Hi
Can someone please explain me, why settlement risk has been defined as a “Non Financial Risk” - Failure to pay committed funds by a counter party should not be a “Financial Risk”.
thankyou guys !
it is not a failure to pay. It is that A paid B the amount due to B. And then during this whole process B went bankrupt. In actuality - if B had declared bankruptcy before - A did not actually have to make any payment to B. Now that payment has been made - for settlement - A will have to wait for bankruptcy court to decide how the amounts must be settled.
Whether you think it should be classified as a financial risk or a nonfinancial risk isn’t important; CFA Institute classifies it as a nonfinancial risk, so you should identify it as such should it appear on the exam.
thanks cpk123 for the explanation, I hope this will help me in remembering that it is a non financial risk.
@S2000magician - was just wondering, because the ultimate exposure is still the creditability of the counterparty…anyways I have got the medicine for it !! thanks as always 
I understand. I always tell my students that 364 days out of the year they can do it any way they want; on exam day, they have to do it the way CFA Institute tells them to do it. They don’t even have to like it; just do it.
why it is non-financial - it is not related to the actual payment. It is the bankruptcy proceedings in one place while someone is making a payment to you. so there are two parties A made the payment and now suffers. B received the payment, declared bankruptcy - but because he received the money - that money now becomes part of the bigger bundle that needs the court to decide how and who gets a part of.
This originally occurred with Bank of Herstatt - and so is also called Herstatt Risk.
Without a payment netting specified in the agreement , even if B went bankrupt , A could be considered by a bankrupty court to be owing B the payments . The decision to pay A back for their side of the swap would only be made per seniority rules , i.e. A would join the rest of the creditors of B in line to receive payments ( possibly low percentage or none ) while being compelled to make payments to honor its side
It really helped me alot, thankyou guys for your valuable time !!!
That’s why we’re here.
You’re welcome.