Settlement Risk

DEFINITION of '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.

BREAKING DOWN 'Settlement Risk'

Settlement risk is the possibility 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 with the substantial losses.

RELATED TERMS
  1. Aggregate Risk

    The exposure of a bank, financial institution, or any type of ...
  2. Delivery Risk

    The risk that a counterparty in a transaction may not be able ...
  3. Central Counterparty Clearing House ...

    An organization that exists in various European countries that ...
  4. Overnight Delivery Risk

    The risk that occurs as a result of conducting transactions between ...
  5. Settlement Agent

    1. The party involved in completing a transaction between a buyer ...
  6. Pre-Settlement Risk

    The risk that one party of a contract will fail to meet the terms ...
Related Articles
  1. Forex Education

    The Fundamentals Of Forex Fundamentals

    Charting is not the only way to analyze the foreign-exchange market. Learn how to apply fundamental analysis to the economic indicators.
  2. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  3. Options & Futures

    Getting Started In Forex

    Before entering this market, you should define what you need from your broker and from your strategy.
  4. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  5. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  6. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  7. Options & Futures

    Contango Versus Normal Backwardation

    It’s important for both hedgers and speculators to know whether the commodity futures markets are in contango or normal backwardation.
  8. Term

    Understanding Remittance

    Remittance is the process of sending money to remove or pay an obligation.
  9. Savings

    Banks: Brick-and-Mortar or eBank?

    Brick-and-mortar banks and ebanks usually offer the same services, but there are differences between the two.
  10. Investing Basics

    What Does Contango Mean?

    Contango​ is when the futures price of a commodity is higher than the expected future spot price.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. Will Netspend cards let you overdraw your account?

    NetSpend lets cardholders overdraw their accounts, but only if they previously enrolled in the overdraft protection service. ... Read Full Answer >>
  3. Does the FDIC cover business accounts?

    Bank deposits owned by corporations, partnerships, limited liability companies (LLCs), and unincorporated associations, including ... Read Full Answer >>
  4. How can I avoid escheatment of my bank account?

    To avoid escheatment of a bank deposit account, either checking or savings, the owner should log on to his online account; ... Read Full Answer >>
  5. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  6. Are bank accounts escheatable?

    If banks are unable to contact account owners at their last known addresses, or receive no response, by law, the accounts ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center