Settlement risk

Settlement risk

Settlement risk is the risk that a counterparty does not deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per the trade agreement.

One form of settlement risk is so-called Herstatt risk, which is the settlement risk resulting from different legs of a transaction settling in different time zones (or more generally, in different settlement systems where netting is not possible). Herstatt risk exists primarily (but not exclusively) in foreign exchange transactions and cross-currency swap transaction.

The term Herstatt risk follows from a famous incident on June 26, 1974, in which the German Herstatt bank was closed due to insolvency during German banking hours, but before the start of US banking hours. As a result, the bank failed to make payment on the US dollar legs of foreign exchange transactions even where it had already received the deutschmark payments on such transactions.

For More Information

* [ Overview of Settlement Risks across Europe (26 countries)]
* [ Bank for International Settlements: Committee on Payment and Settlement Systems] Forum for central banks to monitor and analyse developments in domestic payment, settlement and clearing systems as well as in cross-border and multicurrency settlement schemes. Excellent publications and research showing various forms of settlement risk and mitigation strategies.
* [ Overview: Settlement Risk] is a more in-depth article.

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Look at other dictionaries:

  • settlement risk — The risk is that one party may perform on its obligation upon settlement of a financial instrument but the other might not, leaving the non defaulting party in the position of having paid out under the contract and received nothing in return.… …   Law dictionary

  • 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… …   Investment dictionary

  • settlement risk — The possibility that operational problems might interrupt or delay the settlement of a purchase or sale of a financial instrument. American Banker Glossary The risk that one party will deliver and the counterparty will not be able to pay and vice …   Financial and business terms

  • settlement risk — atsiskaitymų rizika statusas Aprobuotas sritis kredito ir finansų įstaigos apibrėžtis Tikimybė patirti nuostolių dėl to, kad atsiskaitymai nebus įvykdyti taip, kaip numatyta sutartyse. atitikmenys: angl. settlement risk vok. Risiko im… …   Lithuanian dictionary (lietuvių žodynas)

  • settlement risk — The risk that a transaction will not be settled as expected (i. e. that an agreed delivery or payment will not be made). It is sometimes referred to as Herstatt risk after a bank of that name, which failed to honour its foreign exchange… …   Big dictionary of business and management

  • Cross-Currency Settlement Risk — A type of settlement risk in which a party involved in a foreign exchange transaction remits the currency it has sold, but does not receive the currency it has bought. In cross currency settlement risk, the full amount of the currency purchased… …   Investment dictionary

  • pre-settlement risk — The risk that a counterparty will default prior to the financial instrument s final settlement. This means that the counterparty may suffer loss because the contract is not carried out but at least (unlike settlement risk) the non defaulting… …   Law dictionary

  • Pre-Settlement Risk — The risk that one party of a contract will fail to meet the terms of the contract and default before the contract s settlement date, prematurely ending the contract. This type of risk can lead to replacement cost risk. For example, let s say ABC… …   Investment dictionary

  • Cross Currency Settlement Risk —    ► See Herstatt Risk …   Financial and business terms

  • Delivery/settlement risk —   Credit risk on the delivery date, resulting in a loss of the incoming cash flow under any contract which entails the exchange of cash flows on the delivery date …   International financial encyclopaedia

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