Settlement Risk

What is 'Settlement Risk'

Settlement risk is 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. Cross-Currency Settlement Risk

    A type of settlement risk in which a party involved in a foreign ...
  2. Window Settlement

    A form of settlement between dealers whereby trades are settled ...
  3. Real Time Gross Settlement - RTGS

    The continuous settlement of payments on an individual order ...
  4. Settlement Period

    The period of time between the settlement date and the transaction ...
  5. Delivery Risk

    The risk that a counterparty in a transaction may not be able ...
  6. Threshold List

    A daily public accounting of market settlement system failures ...
Related Articles
  1. ETFs & Mutual Funds

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  2. Markets

    The Foundation Of Structured Settlements

    This annuitized payment setup should be arranged through impartial attorneys and tax agents.
  3. Personal Finance

    A Guide To Debt Settlement

    Find out how you can negotiate your way to a lower debt load by paying up front.
  4. Trading

    Profit From Unwanted Life Policies With Life Settlement

    With a life settlement you could cash in on your policy money now.
  5. Investing

    The Truth About IRS Tax Settlement Firms

    These companies claim that they can reduce or even eliminate what you owe to the IRS. Find out the facts behind this alluring fiction.
  6. Investing

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  7. Investing

    What Do Central Counterparty Clearing Houses Do?

    A central counterparty clearing house facilitates trading in European derivatives and equities markets.
  8. Personal Finance

    An Introduction To Life Settlements

    A life settlement is the trading of a life insurance policy under specific circumstances. Learn what it's all about.
  9. Managing Wealth

    The Top Alternative Investments for 2016

    What are some of the best outside-the-box investment ideas for 2016? The answers may surprise you.
  10. Markets

    What Do T+1, T+2, and T+3 Mean?

    T+1, T+2, and T+3 denote the day settlement occurs on a transaction.
RELATED FAQS
  1. Can a special needs trust protect my settlement from collections?

    I am on SSI and expecting a settlement from a class action lawsuit. I have several accounts in collections. I'm thinking ... Read Answer >>
  2. Do I own a stock as of the trade date or the settlement date?

    When it comes to buying shares, there are two key dates involved in the transaction. The first date is the trade date, which ... Read Answer >>
  3. When is a share purchase marked as 'settled' by a brokerage?

    Understand the process of purchasing stock, including ordering, clearing and settlement, and learn when a stock trade is ... Read Answer >>
  4. Do you get a dividend if you have the stock on the ex-dividend date, but sell before ...

    Suppose the ex-dividend date is a Monday and the record date is a Wednesday. If you own the stock before & on the ex-dividend ... Read Answer >>
  5. How will debt settlement affect my credit score?

    Learn how a debt settlement arrangement, though sometimes the best option to eliminate an outstanding debt, can negatively ... Read Answer >>
  6. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center