An Overview of Settlement Risk

Settlement risk can be defined as the possibility of a loss that arises when one party fails to honor its end of the deal. Therefore, the settlement in a transfer system will not be completed as expected. It can be as a result of defaulted payments or timing difference in a settlement. Parties to a contract ought to fulfill their promises during the settlement period. This is the period between the transaction and the settlement dates.

Types of Settlement Risk

Settlement risk is made up of credit and liquidity risks. Credit risk is whereby one party is unable to fulfill their promise on the agreed date or later because they are insolvent. Liquidity risk, on the other hand, is the risk that one party to a contract is unable to honor the promise at the agreed date but could fulfill their end of the bargain later. Therefore the main difference between credit risk and liquidity risk is that for liquidity risk the defaulting counterparty can honor their promise at a later date.

How to Mitigate Settlement Risk

Settlement risk can be mitigated in three ways

– Delivery versus payment: This is a mitigation measure where parties to the contract honor their promises simultaneously. For instance, in securities, the parties exchange documents for the transfer and the agreed payment amount simultaneously. With simultaneous delivery, the risk of one party failing to honor their promise is eliminated.

– Settlement via special purpose entities: Special purpose entities are legal entities used by companies to mitigate settlement risk. Example of special purpose entity is the CLS Group. CLS group caters for settlements in the foreign exchange market. Since the foreign exchange market does not have a central clearing platform, most traders use CLS to settle their transactions so as to mitigate risk.

– Settlement through settlement risk solution services.

Settlement Risk Example

A good example of a settlement risk is the case of Herstatt Bank that failed causing a huge financial crisis. The bank was opened in 1956 by Iwan Herstatt and Hans Gerling. The investment grew and became the 35th largest bank in Germany. The bank had a foreign exchange department that operated without the control and collaboration with other divisions.

In 1974, Herstatt Bank failed causing failures in other banks that relied on them for delivery of foreign currencies. The cause of the problem was attributed to the huge foreign exchange exposure which was eight times higher than the limit. Consequently, the bank’s license was withdrawn in June 1974 as the bank lacked assets to cover the liabilities.

Conclusion

The huge liability was as a result of flawed methods applied by the bank when speculating the dollar movement. On the day the bank’s license was withdrawn, some other banks had paid Deutsche Mark to the Herstatt with the hope of getting US dollars later in the day. However, Herstatt stopped all dollar transactions at 3.30pm, that is 10.30 am in New York, and thus counterparties did not receive their dollars. This kind of risk is today referred to as Herstatt risk. The bank’s crisis resulted in a number of regulations. For instance, the banking act was amended, and a deposit protection scheme was set up for German banks.

These Tips Will Help You Avoid Getting Into Trouble With Your Credit Card

Owing a large amount of debt on a credit card can feel like quicksand, the longer you sit still the deeper you slide into a bottomless hole. Honestly, using a credit card shouldn’t leave you feeling bogged down, but it’s important to realize that there are responsible and irresponsible ways to use a credit card. Here are four tips you should follow to keep your credit card debt free and safe.

 

Don’t charge frivolous items to credit

 

Have you ever seen an amazing pair of sunglasses at a store that you didn’t need but still wanted?

Well, you might be tempted to charge those sunglasses to your credit card, however, you shouldn’t, as charging frivolous expenditures to your credit card could leave you with unmanageable debt. Your credit card should be available when you really need it, such as paying for the tow truck after your car battery dies, or when you need to pay an outstanding electricity bill. Buying luxury items on credit could leave you with a mountain of unnecessary, interest collecting debt.

 

Pay more than the minimum each month

 

You used your credit card only for emergency expenses, but now the bill is here, and you aren’t sure how much you should pay. You might be tempted to only pay the minimum, and use the extra money to buy those sunglasses, but the reality is that paying only the minimum you owe will end up costing you more money because of the incurring interest. Aim to pay the full balance you owe every month, and you can avoid ever playing catch up with interest again.

 

Don’t miss a payment

 

You try to be responsible, and pay the full amount each month, however, if one month you can’t afford the full payment, then you might be tempted to skip the payment, and try to catch up next month, but this isn’t something you should consider doing. The consequences of skipping a payment could be a damaged credit score, a late fee on top of your monthly bill, and an increased interest rate. If you can’t make the full payment, then be sure to try to pay at least the minimum as the consequences for missing a credit card payment can be catastrophic.

 

Watch out for credit card fraud

 

Credit card fraud affects millions of people each year, and everyone is a potential victim. With people using their credit cards more often, it can be convenient to reach for the plastic and type or swipe almost anywhere, but this is something you should avoid doing flippantly. How and where you use your credit card matters, so be careful to guard yourself against credit card fraud. There are many steps you can take to prevent credit card fraud:

  • Keep your credit cards secure on you at all times.
  • Choosing a bank that also allows foreign payment, like mach, the best bank in Malaysia.
  • Only use your credit card in places you trust.
  • Destroy any documents that reveal information about your credit card.
  • Set up a push notification system on your smartphone to alert you when your credit card is being used.

Getting loan to finance real estate projects

Capital is utmost part of any business. No business can survive without sufficient capital. Even, for a successful real estate business, you need to have sufficient funds so that you can invest in the best deals. Real estate business is very risky, one need to have a detailed plan for the finances to get the business funded.

If you want to raise sufficient finances for your real estate business, then it is very important that first, you invest sufficient capital yourself. Your liquid assets should become part of the capital for your real estate business.

After your own investment, you can start looking for capital from outside. Firstly, make a project for your real estate business. This will help you to know about the specific requirements of your project. Now, you will have an idea of how much capital is needed and the estimated profit you will make with this project. Now, you can discuss your project with the outsiders to raise capital for your project.

Here are the few options by which you can get loans for your real estate project:

 

  • Loans from private investors:

You can take loans from private investors by paying them interest. They will finance your project only if they are satisfied that their money will be returned back in time. The amount of loan that you can raise depends on your relationship with the private lender and your credibility in the market.

So, make sure you always make timely payment of interest and principal amount to maintain your goodwill in the market.

They usually charge a very high rate of interest in comparison to other financial institutions.

  • Personal Loans:

You can also take a personal loan to raise capital for your real estate project at a specified rate of interest from the bank. Also, you can take a loan from the bank at a variable interest rate, from rates ranging from 12 to 22 percent.

  • Mortgage loans:

In the case of a mortgage loan, you need to mortgage the property against the loan. You need to have real property to avail this loan. So, in this case, the interest rates will be slightly less but, if you are not able to timely repay the loan, your property will be taken over and auctioned by the bank to recover the money.

  • Credit cards:

If you are having a credit card with a very high credit limit, then you can use that to fund your real estate project. For this purpose, you should make a good credit history by paying your credit card bills always on time.

For making your real estate project success, you need to do good research and planning before raising the capital for the same.