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Settlement Risk Meaning

Settlement risk (also known as "Herstatt Risk") is the danger that one party in a transaction will fulfill their obligation (e.g., sending money) but the other party will fail to deliver the asset in return. This typically happens because of "Time Zone Gaps" or "Operational Failures" in the legacy banking system.

It is a major source of concern in international trade and foreign exchange markets.The classic example occurred in 1974 when Herstatt Bank was closed by regulators mid-day. Several banks had already sent German Marks to Herstatt, expecting to receive US Dollars in New York later that day.

Because the bank was shut down before the "Second Half" of the trade could settle, the other banks lost their money. This event led to the creation of the "Basel Committee" and the "CLS Bank," which synchronize international payments to ensure both sides happen simultaneously.Blockchain technology eliminates settlement risk through "Atomic Settlement." On a blockchain, a trade is an "All-or-Nothing" event.

A smart contract ensures that the "Swap" happens in a single transaction; the tokens move from Person A to Person B at the exact same millisecond that the payment moves from Person B to Person A. There is no "In-between" state where one person is at risk of the other's failure, which is one of the most significant efficiency gains of decentralized finance over traditional banking.

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Important Disclaimer:

Finery Markets BVI Limited (“Finery Markets”) provides software, technology infrastructure, and related Information and Communication Technology (ICT) services on a Software-as-a-Service (“SaaS”) basis. Finery Markets acts solely as a software vendor and does not operate a trading platform, does not intermediate, match, execute, clear, or settle transactions, and does not engage in any activities that would require regulatory authorisation under applicable laws.

Finery Markets’ software is non-custodial and is provided exclusively to licensed institutional entities that act as independent operators of their own environments. All counterparties are solely responsible for establishing and maintaining their own bilateral trading and settlement relationships. Finery Markets is not a party to any such arrangements and assumes no responsibility for the conduct, verification, or compliance obligations of any users of the software.

Nothing on this website shall be construed as a financial promotion, investment advice, or an offer to engage in regulated activities. Access to and use of the software is strictly limited to clients who have entered into a software licensing agreement with Finery Markets. Persons located in jurisdictions where such access is restricted should not rely on this website or any of its contents.

Additional notice to UK visitors: This website and associated communications are not intended to constitute a financial promotion under The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) and related guidance. Access to services provided by Finery Markets is limited to regulated entities, professional clients and eligible counterparties as set out by the Financial Conduct Authority. UK users are not permitted to use this website for the services of Finery Markets if they don't fall within these categories.