What is Overnight Delivery Risk

Overnight delivery risk is the risk that occurs as a result of conducting transactions between different time zones. More specifically, this refers to how the receiving party may not necessarily know whether the other party fulfilled its obligations until the next trading day.

BREAKING DOWN Overnight Delivery Risk

This risk is most evident when the time zone difference is the largest. For example, transactions that occur between a party from Tokyo and another party in New York could be a cause for overnight delivery risk. Since both locations are located in different timezones, the party in Tokyo would need to wait over night to receive confirmation that the transaction from the party in New York was completed. However, if the transaction did not go through, the partner in Tokyo would not find out until the next day, at which time it may be too late to conduct the transaction again.

The settlement date is the date when a trade must is final, and the buyer must make payment. The settlement date for stocks and bonds is usually two business days after the execution date. For government securities and options, it's the next business day. In spot foreign exchange (FX), the date is two business days after the transaction date. With respect to these timelines, parties to a transaction must also be aware of the inherent overnight delivery risk. Weekends and local holidays can also exacerbate overnight delivery risk.

Overnight delivery risk and the elapsed time between the transaction and settlement dates are both different types of credit risks that investors – especially those investing and trading in international securities – must take on. Credit risk is especially significant in forward foreign exchange transactions, due to the length of time that can pass and the volatility in the market. There is also settlement risk because the currencies are not paid and received simultaneously. Furthermore, time zone differences increase that risk.

the perception of overnight delivery risks and settlement risks can be elevated during times of global financial strain. For example, following the collapse of Lehman Brothers in September 2008, there was widespread worry that those invested with Lehman and expecting returns would not receive them.

Overnight Trading and Overnight Delivery Risk

Overnight trading encompasses a broad range of economic activity outside of standard market hours, and overnight delivery risk is an important risk factor to consider with such transactions. Across the financial markets, there are various avenues for overnight trading through a variety of exchanges. The mainstream markets include stocks and bonds. Alternative markets may include foreign exchange trading and cryptocurrencies. Each market has standards for overnight trading that must be considered by investors when placing trades during off-market hours.