Question:
What is liquidity risk a variant of?
What is liquidity risk a variant of?
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In clearing house operations, counterparty risk has two main forms: Credit risk (you lose the money completely) and Liquidity risk (you will get the money, but not on time).
Updated On: Jun 22, 2026
- Legal risk
- Operational risk
- Counterparty risk
- Systemic risk
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The Correct Option is C
Solution and Explanation
Step 1: Categorizing Securities Settlement Risks:
Clearing and settlement houses face several operational and financial risks, including market risk, credit risk, operational risk, legal risk, and counterparty risk.
Step 2: Defining Counterparty Risk and Its Variants:
Counterparty risk (also referred to as settlement risk) is the hazard that a trading partner fails to meet their obligations. This risk has two primary variants:
• Credit Risk (Replacement Cost Risk Principal Risk): The risk that a counterparty defaults completely on their obligation, leading to a loss of the principal transaction value.
• Liquidity Risk: The risk that a counterparty fails to deliver funds or securities at the designated settlement time, but does so at some unspecified time in the future.
Step 3: Conclusion:
Since liquidity risk in this context arises from a counterparty's temporary failure to settle their obligations on time, it is classified as a variant of Counterparty risk (C).
Clearing and settlement houses face several operational and financial risks, including market risk, credit risk, operational risk, legal risk, and counterparty risk.
Step 2: Defining Counterparty Risk and Its Variants:
Counterparty risk (also referred to as settlement risk) is the hazard that a trading partner fails to meet their obligations. This risk has two primary variants:
• Credit Risk (Replacement Cost Risk Principal Risk): The risk that a counterparty defaults completely on their obligation, leading to a loss of the principal transaction value.
• Liquidity Risk: The risk that a counterparty fails to deliver funds or securities at the designated settlement time, but does so at some unspecified time in the future.
Step 3: Conclusion:
Since liquidity risk in this context arises from a counterparty's temporary failure to settle their obligations on time, it is classified as a variant of Counterparty risk (C).
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