Foreign Exchange Settlement Practices in Australia Annex E Glossary

AED United Arab Emirates dirham
AEST Australian Eastern Standard Time
ATS Austrian schilling
AUD Australian dollar
Austraclear A private sector company that operates the main securities depository in Australia. Members may use the transfer system operated by Austraclear to make foreign exchange confirmations and deliver the AUD leg.
BDT Bangladeshi taka
BEF Belgian franc
BHD Bahraini dinar
BIS Bank for International Settlements
BITS Bank Interchange and Transfer System. A large-value transfer system used frequently in Australia for settling foreign exchange payments in Australian dollars.
BND Brunei dollar
CAD Canadian dollar
CHF Swiss franc
CHIPS Clearing House Interbank Payment System. The large-value transfer system used in the United States principally for settlement of international USD payments, such as those arising from foreign exchange transactions.
Close-out netting An arrangement to settle all contracted but not yet due liabilities to and claims on an institution 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 institution (see netting by novation and obligation netting).
CLS Continuous linked settlement – a process for simultaneous settlement of both legs of a foreign exchange transaction.
CLS Services A UK company founded by the G20 banks to oversee the implementation of continuous linked settlement (see CLS and G20).
CNY Chinese renminbi
CPSS Committee on Payment and Settlement Systems of the BIS.
Credit risk/exposure The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. In exchange-for-value systems, the risk is generally defined to include replacement risk and principal risk.
CYP Cypriot pound
DEM Deutsche mark
DKK Danish kroner
ECHO Exchange Clearing House Limited, a UK-based company offering multilateral netting services for foreign exchange transactions in eligible currencies.
ECU European currency unit
EMEAP Executive Meeting of East Asian and Pacific central banks. The member countries are Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand.
ESP Spanish peseta
EUR SWIFT code for the euro
Exchange rate risk See market risk.
Fedwire The real-time gross settlement system operating in the United States.
FEYCS Foreign Exchange Yen Clearing System. The large-value transfer system used in Japan principally for settlement of international JPY payments, particularly those arising from foreign exchange transactions.
FIM Finnish markka
Final (finality) Irrevocable and unconditional.
FJD Fiji dollar
Foreign exchange settlement exposure The amount at risk when a foreign exchange transaction is settled. This equals the full amount of the currency purchased and lasts from the time that a payment instruction for the currency sold can no longer be cancelled unilaterally until the time the currency purchased is received with finality (see credit risk/exposure and foreign exchange settlement risk).
Foreign exchange settlement risk The risk that one party to a foreign exchange transaction will pay the currency it sold but not receive the currency it bought. This is also called cross-currency settlement risk or principal risk; it is also referred to as Herstatt risk, although this is an inappropriate term given the differing circumstances in which this risk has materialised.
FRF French franc
G10 The Group of Ten Countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.
G20 The Group of Twenty; an association of twenty large commercial banks from Europe, North America and Asia.
GBP Pound sterling
GRD Greek drachma
HKD Hong Kong dollar
IDR Indonesian rupiah
IEP Irish pound
INR Indian rupee
ITL Italian lira
JPY Japanese yen
KES Kenyan shilling
KWD Kuwaiti dinar
Liquidity risk The risk that a counterparty (or participant in a settlement system) will not settle an obligation for full value when due. Liquidity risk does not imply that a counterparty or participant is insolvent since it may be able to settle the required debit obligations at some time thereafter.
LKR Sri Lankan rupee
Market risk The risk that an institution or other trader will experience a loss on a trade owing to an unfavourable exchange rate movement (see replacement cost risk).
MTL Maltese lira
MUR Mauritian rupee
MYR Malaysian ringgit
Netting An agreed offsetting of positions or obligations by trading partners or participants. The netting reduces a large number of individual positions or obligations to a smaller number of positions or obligations. Netting may take several forms which have varying degrees of legal enforceability in the event of default of one of the parties (see also close-out netting, netting by novation and obligation netting).
Netting by novation (novation) Satisfaction and discharge of existing contractual obligations by means of their replacement by new obligations (whose effect, for example, is to replace gross with net payment obligations). The parties to the new obligations may be the same as to the existing obligations or, in the context of some clearing house arrangements, there may additionally be substitution of parties (see close-out netting, netting and obligation netting).
NLG Netherlands guilder
NOK Norwegian krone
Nostro account An account held by one bank with another bank, generally for the purpose of making and receiving payments. The account may be denominated in the domestic currency or, more typically, in a foreign currency. Derived from the Latin for ‘mine’.
NZD New Zealand dollar
Obligation netting The legally binding netting of amounts due in the same currency for settlement on the same day under two or more trades. Under an obligation netting agreement for foreign exchange transactions, counterparties are required to settle on the due date all of the trades included under the agreement by either making or receiving a single payment in each of the relevant currencies. Depending on the legal system, obligation netting can find a legal basis in constructions such as novation, set-off or the current account mechanism (see close-out netting, netting and netting by novation).
OMR Omani rial
Operational risk The risk of incurring interest charges or other penalties for misdirecting or otherwise failing to make settlement payments on time owing to an error or technical failure.
Payment versus payment (PVP) A mechanism in a foreign exchange settlement system that ensures that a final transfer of one currency occurs if and only if a final transfer of the other currency or currencies takes place.
PGK Papua New Guinea kina
PHP Philippines peso
PKR Pakistani rupee
Principal risk See foreign exchange settlement risk.
PTE Portugese escudo
PVP See payment versus payment.
RBA Reserve Bank of Australia
Replacement cost risk/replacement risk The risk that a counterparty to an outstanding transaction for completion at a future date will fail to perform on the settlement date. This failure may leave the solvent party with an unhedged or open market position or deny the solvent party unrealised gains on the position. The resulting exposure is the cost of replacing, at current market prices, the original transaction (see credit risk/exposure and market risk).
RITS Reserve Bank Information and Transfer System. A system operated by the RBA primarily for the settlement of transactions in government securities. All foreign exchange transactions with the RBA are settled using RITS.
RTGS Real time gross settlement; the final and irrevocable settlement of transactions on an individual basis.
SAR Saudi Arabian riyal
SBD Solomon Islands dollar
SEK Swedish krona
Settlement An act that discharges obligations in respect of funds or securities transfers between two or more parties.
SGD Singapore dollar
Simultaneous settlement The settlement of payment obligations in different currencies at the same time. A simultaneous settlement system would not pay out any currencies to any participant before all relevant participants pay in all of the currencies they owe (see payment versus payment and settlement).
SWIFT Society for Worldwide Interbank Financial Telecommunication
Systemic risk The risk that the failure of one participant in a payments system, or in financial markets generally, to meet its required obligations when due will cause other participants or financial institutions to be unable to meet their obligations (including settlement obligations in a transfer system) when due. Such a failure may cause significant liquidity or credit problems and, as a result, might threaten the stability of financial markets.
TARGET Trans-European Automated Real Time Gross Express Transfer system. A payments mechanism being developed in the European Union to process cross-border transactions in euro on a real-time gross settlement basis. TARGET is comprised of an RTGS system in each country and the bilateral linkages between these systems.
THB Thai baht
TRL Turkish lira
USD United States dollar
Vostro account An account held by one bank for another bank, generally for the purpose of making and receiving payments. The account is typically denominated in the domestic currency of the bank providing the account. Derived from the Latin for ‘yours’.
VUV Vanuatu vatu
WST Western Samoan tala
XEU SWIFT code for the European currency unit (ECU)
XPF Central Pacific franc
ZAR South African rand