text: irrevocable credittothecreditpartybeforereceivin, value. Thismay occur,forexample, because thepattern offundstransfers callsforcertain bankstosendmorefundstransfer instructions thantheyreceive earlyinthe day and toreceive morethantheysendlateintheday.Although thesebanks mayre,ularly carrysubstantial creditbalances attheendoftheday.they mayalsoregularly carrysubstantial debitbalances duringtheday.Inthis casepassa,e ofhigh-value credittransfers through correspondent bank relationships maycreatesi,nifieant system-risk.A/CN.9/266/Add.l English Page28 3.Netsettlement 4.Anetsettlement netwo~k isinmanyrespects anarrangement foraseries ofcorrespondent bank ~elationships between eachpairofbanksinthenetwork madethrough asingleswitch. However. thereareseveral institutional features whichmayincrease systemriskincomparison withpurecorrespondent bankrelationships. Sincethereisnomechanism inanetsettlement network forthesending banktogivevaluetothereceiving bankpriortosettlement. atanypointoftimeduringthedayonebanknecessari lyhasadebitbalance withtheotherbank.Furthernlore. sincethecreation ofadebitbalance arisesoutofthereceipt ofcredittransfer instructions. aswellas bythe sending ofdebittransfer instructions. nobankinthenetwork canknowuntil theendofthedaywhether i~willfinishthedaywithadebitoracredit balance withanyotherbank.evenifitweretoknowthetotalamountof creditsitwouldsendtothatotherhankduringtheday.As aresult. abank whichadopted apolicyofnotgivingirrevocable credit on acredittransfer untilitknewithadvalue.couldactoninstructions itreceived onlytothe extentithadalready sentcredittransfer instructions totheotherbank. An alternative policy. whichwouldpermitreceiving bankstogiveimmediate irrevocable creditloalargerproportion ofcredittransfer instructions it received, wouldbeforeachbanktoestablish anupperlimitofthenet intra-day debitbalanceitwouldalloweachoftheotherparticipating banks tocarrywithitatanypointoftime. Abankwhichreceived instructions thatwouldbringthedebitbalance ofthesending bankoverthe pre-established limitwouldhavetoreturnthoseinstructions tothesending bankforre--submission afterthesending bank'sbalance hadbeen re-established. Ifthenetwork functioned through acentral switch, the switchcouldbeprogrammed toreturntheinstructions tothesending bank ratherthanrequiring thereceiving banktodoso. 4.Net-net settlement S.Ifafundstransfer network settles theday'sfundstransfers on anet-net basis,i.e.byestablishing asingledebitorcreditbalance foreach participating bankforthetotalamountofallfundstransfer instructions it hassenttoorreceived fromallotherparticipating banks,butdistributes lossincaseoffailure by ahanktosettleonthebasisofthenetdebitor creditbalance of~hatbankwitheachoftheotherparticipating banks,the systemriskisthatofanetsettlement netwo~k. However, wherethelossis considered tobethatoftheenUrenetwork tobeshared amongthe participating banks,underseveral ofthepossible loss-sharing formulas the losstobebornebytheotherhankscanoftenbeestimated onlyafterthe closeofthesettlement. Undersomeformulas abankwithacreditbalance in itsownbilateral transactions withthenon-performing bankmightnevertheless becalledupontoshareintheloss.Thisinturncouldmeanthatbankswhich couldeasilyhavesetlledifthesettlement hadbeencompleted undernormal circumstances maynotbeabletosettlebecause ofthelosstheyhavesuffered arising outofthefailure ofthefirstbanktosettle. Thiscumulative effectarising outofonebank'sfailure tosettleincreases thesystemrisk. S. Means available toreducesystemrisk 6. Arisk-reduction policywouldhavethreeprincipal goals;lolimitthe likelihood thatabankwillfailtosettle; tolimittheeffectofsucha failure onotherbanks,thebanking system as awholeandtheeconomy in• •• •A/CN.91266/Add.l English Page29 general; andtoensurethecontinued smoothoperation ofthefundstransfer system. Thesegoalsmay beinconflict. Theprimary techniques available for reducing systemriskineithernetornet-net settlement networks canbe grouped underfiveheadings: Participation innetornet-net settlement networks canbelimited in various ways.The number ofbankscanbelimited, sincethefewerthe number, thelesslikelythatanyone ofthemwillfailtosettle. The participating bankscanbelimited tothosewhosefinancial security is unquestionable. Foreign banks,whichmay beunabletosettleinlocal currency, maynotbepermitted toparticipate, allowed toparticipate to onlyalimited degreeorallowed toparticipate onlyiftheyfurnish additional assurance oftheirability tomeettheircommitments. Thedegreeofmonetary exposure ofanysinglebankorofthenetwork as awholecanbelimited. Intra-day bilateral netdebitlimitscanbe established between individual pairsofbanks. Intra-day netcreditcaps canbeestablished limiting theamount owed by anyone banktotheentire
analysis: The text discusses the risks and mechanisms of international fund transfer systems, highlighting the importance of risk reduction policies to ensure the smooth operation of such systems. The text focuses on the technical aspects of fund transfer networks, including net settlement, net-net settlement, and risk reduction techniques. The language used is technical and specialized, indicating that the text is primarily intended for an audience with a background in finance or economics.