Market participants should, where activity justifies it, aim to reduce settlement and related credit risk on currency transactions by:
A) Establishing realistic daylight limits for counterparties.
B) Monitoring all payments to counterparties who are known to be experiencing difficulties.
C) Establishing legally binding bilateral netting agreements with counterparties or participating in a multilateral netting system.
D) Seeking pre-payment.

Question

Quizplus · Accepted Answer

Establishing legally binding bilateral netting agreements with counterparties or participating in a multilateral netting system reduces settlement risk by offsetting obligations between counterparties. This reduces the amount of currency that needs to be exchanged and therefore reduces the risk of one counterparty defaulting on its obligation. Establishing daylight limits for counterparties and monitoring payments to counterparties who are experiencing difficulties are also risk mitigation measures, but they don't address the root cause of settlement risk as effectively as netting agreements. Seeking pre-payment is not a standard practice in currency transactions and may not be feasible in all cases.

Market Participants Should, Where Activity Justifies It, Aim to Reduce