Glossary · Settlement
Settlement Risk
Also: principal risk
Published
Settlement Risk — Settlement risk is the risk that one party to a trade delivers its side, the asset or the cash, and the other party fails to deliver, leaving the first party exposed for the full value of what it sent. It arises whenever the two legs of a trade do not move at the same time or under the same control.
Where the Gap Comes From
A digital asset trade settles in two legs on two rails. The asset leg moves on-chain or between custody accounts in minutes at any hour. A cash leg settled by bank wire moves only on banking days and within cutoffs. Whichever party moves first is exposed until the other leg lands. The exposure is principal, not spread: the full value of the leg already delivered.
Reducing the Gap
Desks and treasuries use four tools. Delivery-versus-payment sequencing conditions one leg on the other. Stablecoin settlement puts the cash leg on a rail that moves at the same speed as the asset leg. Netting reduces the gross amount that must move. Documented settlement terms with defined cutoffs make the exposure window known and short.
Why It Matters for Counterparty Selection
Two quotes at the same price are not equivalent if one settles delivery-versus-payment in stablecoin within the hour and the other requires the client to send assets first and wait for a wire. The settlement model is part of the price.
Sources
- Prudential treatment of cryptoasset exposures — Basel Committee on Banking Supervision, Dec 2022