Optimal Clearing Arrangements for Financial Trades

Thorsten Koeppl, Cyril Monnet and Ted Temzelides

No 273708, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that is periodically cleared by participants. We study efficient clearing arrangements for formal exchanges, where traders must clear with a clearinghouse, and for over-the-counter (OTC) markets, where trades can be cleared bilaterally. When clearing is costly, we show that it can be efficient to subsidize the clearing process for OTC transactions by charging a higher price for the clearing of transactions in exchanges. This necessitates a clearinghouse that operates across both markets. As a clearinghouse offers credit, intertemporal incentives are needed in order to ensure settlement. An increase in the costs of liquidity provision worsens the incentives to settle. Hence, when liquidity costs increase, concerns about default must lead to a tightening of liquidity provision.

Keywords: Demand and Price Analysis; Financial Economics (search for similar items in EconPapers)
Pages: 42
Date: 2009-11
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Related works:
Journal Article: Optimal clearing arrangements for financial trades (2012)
Working Paper: Optimal Clearing Arrangements For Financial Trades (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:273708

DOI: 10.22004/ag.econ.273708

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