■ Optimal Settlement Lag for Securities Transactions: An Application to Southeast Stock Exchanges
The microstructure of equity markets is key in assessing the size of trading costs and determining the liquidity of a given asset. This chapter focuses on one specific feature of the microstructure of equity transactions: settlement.* With the surge in trading activities, including crossborder, since the early 1980s, increasing attention was paid to managing risks in clearing and settlement systems, which had become more complex, particularly in the aftermath to the October 1987 market break. Several recommendations-most notably by the Group of Thirty (G-30, 1989)— started to be implemented in the early 1990s to facilitate the setting of industry standards, including guidelines about position limits, collateral and mark-to-market requirements, netting procedures, borrowing and lending facilities, guarantee/clearing funds, and finality of transaction. Technological advances and the recognition that the efficiency and security of the clearing and settlement mechanism affect the attractiveness of national financial centers and their ability to compete with other centers in the region have moved stock exchanges toward settlement systems, which incorporate many of the recommended features and, in particular from this chapter’s perspective, the requirement that delivery and payment occur simultaneously and with short delays, generally a few days.