Herstatt risk
The so-called Herstatt risk is colloquially referred to in interbank trading ( foreign exchange , securities and derivatives trading ) as the financial risk of one contracting party that the other contracting party does not meet its obligations by the mutual fulfillment date while its own obligation has already been fulfilled. This performance risk was named after the Herstatt Bank , which, due to its insolvency in June 1974 as a contractual partner (“ counterparty ”), particularly in foreign exchange trading, was no longer able to meet the payment obligations it had previously entered into. Today we speak of counterparty risk .
prehistory
On June 26, 1974, the Herstatt Bank was withdrawn by the banking supervisory authority from conducting banking business (“ banking license ”) in accordance with Section 35 (2) No. 4 KWG , so that the bank was no longer allowed to conduct banking business and to stop its payments would have. The banking supervisory authority had expressly given the Herstatt Bank to stop making payments. This even affected those foreign exchange transactions in which the Herstatt Bank had already received a payment from its counterparty and its own consideration was due. At Herstatt, the order particularly affected foreign exchange spot and forward transactions . In international interbank trading, service and consideration usually do not take place at the same time, as is customary, but rather after two trading days since the transaction was concluded.
The term Herstatt Risk was also used in the language used by the Bank for International Settlements . In 2002, she understood this to mean "the risk that one party to a foreign exchange transaction will pay off the currency it has sold without receiving the currency it has bought is referred to as the settlement risk in currency trading transactions or the" Herstatt risk "".
Conversely, from Article 38 (2) of the EU Regulation of August 10, 2006 (MiFID Implementation Regulation), which defines futures transactions, a cash transaction usually occurs when the conditions for a sale of goods, assets or rights provide for that the delivery must have taken place after two trading days at the latest .
Compliance risk
The settlement risk ( English settlement risk or English counter party risk , see Settlement ) describes the risk that a transaction will not be processed or not processed in time, i.e. the risk that the buyer will not pay or the seller will not deliver the transaction object. Economic transactions (e.g. purchase of securities ) as legal transactions are subdivided according to the principle of separation into an obligation transaction and the subsequent disposal or fulfillment transaction . The performance risk arises in particular when the two transactions fall apart and one counterparty provides its service, but the other does not. Reasons can be short sales (missing items for delivery), lack of liquidity or default of a counterparty (see counterparty risk ) at the time of settlement.
There is therefore only no mutual performance risk if the services would take place at the same point in time and each counterparty would provide with knowledge of the consideration of the other counterparty. However, as soon as there is a period of one or two days between the services, there is a risk of the counterparty becoming insolvent. At the time of your own payment, there is usually no certainty as to whether the other contractual partner has already paid. From a legal point of view, one of the contracting parties is in default of payment or delivery . The performance risk is particularly important for those involved because a single transaction usually accounts for a double-digit million amount, which in the event of non-performance by the counterparty leads to high losses for the other contractual partner.
Settlement risk in stock trading
For stock exchange transactions in shares , the settlement period in Europe (see Settlement ) is two business days (three in the USA), so the obligation transaction and the fulfillment transaction are at different times. During this period, the security price can change (price change risk), which creates a disadvantage if one side (buyer or seller) fails. The fulfillment risk can be countered by a security deposit ( English margin ), which covers the exchange rate risk and a subsequent fulfillment z. B. in the form of replacement. For transactions via Xetra or the Frankfurt Stock Exchange , the central counterparty requires the trading participants to provide this security.
- For example, if the seller does not deliver any securities, the buyer cannot sell these securities on, e.g. B. when the course has risen. A central counterparty can now try to get the securities back, e.g. B. by buying on the market - for this the payment of the buyer and the security deposit of the seller are available to him, so that a covering is possible at higher exchange rates.
- It can become problematic if a market participant has bought a security on exchange A and then sold it on exchange B, but exchange A does not deliver the security, as has often happened in cross-border equity trading .
- In order to have at least legal certainty and to avoid a subsequent judicial contestation of securities purchases, all stock exchanges have very short mistrade periods during which a claim can be made for a bad deal. Civil law contestation options are therefore excluded on most stock exchanges.
Settlement risk in derivatives trading
In the case of derivatives, e.g. B. in the case of options or futures , the mutual benefits also differ in time. If an option is exercised or a futures expires, defaults can occur, which is why a clearinghouse is used for exchange-traded derivatives , in which the trading participants maintain a margin account and top up the security deposit as required on each trading day (additional payment obligation) or settle the liabilities daily. In addition, a cash settlement is often specified as the type of settlement, so that replacement or physical settlement (e.g. in the case of raw material or agricultural derivatives) is not required.
Settlement risk in foreign exchange trading
The actual Herstatt risk consisted and still consists of the risk that the other contractual partner can no longer or does not want to perform in the case of foreign exchange spot and forward exchange transactions, although one's own performance has already been provided - in anticipation of the consideration. At the Herstatt Bank, there was even a ban by the banking supervisory authority on making payments due. A large number of credit institutions worldwide were affected by the payment ban: at least 12 US Herstatt partner banks had irrevocably made payments amounting to an estimated 200 million US dollars; however, because of the ban, they no longer received the consideration due.
Today's regulation
The Herstatt risk is referred to in technical terms as the performance risk or advance performance risk . There is a risk that the contracting party to a commercial transaction has already performed its contractual performance without, however, having received the consideration owed by the other party. Even before the Herstatt crisis, however, credit institutions around the world had taken precautions against the asynchronous processing of the two payment flows. It was and is customary to grant other banks as possible contractual partners corresponding credit lines or facilities internally based on a credit rating of this bank partner. Trading transactions with a settlement risk may then only be concluded within this limit.
The Solvency Ordinance (SolvV), which has been in force in Germany since January 2007 , took up this performance risk under the regulatory term wholesale risk . An advance payment risk then arose when securities , foreign exchange or derivatives have been paid for but not yet delivered or vice versa, more than one business day has passed since payment or delivery with a foreign connection and no deduction from core capital pursuant to Section 10 (6a) No. 4 KWG was to be carried out (Section 14 (1) SolvV old version). Since the regulation from January 2014 pursuant to Art. 379 Capital Adequacy Ordinance (CRR), a prepayment risk arises for a bank if it has paid for financial instruments before it has received their delivery or vice versa, or in cross-border transactions if since payment or delivery at least one day has passed. This advance payment risk ultimately includes a risk of bankruptcy to which each of the counterparties is subject. This risk increases with the volume of transactions.
Risk avoidance
There are two methods available to eliminate the compliance risk and thus to avoid risk . One method is the mutual protection of two counterparties who process a high volume with each other by netting . This is a contractually agreed bilateral set-off procedure with the aim of having to bear as little or no losses as possible by offsetting each other in the event of the other's insolvency.
The other method concerns a higher-level, institutionalized accounting system. In July 1997 the CLS-Bank was established in New York ( Continuous Linked Settlement , for example: "permanently networked settlement"). The performance risk of two counterparties is eliminated by the “payment against payment” principle. The bank installed the world's first settlement system in order to eliminate the mutual settlement risk in the foreign exchange market with initially 17 currencies. These currencies represent around 94% of the world's daily foreign exchange volume. It was put into operation in September 2002. Numerous banks are now participating directly or indirectly in the system. According to its own information, the CLS Bank accounted for 68% of the global foreign exchange market, which in March 2012 amounted to a daily volume of over 5 trillion dollars processed by the bank. Planned as a monofunctional institute, from 2008 it will also process credit derivatives and other traded financial instruments. CLS makes a significant contribution to eliminating the risk of compliance.
Web links
Individual evidence
- ↑ BGH, judgment of July 9, 1979, Az .: II ZR 118/77 = BGHZ 75, 96 ff.
- ↑ Reuters about the “Herstatt Risk” ( memento of the original dated August 4, 2011 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice.
- ↑ Bank for International Settlements, Quarterly Report December 2002 , 2002, p. 65
- ↑ EU regulation 1287/2006
- ↑ Eurexclearing ( Memento of the original of March 9, 2010 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice.
- ^ Frankfurter Wertpapierbörse: Conditions for transactions on the Frankfurt Stock Exchange. (No longer available online.) January 3, 2018, archived from the original on February 25, 2018 ; accessed on April 15, 2018 : "Civil law claims of the business parties in accordance with § 2 Paragraph 1 and 2 for the cancellation and adjustment of transactions and the right to contest transactions are excluded" Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice.
- ↑ Eurex Deutschland: Conditions for trading on Eurex Deutschland. (No longer available online.) April 2, 2018, formerly in the original ; retrieved on April 15, 2018 : "With regard to the transactions concluded at Eurex Deutschland, civil law claims of the business parties within the meaning of Number 2.3 Paragraph 1 to Paragraph 3, which are aimed at the cancellation of such transactions, in particular a contestation due to error, other Avoidance rights and civil law claims that aim to adapt the content of such transactions are excluded "
- ↑ Tradegate Exchange: Conditions for business as at: 03.01.2018 Page 1 of 12 Conditions for business at the Tradegate Exchange. November 24, 2017, accessed on April 15, 2018 : "Civil law claims of the business parties for the cancellation and adjustment of transactions as well as the right to contest transactions are excluded"
- ↑ Alexandra Schaller, Continuous Linked Settlement: History and Implications , December 2007, p. 33 f.
- ↑ Played, deceived, cheated, The Anatomy of the Herstatt Bankruptcy Part II . In: Der Spiegel . No. 14 , 1975, p. 113 ( online ).
- ↑ CLS Market Share, February 2011 ( Memento from February 13, 2012 in the Internet Archive )
- ↑ Gerald R. Riedl: The banking business payment transactions . Gabler Wissenschaftsverlage, 2002, ISBN 978-3-7908-1452-1 , p. 227 ( limited preview in Google Book search).
