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

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 settl...

Full description

Saved in:
Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2017-09, Vol.49 (6), p.1273-1298
Main Authors: MCSHERRY, BERNARD, WILSON, BERRY K., MCANDREWS, JAMES J.
Format: Article
Language:English
Subjects:
Bank clearings
clearinghouse
counterparty risk
G100
G230
gross settlement
Incentives
Markets
net settlement
New York Stock Exchange
Risk management
Risk reduction
Risk taking
Stock exchanges
Stocks
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12417