The Risks Of Clearing And Settlement Systems

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2. The Risks of Clearing and Settlement Systems There are various risks involved in clearing and settlement systems. In order to stabilize the Canadian financial system, all systemically important clearing and settlement systems are required to be able to handle certain levels of risks sufficiently under reasonable circumstances.(8) The risks are listed: Systematic risks: The risk to entire payment system due to the inability of one institution to meet its obligations in a timely fashion. This may cause significant liquidity or credit problems, and, as a result, might threaten the stability of or confidence in markets. Operational risks: The risk that deficiencies in information systems or internal controls, human errors, or management failures will result in unexpected losses. Pre-settlement risks: The risk that a counterparty to a transaction for completion at a future date will default before final settlement. The resulting exposure is the cost of replacing the original transaction at current market prices. Credit risks: The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Liquidity risks: The risk that a counterparty will not settle an obligation for full value when due, but on some unspecified date thereafter. Settlement risk: The risk beard by all foreign exchange community members for losing the principle. Principal risk: The risk that the seller of a security delivers a security but does not receive
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