Herstatt risk

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 ?
With direct yen-renminbi exchange the Herstatt risk almost disappeared.
CLS means Continuous Linked Settlement and it is designed to do away with the Herstatt risk of default assumed by one party in a foreign currency deal.
As transactions are settled on a PvP basis, Herstatt risk associated with these trades is virtually eliminated.
Indeed, Herstatt risk has become a generic term to describe cross-border settlement risk for banks.
They are typically categorized as credit or solvency risk, liquidity risk, market risk, Herstatt risk, fraud risk, operational risk, legal risk, and systemic risk.
systemic risk -- associated with payment systems, market transaction settlement practices and the inter-connectedness of market participants (sometimes called knock-on risk; there is a form of settlement risk known as Herstatt risk dealing with cross-border transactions);
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.
credit/systemic risk has come to be known as Herstatt risk
Indeed, finding a safe and efficient delivery-versus-payment mechanism that ensures the simultaneous settlement of payments in two or more currencies and virtually eliminates Herstatt risk remains both a goal and a challenge for market participants.
Payments netting reduces the so-called Herstatt Risk that one party will make a payment and the other party default before the offsetting payment is made.
Herstatt risk arises when there is a difference between the time at which an entity makes an irrevocable payment in one currency and the time at which that entity receives the other leg of the transaction (ie the other currency being traded) in final, settled terms.
Herstatt risk arises in part because the operating schedules of national payment systems are not synchronized.