The risk that one party delivers its side of a trade and the other does not. It is most acute where payments in two currencies are not exchanged at the same time.
Where you will meet it
Settlement risk comes up in 6 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“In foreign exchange, CLS Bank settles both currency legs together through payment versus payment, removing the settlement risk exposed by the Herstatt failure in 1974.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“Settlement risk arises when one side delivers and the other does not.”
Exchanges and OTC Markets FRM Part I · Financial markets and products
“Settlement risk appears when one leg is paid before the other is received, as in foreign exchange.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“Settlement risk is the loss of principal when you pay and the counterparty does not deliver, as in cross-border FX.”
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