Settlement risk

Settlement risk, also known as the Herstatt risk is the risk that a counterparty does not deliver security or its value in cash as per agreement when the security was traded after other counterparty or counterparties have delivered security or cash value as per the trade agreement.

Herstatt Bank used to be a German bank whose creditors in the United States lost their investments because when it was time to open business in the United States, the German market had already shut down due to time zone differences. Creditors in United States were not able to redeem their debt certificates later because that was the last day of Herstatt Bank's existence. Herstatt Bank was liquidated.