Failed Settlements

When a counterparty fails to settle a trade, this needs to generate exposure beyond the maturity of the deal. Here are some ideas on how this could be handled in ACR:

• A new 'Failed Settlement' product could be configured, generating notional exposure for the settlement amount over a rolling/open-ended tenor. The original deal would be allowed mature normally, but would be replaced by a 'Failed Settlement' deal if the counterparty defaults on settlement.

OR:

• Relevant deals (FX, etc.) could be enhanced to have a new 'Failed Settlement' flag, which if set to TRUE, would generate 'notional' exposure beyond the maturity date of the deal. This would be the Receive/Buy Amount for FX deals, or the simple principal amount for lending/money market deals.

Under either approach, failed settlements could impact the same (pre-settlement?) measure as the original deal, OR we could configure a new 'measure' for the purpose of capturing failed settlements, which would need to roll up to the overall counterparty exposure. Note that a failed settlement is NOT settlement risk (Herstatt risk) anymore, because it is a simple unilateral payment required from the counterparty, whereas traditional settlement risk arises from an exchange of payments.