Settlement risk: Difference between revisions
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'''Settlement risk''' is the [[risk]] that a [[counterparty]] does not deliver a [[Security (finance)|security]] or its [[Value (economics)|value]] in cash as per agreement when the security was traded after the other [[counterparty]] or counterparties have already delivered security or cash value as per the [[trade]] agreement. |
'''Settlement risk''' is the [[risk]] that a [[counterparty]] does not deliver a [[Security (finance)|security]] or its [[Value (economics)|value]] in cash as per agreement when the security was traded after the other [[counterparty]] or counterparties have already delivered security or cash value as per the [[trade]] agreement. |
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One form of settlement risk is foreign exchange settlement risk or cross-currency settlement risk, sometimes called '''Herstatt risk''' after the [[Herstatt_Bank|German bank]] that made a famous example of the risk. On 26th June 1974, the bank's license was withdrawn by German regulators at the end of the banking day (4:30pm local time) due to a lack of income and capital to cover liabilities that were due. But some |
One form of settlement risk is foreign exchange settlement risk or cross-currency settlement risk, sometimes called '''Herstatt risk''' after the [[Herstatt_Bank|German bank]] that made a famous example of the risk. On 26th June 1974, the bank's license was withdrawn by German regulators at the end of the banking day (4:30pm local time) due to a lack of income and capital to cover liabilities that were due. But some banks had undertaken foreign exchange transactions with Herstatt and had already paid [[Deutsche Mark]] to the bank during the day, believing they would receive US dollars later the same day in the US from Herstatt's US nostro. But after 4:30 pm in Germany and 10:30 am in New York, Herstatt stopped all dollar payments to counterparties, leaving the counterparties unable to collect their payment. The closing of [[Drexel Burnham Lambert]] in 1990 did not cause similar problems because the Bank of England had set up a special scheme which ensured that payments were completed. Barings [[Barings Bank|Barings]] in 1995 resulted in minor losses for counterparties in the foreign exchange market due to a specific complexity in the ECU clearing system. |
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==Mitigating settlement risk== |
==Mitigating settlement risk== |
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Revision as of 16:11, 26 August 2009
Settlement risk is the risk that a counterparty does not deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per the trade agreement.
One form of settlement risk is foreign exchange settlement risk or cross-currency settlement risk, sometimes called Herstatt risk after the German bank that made a famous example of the risk. On 26th June 1974, the bank's license was withdrawn by German regulators at the end of the banking day (4:30pm local time) due to a lack of income and capital to cover liabilities that were due. But some banks had undertaken foreign exchange transactions with Herstatt and had already paid Deutsche Mark to the bank during the day, believing they would receive US dollars later the same day in the US from Herstatt's US nostro. But after 4:30 pm in Germany and 10:30 am in New York, Herstatt stopped all dollar payments to counterparties, leaving the counterparties unable to collect their payment. The closing of Drexel Burnham Lambert in 1990 did not cause similar problems because the Bank of England had set up a special scheme which ensured that payments were completed. Barings Barings in 1995 resulted in minor losses for counterparties in the foreign exchange market due to a specific complexity in the ECU clearing system.
Mitigating settlement risk
- Delivery versus payment
- Settlement via clearing houses
- Foreign exchange settlement using continuous linked settlement
For More Information
- Overview of Settlement Risks across Europe (26 countries)
- Bank for International Settlements: Committee on Payment and Settlement Systems Forum for central banks to monitor and analyse developments in domestic payment, settlement and clearing systems as well as in cross-border and multicurrency settlement schemes. Excellent publications and research showing various forms of settlement risk and mitigation strategies.
- Overview: Settlement Risk is a more in-depth article.
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