Herstatt Risk

Herstatt Risk is the specific form of settlement risk in foreign exchange (FX) transactions where one counterparty pays the currency it sold but does not receive the currency it bought due to the other counterparty's insolvency or failure to deliver before the final settlement is complete. This risk is named after the 1974 failure of Bankhaus Herstatt, which highlighted the systemic danger of cross-jurisdictional and cross-time-zone settlement gaps, particularly the risk of losing the full principal amount of a trade.