Page 56 - ITU-T Focus Group Digital Financial Services – Interoperability

ITU-T Focus Group Digital Financial Services
Interoperability

Annex I: Payment system risk glossary

Credit risk The risk that a counterparty will not settle an obligation for full value, either
when due, or at any time thereafter. In exchange-for-value systems, the risk is
generally defined to include replacement cost risk and principal risk.
Finality risk The risk that a provisional transfer of funds or securities will be rescinded.

Financial risk Term covering a range of risks incurred in financial transactions – both liquidity
and credit risks.
Foreign exchange The risk that one party to a foreign exchange transaction will pay the currency
settlement risk it sold but not receive the currency it bought.

Fraud Risk of financial loss for one of the parties involved in a payment transaction
arising from wrongful or criminal deception. The risk that a transaction cannot
be properly completed because the payee does not have a legitimate claim on
the payer.
Gridlock A situation that can arise in a funds or securities transfer system in which the
failure of some transfer instructions to be executed (because the necessary
funds or securities balances are unavailable) prevents a substantial number of
other instructions from other participants from being executed.
General business risk Any potential impairment of the FMI’s financial position (as a business
concern) because of a decline in its revenues or an increase in its expenses,
such that expenses exceed revenues and result in a loss that must be charged
against capital.
Legal risk The risk of loss due to the unexpected application of a law or regulation,
because a contract cannot be enforced, or because laws or regulations do
not support the rules of the securities settlement system, the performance of
related settlement arrangements, or the property rights and other interests
held through the settlement system. Legal risk also arises if the application of
laws and regulations is unclear.
Liquidity risk The risk that a counterparty (or participant in a settlement system) will not
settle an obligation for full value when due. Liquidity risk does not imply that
a counterparty or participant is insolvent since it may be able to settle the
required debit obligations at some unspecified time thereafter.
Market risk The risk of losses in on- and off-balance sheet positions arising from
movements in market prices.
Operational risk The risk that deficiencies in information systems or internal controls could
result in unexpected losses. These deficiencies could be caused by human
error or a breakdown of some component of the hardware, software, or
communications systems that are crucial to settlement.

Pre-settlement risk (or The risk that a counterparty to an outstanding transaction for completion at
replacement cost risk) a future date will fail to perform on the contract or agreement during the life
of the transaction. The resulting exposure is the cost of replacing the original
transaction at current market prices and is also known as replacement cost
risk.

46