Settlement Risk ORIGIN OF SETTLEMENT RISK A settlement is classified into two types. The first one is the "simple settlement," in which funds are simply transferred from the payer to the payee. The second type is called the "exchange-for-value settlement," in which funds are exchanged with other financial assets, such as foreign currencies or securities. The origin of settlement risk differs according to the type. Simple Settlement "Simple Settlement" is a settlement in which funds are simply transferred from the payer to the payee. In this settlement, the delivery of equivalent value of the transferred funds, such as goods or services, are conducted in a different dimension from payment system. More simply put, if you order In the exchange-for-value settlement, a settlement lag is the origin of settlement risk. "Settlement lag" is a time-lag between a funds settlement and delivery of a financial asset. Such a situation could happen, in which a transfer of funds are made but cannot receive the counter financial asset, and vice versa. A mechanism in which the transfer of funds and delivery of assets are conducted simultaneously is quite useful in order to prevent such an awkward situation. These mechanisms are called "Delivery versus Payment" (DVP) for securities settlement and "Payment versus Payment" (PVP) for FX settlement (both will be discussed later). SETTLEMENT RISK AND PRE-SETTLEMENT RISK Settlement Risk