Settlement Risk

Settlement risk is the gap between paying and getting paid. In a currency trade, if you send your euros in the morning and the other bank collapses before sending its dollars, you are out the full amount.

It is also called Herstatt risk, after a German bank closed by regulators in 1974 partway through the trading day, after it had received payments but before it had paid out the dollars it owed. To prevent repeats, the industry created systems like CLS, which only release each side's payment when both have arrived.