With direct yen-renminbi exchange the Herstatt risk
CLS means Continuous Linked Settlement and it is designed to do away with the Herstatt risk
of default assumed by one party in a foreign currency deal.
As transactions are settled on a PvP basis, Herstatt risk
associated with these trades is virtually eliminated.
Indeed, Herstatt risk
has become a generic term to describe cross-border settlement risk for banks.
They are typically categorized as credit or solvency risk, liquidity risk, market risk, Herstatt risk
, fraud risk, operational risk, legal risk, and systemic risk.
systemic risk -- associated with payment systems, market transaction settlement practices and the inter-connectedness of market participants (sometimes called knock-on risk; there is a form of settlement risk known as Herstatt risk
dealing with cross-border transactions);
For example, most Asian financial markets are connected to the two largest International Central Securities Depositories--Euroclear and Cedel--which clear Asian paper in European time and give rise to Herstatt risk
credit/systemic risk has come to be known as Herstatt risk
Indeed, finding a safe and efficient delivery-versus-payment mechanism that ensures the simultaneous settlement of payments in two or more currencies and virtually eliminates Herstatt risk
remains both a goal and a challenge for market participants.
Payments netting reduces the so-called Herstatt Risk
that one party will make a payment and the other party default before the offsetting payment is made.
arises when there is a difference between the time at which an entity makes an irrevocable payment in one currency and the time at which that entity receives the other leg of the transaction (ie the other currency being traded) in final, settled terms.
arises in part because the operating schedules of national payment systems are not synchronized.