@article{Settlement:683, recid = {683}, author = {Engert, Walter}, title = {Certainty of Settlement and Loss Allocation with a Minimum of Collateral}, publisher = {Bank of Canada}, address = {1993}, pages = {1 online resource (vi, 27 pages)}, abstract = {To assure liquidity needs and the robustness of loss allocation in a clearing and settlement system based on netting, collateral requirements and net debit caps could be set in a specific, interrelated way. For instance, it has been advocated that system participants collateralize a predetermined fraction of the largest credit line that they extend within the system, and that net debit caps be set equal to the sum of the credit lines that participants receive multiplied by the same fraction. This paper shows how this approach will assure sufficient liquidity for daily settlement to occur in the event of the default of any participant in the system. The paper also examines the degree to which the collateral would cover each participant’s obligations under the loss allocation rule. The paper then shows how this approach to collateral requirements and net debit caps can lead to excess collateral in the system. It suggests ways to reduce collateral to a minimum, while securing liquidity needs and the robustness of loss allocation. In addition, an arrangement is outlined that would allow a given stock of collateral to simultaneously secure a survivors-pay net debit cap and a defaulter-pays net debit cap in a clearing and settlement system. Finally, the paper shows that maximizing the capacity of a clearing and settlement system with both defaulter-pays and survivors-pay segments requires that a participant use its survivors-pay segment before using its defaulter-pays segment.}, url = {http://www.oar-rao.bank-banque-canada.ca/record/683}, doi = {https://doi.org/10.34989/swp-1993-14}, }