Settlement risk is a real threat for those who are involved in financial transactions of various kinds. The risk of one party not paying and the other not delivering on services is a very real threat, whether intended or not. Therefore, there are financial services companies whose task is to reduce the risks. These could be privately run companies or governmental regulatory bodies. Among the private financial services companies, one of the most noted ones is The Depository Trust and Clearing Corporation or DTCC for short. It is a US based company settlement as well as clearing services for finance related markets. The main role it plays is to act as a central custodian of securities on behalf of sellers and buyers.
The DTCC was established back in 1973 as the DTC, because of the fast growth experienced by the securities business in the late 1960’s. Basically, when things grew too fast, the paper work portion could not keep up with it. In those days brokers had to literally employ messengers to send checks and certificates. This method soon became highly inefficient. It was out of this need that a centralized system to help with financial transactions came about in the form of the DTCC. Later the company merged with another financial service company known as NSCC or the National Securities Clearing Corporation and that is how the name changed to DTCC. The NSCC was actually established before DTCC.
The European Connection
In Europe, there is a similar service provided by an organization called the EuroCCP which is short for the European Central Counter Party Limited. It is actually a branch of the DTCC which gives equities clearing for Europeans. The headquarters are in London and it is regulated by the UK’s Financial Services Authority. EuroCCp started in 2008 and in its early days the organization did clearing with the trading platform known as “Turquoise”. Now it has been cleared to use other trading platforms and gives central counterparty service for equity based trades such as NYSE Arca, SmartPool, and Pipeline Financial Limited. Citi Global Transaction Services now acts as an agent for the settlement of trades cleared by EuroCCp. This service is now available in all major financial markets in Europe such as France, Belgium, Denmark, Austria, Finland, Italy, Ireland, Portugal, Norway, Netherlands, Sweden, Switzerland, UK, Spain, and Germany.
What about the banks?
So far we have discussed the various financial services solutions put in place to help mitigate settlement risk as well as other services to help matters go smoothly. But there is one more important place that can help with settlement risks and that is the banks themselves. Any bank, especially one dealing with something like Fx trades, should have a comprehensive framework in place to take care of risk management. If this is the case then the bank will not only be able to handle settlement risk, but also operational risk, legal risk, principal risk, liquidity risk and replacement cost.