Risk management and public policy in clearing, payment and settlement systems

In recent years regulators have been increasingly focusing their attention on payment, clearing and settlement systems on the grounds that any serious disruption to the settlement process could have widespread sys-temic consequences. These concerns embrace wholesale interbank payment systems, foreign-exchange settlement, securities settlement and derivatives clearing houses. There is, however, a dilemma for regulators insofar as their active involvement in the settlement process can lead to market expectations of official support in the event of any threatened disruption.This paper explains the nature of settlement risk in interbank payments as well as foreign exchange, securities and derivatives markets; describes recent regulatory initiatives in these areas; and assesses the financial market's approach to handling settlement risks. The conclusion is that the market has been most effective in controlling settlement exposures in those areas where systemic risk – and therefore central bank involvement – is least evident