With the development of clearing and settlement organisations, many new and complex legal issues need to be resolved. Furthermore, many recent disturbances in settlement processes have highlighted that certain legal issues which market participants had assumed were resolved, still remain unclear.
The great level of interest in the risks involved in clearing and settlement systems in recent years is reflected in the number of publications and reports on the topic. Several of the most important reports include the G-30Report (1989), IOSCO'sClearing and Settlement in Emerging Markets Blueprint (1992), BISReport on DVP (1992), Euroclear's Beyond the G-30Report (1993), BISReport on Cross-Border Settlement (1995), the BIS-IOSCORisk Transparency Questionnaire, and more recently, the International Bar Association's discussion paper on Modernising Securities Ownership, Transfer and Pledging Laws (1996), and the CPSS-IOSCODisclosure Framework for Securities Settlement System (1997).
One of the risks involved in clearing and settlement systems is legal risk. The precise allocation of losses among participants in clearing and settlement systems and the risk to which they are exposed depend on the legal framework which governs the rights and obligations of parties to the transactions. Lack of clarity in the legal framework is a source of risk to the extent that it creates uncertainty about exposures of market participants to potential losses. Market participants must be able to determine in advance, with sufficient certainty and predictability, the substantive laws which govern their rights and obligations or those of adverse claimants. They must be certain of their ownership rights and that these will not be successfully claimed by adverse claimants. Uncertainties surrounding the implications of bankruptcy law, legal risks associated with pledging/collateralising securities, finality of transfers and fungibility are examples of legal risks which are relevant in this context.
