Settlement risk refers to delivery failures, as well as failure to close out and match accurately with counterparties. Traditionally, settlement risk has been difficult to manage due in large part to the vast, complex nature of supply chains within the global energy market. However, recent breakthroughs in financial technology are poised to solve this challenge.
The key to mitigating settlement risk is a combination of advanced matching technology, workflow management, and clear communications. Applying some of the recent technological breakthroughs like big data, the cloud, and fintech concepts to commodity and energy markets will produce astonishing cost savings, improved service quality, and enhanced business and market analytics.
As stated by the author, Thomas McNulty: “If just 1% of settlement risk is mitigated in a $6 trillion market, that represents an annual $60 billion capital risk savings. And far more than 1% can be mitigated.”
The following paper describes the origin and nature of settlement risk, how to measure it, and the part technology is playing in mitigating settlement risk.