Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/67750 
Year of Publication: 
2009
Series/Report no.: 
Queen's Economics Department Working Paper No. 1222
Publisher: 
Queen's University, Department of Economics, Kingston (Ontario)
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.
Subjects: 
Clearing
OTC vs Exchanges
Private Information
Liquidity Costs
Default
JEL: 
E42
G14
G23
Document Type: 
Working Paper

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