What is Settlement Risk?
John Spacey, updated on February 25, 2016
Settlement risk is the chance that a trading counterparty does not deliver a security or asset as per agreement. It is usually related to the trading of securities on financial markets. Most countries have laws and institutions in place that provide certain guarantees on settlement including a time limit for settling transactions. In the past, a common source of settlement risk was the foreign exchange market. For example, Herstatt Bank in Germany collapsed in 1974 and failed to settle several major transactions with foreign counterparties. This event led to improvements in international settlement such as a move to real-time gross settlement systems that execute transactions in real-time that are considered final.
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