@A4@hotmix87I think the key is when settlement takes place. A transaction can be up in the air with an intermediary, particularly with international trades.
I think CHESS is model 2.
(International)Settlement Models
https://www.iosco.org› library › pubdocs › pdf › IOSCOPD377-PFMI
A key requirement ofinternational financial transactions is Real-Time-Gross-Settlement. It in turnrequires Intraday-Final-Settlement to avoid one bank in another country failingto honor a transaction payment. Settlement risk is a real concern, and DvP ordelivery versus payments and PvP or matching payments systems need to be inplace to reduce settlement risk.
There are 3 modelsystem categories to reduce settlement risk.
Model 1
Model 1 is where bothsecurities and funds settle on a gross basis, trade by trade, with fundstransfer and securities transfer occurring simultaneously. “Participation insuch systems requires participants to maintain substantial money balancesduring the business day.”
To mitigate that risk,central securities depositories (CSDs) typically settle securities usingdelivery versus payment or DvP. While the details of this process can besomewhat intricate, the key point is that delivery of securities to thepurchaser and payment of funds to the seller occur if and only if the CSD issatisfied that each party has met its obligations. Once the CSD is satisfiedthat payment has been received and that the securities are available fortransfer, title to the securities passes to the buyer on the books of the CSD13and cash is released to the seller.
CHESS is a CSD withsettlement finalized after 3 days…..
Model 2
An alternative, lessliquidity-intensive implementation of DvP is the so-called Model 2 system, inwhich securities settle on a gross basis throughout the day, but funds aresettled on a net basis at the end of the processing cycle. An example of aModel 2 system is the Depository Trust Company (DTC), which is the primarysecurities settlement system for U.S. corporate equities and fixed-incomesecurities.
The netting feature ofModel 2 systems makes them somewhat less reliant on time-critical intradayliquidity provision than Model 1 systems. Even so, Model 2 systems typicallyrely on if-and-only-if conditionality to appropriately control settlement risk.
International CurrencyTrades
Foreign currencysettlements use a payment versus payment, or PvP, process. Like DvP, the PvPprocess requires both legs of a transaction to be settled either simultaneouslyor with equivalent assurances that one leg will be settled if and only if theother leg is settled with finality. The conditionality for such a PvP arrangementcan be expressed as follows
ayment in one currency will take placeif-and-only-if immediate payment in the other currency (or possibly currencies)can take place with finality.
Credit Risk & DvPmodels
Sources of credit risk. An Securities Settlement System(SSS) may face a number of credit risks from its participants or its settlement processes. An SSS faces counterparty credit risk when it extends intraday or overnight credit to participants. This extension of credit creates current exposures and can lead to potential future exposures, even when the SSS accepts collateral to secure the credit. An SSS would face potential future exposure if the value of collateral posted by a participant to cover this credit might fall below the amount of credit extended to the participant by the SSS, leaving a residual exposure. In addition, an SSS that explicitly guarantees settlement would face current exposures if a participant were not to fund its net debit position or meet its obligations to deliver financial instruments. Further, if an SSS does not use a DvP settlement mechanism, the SSS or its participants face principal risk, which is the risk of loss of securities or payments made to the defaulting participant prior to the detection of the default (see Principle 12 on exchange-of-value settlement systems).
3.4.9. Sources of credit risk indeferred net settlement systems. An SSS may settle securities on a grossbasis and funds on a net basis (DvP model 2) or settle both securities and funds on a net basis (DvP model 3). Further, an SSS that uses aDvP model 2 or 3 settlement mechanism may explicitly guarantee settlement,whether the guarantee is by the FMI itself or by its participants. In suchsystems, this guarantee represents an extension of intraday credit from theguarantor. In an SSS that does not provide an explicit settlement guarantee,participants may face settlement risk vis-à-vis each other if a participantdefaults on its obligations. Whether this settlement risk involves creditexposures, liquidity exposures, or a combination of both will depend on thetype and scope of the obligations, including any contingent obligations, theparticipants bear. The type of obligations will, in turn, depend on factorssuch as the SSS’s design, rules, and legal framework.
Given the above, how do you think that affects ISX in relation to Astraclear?
