Settlement risk

The term applies only to risks inherent to the settlement method of a particular transaction. Broader risks of trading such as political risk or systemic risk may interrupt markets and prevent settlement, but these are not settlement risk per se.

Herstatt risk

One form of settlement risk is foreign exchange settlement risk or cross-currency settlement risk, sometimes called Herstatt risk after a notable incident in which the German bank failed due to trading risks. On 26 June 1974, the bank's license was withdrawn by German regulators at the end of the banking day (4:30pm local time) because of a lack of capital to cover liabilities that were due. Some banks had undertaken foreign exchange transactions with Herstatt and had already paid Deutsche Marks to the bank during the day, believing they would receive US dollars later that day in the US from Herstatt's US nostro. But after 3:30 pm in Germany and 10:30 am in New York, Herstatt stopped all dollar payments to counterparties, leaving the counterparties unable to collect their payment.

The closing of Drexel Burnham Lambert in 1990 was prevented from causing similar problems because the Bank of England had set up a special scheme which ensured that payments were completed. The collapse of Barings Bank in 1995 resulted in minor losses for counterparties in the foreign exchange market because of a specific complexity in the ECU clearing system.