Definitions for "Herstatt risk"
Term used to define the risk that one party in a currency swap will default after the other party has met their obligation. Herstattt or settlement risk arises because differences in time zones lead to different settlement times for each part of a currency exchange. This risk is named for a small, privately owned German bank that went into liquidation in 1974 and defaulted on foreign exchange contracts. At the time, Herstatt had several maturing spot and forward contracts where it received Deutschemarks and had to pay out U.S. dollars. In the six hours between the time Herstatt received the D-marks and the time when it had to pay its U.S. dollar obligations in New York, the bank went into liquidation and did not make the necessary payments under the foreign exchange contracts.
See "Settlement risk".
The risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to complete its end of the contract. This is also referred to as settlement risk.