Module 11 Quiz-Clearing and Settlement Systems

What are the different agencies involved in the settlement process?

 The agencies which participate in the process of settlement are NSCCL, clearing
members, custodians, depositories and NSE. There are several risks that may
arise in the process of settlement. They are broadly classified as counterparty
risk and system risk.

What are the risks involved in the settlement process?

The two main types of settlement risk are default risk and settlement timing risks.

 Default Risk

Default risk is the possibility that one of the parties fails to deliver on a contract
entirely. This situation is similar to what happens when an online seller fails to
send the goods after receiving the money. Default is the worst possible outcome,
so it is really only a risk in financial markets when firms go bankrupt. Even then,
U.S. investors still have Securities Investor Protection Corporation (SIPC)
insurance.

 Settlement Timing Risks

Settlement timing risks include potential situations where securities are

exchanged as agreed, but not in the agreed-upon time frame. Settlement timing
risks are generally far less serious than default risk, as transactions still take
place. These risks are the securities market equivalent of everyday situations
where a pizza or a package from Amazon shows up late. However, the speed
and liquidity of financial markets make the consequences much more severe.