Settlement Risk

Settlement risk is the danger that one party to a currency trade delivers the money it owes while the counterparty fails to deliver its side, leaving the first party exposed for the full principal amount. In foreign exchange it is often called Herstatt risk, after the German bank whose 1974 failure left counterparties who had already paid Deutsche Marks waiting for dollars that never arrived — the episode that pushed the industry to address the problem. The main institutional remedy is payment-versus-payment settlement through CLS, a specialist infrastructure that releases both legs of a trade simultaneously or not at all, alongside netting arrangements that shrink the amounts actually exchanged. Retail CFD traders do not exchange currency principal, so their exposure is credit risk to the broker rather than settlement risk in this interbank sense.