Authors: Michael J. Fleming and Frank M. Keane
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Staff Reports
The Netting Efficiencies of Marketwide Central Clearing
Number 964
April 2021
April 2021
JEL classification: G28, G18, G12
Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 percent) when trading was at its highest. We also find that expanded central clearing would have substantially lowered settlement fails. The estimated benefits would likely be greater if dealers’ auction purchases were included in the analysis or if the increased central clearing included repo transactions.
Author Disclosure Statement(s)
Michael Fleming
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of FR 2004SI data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.
Frank Keane
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of FR 2004SI data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of FR 2004SI data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.
Frank Keane
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of TRACE data was subject to review by the Financial Industry Regulatory Authority and the Inter-Agency Working Group for Treasury Market Surveillance (members of which include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Department of the Treasury, the Federal Reserve Bank of New York, and the U.S. Securities and Exchange Commission). Use of FR 2004SI data was subject to review by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.
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