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Settlement Risk

Settlement risk is a form of counterparty risk and is also sometimes called delivery risk or Herstatt risk, referencing the 1974 failure of Bankhaus Herstatt, which led to significant losses for counterparties in the foreign exchange market. It most frequently arises in transactions such as securities trades or foreign exchange deals, where timing mismatches during settlement can expose both parties to potential losses if one side does not perform as required.

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Settlement risk can be mitigated through mechanisms such as delivery versus payment (DVP) systems, where the asset and payment exchange occur only if both sides meet their obligations simultaneously.