Securities settlement systems (SSS) are institutional arrangements for confirmation, clearance and settlement of securities trades and safekeeping of securities. Different arrangements for settlement have been devised. In gross settlements systems payments are executed continuously or in batches via transfers of central bank funds from the account of the paying bank to the account of the receiving bank. By contrast in netting arrangements each party only delivers its net sale, or receives its net purchase, resulting in very significant red uctions in gross exposure. Nonetheless, in net settlement systems a failure to settle results in an unwind, i.e., the deletion of some or all of the provisional transfers involving the defaulting participant and the recalculation of the settlement obligations of the non-defaulting participants. An unwind would have the effect of imposing liquidity pressures and replacement costs on the non-defaulting participants that had delivered securities to, or received securities from, the defaulting participant, thus generating contagion and systemic failure.
In this paper we study the effects of increasing the number of intraday settlement batches, when exogenous random delays affect the tran sfer of securities. For a given distribution of lengths of delays, the likelihood that delays will lead to settlement failure increases as the length of settlement cycles decreases. Thus, we study the interplay between stabilization resulting from reduction in the number of parties involved in a shorter settlement cycle, and destabilization resulting from the effects of delays. We find that the length of settlement cycles has a non-monotonic effect on failures under both gross and net architectures and that there i s no clear-cut ranking of which architecture performs better.