Settlement Risk

Settlement Risk

The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement. Settlement risk can be the risk associated with default at settlement and any timing differences in settlement between the two parties. This type of risk can lead to principal risk.

Notes:

In other words, settlement risk is the possibility that your counter party will never pay you. Settlement risk was a problem in the forex market up until the creation of continuously linked settlement (CLS), which is facilitated by CLS Bank International, which eliminates time differences in settlement, providing a safer forex market.

Settlement risk is sometimes called "Herstatt risk", named after the well-known failure of the German bank Herstatt. On Jun 26, 1974, the bank had taken in its foreign-currency receipts in Europe, but had not made any of its U.S. dollar payments when German banking regulators closed the bank down, leaving counter parties to incur the substantial losses.

See also: Credit Risk, Default Risk, Forex, Pre-Settlement Risk, Replacement Risk, Settlement Date

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Settlement risk

The risk that one party will deliver and the counterparty will not be able to pay and vice versa.