Financial risk or non- financial risk??
Payment netting is way to reduce credit risk, credit risk is financial risk
Settlement netting risk is other, non-financial.
Btw, I think of settlement netting as the OPPOSITE of performance netting. Performance netting is
A owes money to B. B owes money to C. B thinks A is risky so he says screw it, you can pay C directly. Risk is removed because B takes himself out of the picture.
Settlement Netting risk is the opposite. In the same example as above, say A does in fact become banrkupt. B think he’s in the clear but some judge or authority steps and says you can’t remove yourself. You need to collect payment from A and take care of C by yourself.
Watch out on this one. CFA has a different definition of performance netting risk where they talk about investors with multiple investment managers and incentive bonuses.
Eg: say you have 2 hedge fund managers. Hedge Fund A makes you $100. Hedge Fund B loses you $100. You still have to pay an incentive fee to A even though you didn’t make any money overall.