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Settlement Definition. After a trade has been matched by a trading system, it needs to be cleared and settled so that the seller gets paid and the buyer gets ownership of the security or currency traded.Settlement completes the process by transferring good funds and ownership.

Foreign-exchange transactions are settled via correspondent banks or via CLS, which is an international system for settlement of such transactions.Traditionally, the two payments are settled independently of each other, e.g. via correspondent banks in the currencies in question.

International transactions require a change of currency, foreign transaction fees and dealing with an exchange rate. To navigate through these channels, a banking system ushers the money along.The merchant's bank will then receive the remitted funds, and they will be settled into the merchant's account.

What Is Settlement Risk? Settlement risk is the possibility that one or more parties will fail to deliver on the terms of a contract at the agreed-upon time. Settlement risk is a type of counterparty risk associated with default risk, as well as with timing differences between parties.

Foreign exchange (FX) settlement risk is the risk of loss when a bank in a foreign exchange transaction pays the currency it sold but does not receive the currency it bought.FX settlement risk is a form of counterparty risk involving both credit risk and liquidity risk.

A corporate FX transaction involves a bank, on behalf of their corporate client, paying for the currency it sold at an agreed rate to another bank and receiving a different currency in return for the funds being cleared and settled in the local clearings.

Foreign exchange (FX) settlement risk is the risk of loss when a bank in a foreign exchange transaction pays the currency it sold but does not receive the currency it bought.The development of counterparty settlement limits and the monitoring of the exposures against these limits is a critical control function.