Netting Relationships and Credit Exposures in Payment Systems

We develop an empirical methodology to characterize intraday netting relationships in payments systems. Our approach differentiates between average and marginal netting relationships and measures their effect on credit exposures, collateral requirements, and the expected shortfall of operational disruptions. Using data from the Canadian Large Value Transfer System (LVTS) we show that netting relationships are determined by the ability of market participants to coordinate the timing of their payment submissions through exogenous channels, a process that we call shadow netting. We also show that coordination increases with the clearing capacity of market participants, defined as the maximum payment value that participants could clear immediately, without delays or queuing, given a set of risk management conditions. We conclude that disruptions in the shadow netting process could compromise the integrity of the payments system or its ability to manage risks efficiently.

(joint with Charles Kahn and Gabriel Rodriguez)