Credit risk#Counterparty risk

As a so -called Herstatt risk is colloquially (foreign exchange, securities and derivatives trading ) called in the interbank market, the risk of the contractor, that the other part to the mutual settlement on its obligations, while the own obligation has already been met. This settlement risk is named after the Herstatt bank in forex trading payment obligations previously entered into by it could not by their bankruptcy in June 1974 as the contracting party ( the "Counterparty " ) in particular meet.

Prehistory

On 26 June 1974, the Herstatt bank's authorization to conduct banking business ( " banking license " ) pursuant to § 35 Section 2 No. 4 of the Banking Act was withdrawn by the Bank supervision, so that the bank could also no longer engaged in banking transactions. The Banking Supervision had the Herstatt Bank expressly abandoned, set the payments. This included even those foreign exchange transactions, in which the Herstatt bank had already received from their counterparty a payment and their own return was due. In Herstatt in particular foreign exchange spot and forward transactions were affected by the arrangement. In the international interbank trading usually performed in these mally performance and reward not at the same time, but after two days since trade inception. By implication from Article 38 paragraph 2 of the EU Regulation of 10 August 2006, the defined contracts, a spot transaction is regularly present when the conditions provide for a contract for the sale of a commodity, asset or right that the delivery no later than after two trading days must have occurred.

Settlement risk

Settlement risk (English settlement risk, counterparty risk ) is the risk that a transaction you will not be handled or not in time, ie the risk that the buyer does not pay or the seller does not deliver the transaction object. Economic transactions (eg purchase of securities, etc.) as transactions are subdivided according to the principle of separation into a binding transaction and the subsequent disposition or settlement business. Settlement risk arises in particular when the two transactions fall apart in time. Reasons may be the time of fulfillment in short sales (missing pieces for delivery), in lack of liquidity or in default of a counterparty (see counterparty risk).

A mutual settlement risk does not exist, therefore, only if the services would be held at the same time and each counterparty would do having regard to the consideration of the other counterparty. Once between the services, however, there is a period of one or two days, there is a danger of insolvency of the counterparty. At the time of their payment so there is usually not the certainty, whether the other party has already done. From the legal point here comes a party to a payment or delivery delay. Therefore, the settlement risk is particularly relevant for the stakeholders of importance because even a single transaction usually makes up a double-digit million amount by the counterparty resulting in non-performance equal to high losses in the other contracting party.

Settlement risk in stock trading

In exchange trades in shares of the settlement period in Europe is (see settlement) two business days ( three in the U.S.), thus the executory agreement and the fulfillment business fall at different times. During this period, the price of securities may change ( price risk ), which is a disadvantage, the breakdown of one side ( buyer or seller). The settlement risk using security deposit ( margin ) are met, which covers the risk of price fluctuations and permits subsequent fulfillment, for example in the form of re- roofing. In case of transactions on Xetra and the Frankfurt Stock Exchange, the central counterparty that guarantee required by the trading participants.

• Example: The seller delivers any securities. The buyer can not sell these securities thus again, eg due to a rise rate. A central counterparty can try to retrieve the securities, eg, through purchase on the market now - for which the buyer's payment and security deposit from the seller at his disposal, so stocking up at higher rates is possible.

Settlement risk in derivatives trading

For derivatives, such as options or futures on the mutual benefits also fall apart in time. Upon exercise of an option or maturity of a futures contract may result in failure, so a clearing house is used for exchange-traded derivatives in the trading participants perform a margin account and trading day, the security deposit as required to increase ( funding obligation ) or the liabilities balance daily. In addition, in many cases a cash settlement is defined as settlement method so that a pre-settlement or physical delivery ( eg in raw materials or agricultural derivatives ) is omitted.

Settlement risk in foreign exchange trading

Was the actual Herstatt risk and today consists of the risk that foreign exchange spot and forward foreign exchange transactions the other party can no longer afford or wants, even though their own performance - has already been provided - in the expectation of anything in return. In the Herstatt Bank was even a ban by the banking supervision, to provide payments due. A variety of banks was affected worldwide by the payment ban: at least 12 U.S. Herstatt partner banks had irrevocably made ​​payments amounting to an estimated 200 million U.S. dollars; because of the ban it but not received due consideration.

Today's ruling

The Herstatt risk is referred to in the art as settlement risk. There is the risk that the party to a commercial transaction has already been fulfilled its contractual obligations, but without having received the amount owed by the other party in return. Even before the Herstatt crisis, banks had taken precautions against the asynchronous execution of the two payments worldwide. It was and is banking practice, within the bank give other banks as potential contractors of appropriate limits, which are based on a credit rating this banking partner. Commercial transactions with settlement risk may then be completed only under this limit.

The January 2007 in force in Germany Solvency ( Solvency ) has taken up this settlement risk below the regulatory term delivery risk. An intermediate risk arises then when securities, foreign exchange or derivatives were paid, but have not yet been delivered or, conversely, more than one business day has passed with international aspects since payment or delivery and no deduction from core capital in accordance with § 10 para 6a # 4 of the Banking Act make (§ 14 para 1 of the Solvency Regulation ). This delivery risk belongs to § 9 para 1 No. 4 of the Solvency Regulation to the counterparty credit risk exposures. This ultimately involve a risk of insolvency, which is subject to any of the counterparties. This risk increases exponentially with the volume of transactions.

Risk avoidance

In order to eliminate settlement risk are two methods available. One method is the mutual protection between two counterparties that handle a high volume together, through netting. It is a contractually agreed bilateral clearing procedures with the aim of mutual set-off in the event of insolvency of the other to have as little as possible or bear no losses.

The other method involves a parent institutionalized accounting system. In July 1997, CLS Bank was established in New York (Continuous Linked Settlement, about " permanently networked Settlement"). Settlement risk of two counterparties is switched off at her through the principle of " payment against payment ". The Bank installed the world's first settlement system to hereby to eliminate the mutual settlement risk in the foreign exchange market with first 17 ​​currencies. These currencies represent approximately 94 % of the world's traded daily foreign exchange volume. In September 2002, she was put into operation. Meanwhile, take a number of banks directly or indirectly participate in the system. According to the company accounted for by the CLS Bank a 68% share of the global foreign exchange market, which amounted in March 2012 on a bank of the unwound daily volume of more than $ 5 trillion. Planned as a monofunctional Institute, she wraps among others from 2008 on also credit derivatives and other financial instruments traded. CLS makes a significant contribution to the elimination of settlement risk.