Herstatt risk

(redirected from Herstatt Risks)

Herstatt risk

The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial_institution will fail to complete its end of the contract. This is also referred to as settlement risk.

Herstatt Risk

The risk that a foreign exchange trade will not settle. For example, a buyer may not receive delivery of the currency he/she bought by the settlement date, or the seller may not receive payment. This may occur because of the negligence or deliberate withholding by one party or the other. If a party does not receive the securities or payment, he/she is not obligated fulfill his/her end of the bargain until delivery or payment is made, but this can render him/her unable to conduct other activities that would advance his/her investment goals. Herstatt risk takes its name from the Herstatt bank, which notoriously failed to settle currency transactions and went into bankruptcy in 1974.
References in periodicals archive ?
There is little reason to believe that e-money will greatly add to the credit, market, and Herstatt risks in payment systems in the short run.
They are typically categorized as credit or solvency risk, liquidity risk, market risk, Herstatt risk, fraud risk, operational risk, legal risk, and systemic risk.
It will also reduce liquidity, credit and Herstatt risks.
There were obvious benefits if transactions between Hong Kong, mainland China and the United States could eventually be settled on a PvP basis, thereby eliminating Herstatt risks.
For example, most Asian financial markets are connected to the two largest International Central Securities Depositories--Euroclear and Cedel--which clear Asian paper in European time and give rise to Herstatt risk.