A mechanism for the calculation of mutual positions within a group of participants with a view to facilitating the settlement of their mutual obligations on a net basis.

(Note: the phrase "clearing system" is sometimes used to describe a process of multilateral netting by novation and the settlement of the consequential payments. It is not used in that way in this report.)

Confirmation matching

The process of ensuring that the negotiated terms reported by the parties to a contract are identical.

Credit risk

The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter.

Final settlement

Settlement of the obligations between two parties by irrevocable transfer of credit across their accounts at a defined settlement institution. (Note: Where such transfers are made by irrevocable credit to accounts on the books of a central bank, the transfer could be described as reflecting both a "final settlement", in the legal sense of effecting a discharge of obligations, as well as an "ultimate settlement" in the economic sense that it is effected in central bank liabilities.)

Liquidity risk

The risk that settlement of an obligation will be made not on the due date, but on some unspecified date thereafter.

Netting by close-out

An arrangement to settle all contracted but not yet due liabilities to and claims on a bank by one single payment, immediately upon the occurrence of one of a list of defined events (such as the appointment of a liquidator to that bank).

Netting by novation

The replacement of two existing contracts between two parties for delivery of a specified currency on the same date by one single net contract for that date, such that the original contracts are satisfied and discharged. (Also referred to as obligation netting.)

Netting provider

The institution calculating the net positions of members of a clearing system.

Novation

Satisfaction and discharge of an obligation by adjustment or alteration of existing mutual obligations.

Novation and substitution

The process of amending a contract between two parties, so that a third party is interposed as an intermediary creditor/debtor between the two parties, the amended contract is then novated (see Netting by novation), so that the original contract between the two parties is satisfied and discharged.

Obligation

A contractual duty to deliver (or receive) a defined asset (foreign currency, securities, etc.) on an agreed date.

Payment

The satisfaction and discharge of an obligation by the debtor's (irrevocable) provision of an unconditional claim on a third party acceptable to the creditor.

Payment instruction

An order or message requesting the transfer of credit (claim on a third party) to the order of the creditor.

Position netting

The netting of payment instructions in respect of obligations between two or more parties, but which neither satisfies nor discharges those original obligations (also referred to as payment netting).

Settlement

Completion of a payment (or the discharge of an obligation) between two parties. (Frequently used, in contexts to refer to the payment or discharge of wholesale transactions or a series of prior existing transactions. See Final settlement.)

Settlement agent

The institution initiating the final settlement of a clearing, on behalf of all the participants (perhaps also having other functions).

Settlement risk

The risk that a party will default on one or more clearing obligations to its counterparties or to a settlement agent.

Systemic risk

The risk that the inability of one institution within a payments system, as in the financial markets generally, to meet its obligations when due will cause other participants or financial firms to be unable to meet their obligations when due.