markets are highly stressed.

Date: 2017
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https://doi.org/10.1111/jmcb.12417

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:49:y:2017:i:6:p:1273-1298

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