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.
A famous example of settlement risk is the failure of Germany's Herstatt bank. On June 26, 1974, Herstatt had taken in all its foreign currency receipts in Europe, but had not made any of its US dollar payments when German banking regulators closed the bank down at the end of the German business day. Counterparties were left holding unsecured claims against the insolvent bank's assets. Consequently, settlement risk is sometimes called Herstatt risk.
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