What Is “Settlement Risk” in a Derivatives Trade?

Settlement risk is the risk that one party in a derivatives trade will fail to deliver the required assets or funds at the time of settlement, even after the other party has fulfilled their obligation. This failure can be due to bankruptcy, technical issues, or refusal to pay.

In traditional finance, this risk is mitigated by Central Clearing Counterparties (CCPs). Blockchain's instant finality aims to eliminate this risk by ensuring atomic, simultaneous exchange of assets and funds.