Which of the following measures can be used to reduce settlement risks:

Which of the following measures can be used to reduce settlement risks:
A . escrow arrangements using a central clearing house
B . increasing the timing differences between the two legs of the transaction
C . providing for physical delivery instead of netted cash settlements
D . all of the above

View Answer

Answer: C

Explanation:

increasing the timing differences between the two legs of the transaction will increase settlement risk and not reduce it. Using escrow arrangements, such as central clearing houses to settle transactions (eg the DTCC in the United States) reduces settlement risk. Cash settlements based on netting arrangements reduce settlement risk, while physical delivery combined with gross cash payments increase it. Therefore Choice ‘a’ is the correct answer.