Study of international clearing and settlement Page: 8
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Study of laternmtional
Caring and Settlement
Exacun Summary
* One way to reduce the stress on payment systems is the "netting" of payments. "Netting" means
that market participants are required to pay (and receive) only the net amount of their financial
obligations (that is, amounts owed by a market participant are reduced by the amounts of money
that are owed to that same market participant).17
There are several types of netting: "bilateral" netting (in which the payment obligations, plus
and minus, are balanced out between two trading parties who may have made a series of trades
between each other); "multilateral" netting (in which payment obligations are netted out between
more than two trading parties, through a third party, such as a clearing house); and (in the futures
and equity related options markets) cross-margin (in which a market participant's initial margin
requirements are netted out across the markets).
There appears to be a consensus among many of our experts that netting should be expanded,
both for payment and securities delivery obligations. Netting, in addition to relieving stress on
payment systems, also increases liquidity for market participants and reduces the risk that a market
participant will default on either payment or securities delivery. [DOMESTIC,
INTERNATIONAL, PRIVATE SECTOR]
Organizations Involved in the Clearing and Settlement Process: To What Extent
Do They Reduce Their Risks By Sharing Information About Market Participants?
Most transactions in the financial markets involve credit to some extent; therefore, the organization
extending credit (for example, a clearing house or bank) to a market participant must have access to
information about the financial risks facing that market participant.
Outside of the financial markets, for example, when an individual seeks a loan from a bank, much of
the credit information that the bank will use to evaluate the loan request will come from a central
source - such as the TRW credit reporting service. The type of information provided by TRW could
be called "risk information," as it details the amounts of money the loan applicant owes, as well as the
loan applicant's pattern of paying - or not paying - his bills.
In the financial markets, although typically the amounts of money involved in credit decisions are
much larger, there is no single source of risk information paralleling those available to lenders in the
consumer credit market. Experts participating in this study have indicated that some organizations
in the clearing and settlement process (for instance, exchanges and clearing houses), and some
regulators, do have arrangements between themselves for the purpose of sharing risk information
about market participants.
The risk information sharing arrangements which do exist, however, are limited in their scope in that
they do not necessarily include all of a market participant's holdings and financial obligations. This
17 Netting can also be used to determine the amount of securities or other financial instruments which are owed by the
seller, or to the buyer. Not all clearing houses or depositories offer the netting of either payment or securities delivery
obliptions.
18 Cro.marguining is a relatively new development. Its proponents argue that it should be expanded in the U.S. and
explored internationally. Others argue that the benefits - reduction in the size of the payments owed by market
participants - will be minimal.Page 8
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United States. Congress. Office of Technology Assessment. Study of international clearing and settlement, report, September 1990; (https://digital.library.unt.edu/ark:/67531/metadc97403/m1/29/: accessed April 19, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.