Risk involved in trade settlement

 What are the key risks involved in trade settlement and how do you mitigate them?

trade involves several risk factor

1. Counterparty risk - its a default risk factor that effects the settlement. The other party might default the obligations or fail to fulfil their contractual obligations.

Ex. if your entering into derivatives contract, there is potential loss is incurring, the other party might default the obligations and this can be mitigated by paying a premium before entering into the trade minimize the loss.

2. Operational risk - Delays or errors in trade processing due to system or human. this can be mitigated by automating, internal controls and providing the adequate training.

3. Liquidity Risk - Risk of insufficient funds or stocks to fulfil the obligations. The broker must ensure that the buyer or seller has sufficient liquidity position before entering into the trade, if any of the parties is failing to obligate is penalized by the SEBI

4. Market risk - Market movements which ultimately affect the trader’s behaviour in buying and selling of shares. the risk can be reduced by proper speculation and hedging strategies.

5. Legal and compliance risk - being non-compliance might attract the legal penalties and fines by exchanges, it is always ensuring to abide to the legal frameworks and stay updated to the regulatory reporting.