Settlement risk

Settlement risk, also known as the Herstatt 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.

The term Herstatt risk follows from a famous incident on June 26, 1974, in which the German Herstatt bank was closed down on the last business day of its insolvent operations before the US business day began. As a result, many of the US creditors holding unsecured claims against the bank were left with unrecoverable debts. These related to currency trades for which Herstatt had already taken receipt of payment by European banks but had not yet made corresponding US dollar payments to the counterparties in the United States.

For More Information

• Settlement Risk is a slightly longer summary.
• Overview: Settlement Risk is a more in-depth article.
• Die Herstatt Pleite describes the Herstatt bankruptcy in detail (in German).