Settlement risk is the risk that a trading counterparty will not deliver a security or asset as agreed upon in a trade. This risk is most commonly associated with the trading of securities on financial markets. To address this risk, many countries have laws and institutions in place that provide guarantees on settlement, including time limits for completing transactions.
Historically, the foreign exchange market has been a significant source of settlement risk. For example, the collapse of Herstatt Bank in Germany in 1974 resulted in the bank failing to settle several major transactions with foreign counterparties, leading to improvements in international settlement practices, such as the adoption of real-time gross settlement systems that execute transactions in real-time and are considered final.