002CASE / Finance
The Herstatt settlement gap
One currency had been paid; the other was expected later, across a boundary no single party controlled.
SOURCE STATE · The Last Undo, Chapter 5 draft v0.5.1, notes 4–6; BIS, Settlement Risk in Foreign Exchange Transactions (Allsopp report), March 1996; Galati, BIS Quarterly Review, December 2002.
This record reconstructs the argument in its cited manuscript draft. It is not a certified procedure or an independent audit.
THE JUDGMENT MACHINE
Trace the chain.
- Object
- A foreign-exchange transaction exchanging Deutsche Marks for U.S. dollars across time zones.
- Observation
- The payment instruction, local settlement status, bank condition, and whether the counter-currency has reached final settlement.
- Distinction
- The sold currency may be irrevocably paid while the purchased currency remains outstanding.
- Representation
- A pair of linked obligations with separate payment systems and operating hours.
- Criterion
- Settlement finality is reached only when the purchased currency is received with finality; a sent instruction is not the same as settlement.
- Judgment
- Do not treat one leg’s completion as proof that the exchange is complete.
- Authority
- Counterparties, banks, and settlement-system rules distribute control; no one party can unilaterally make the other leg final.
- Last undo / seam
- The exposure begins when the sold-currency payment can no longer be canceled unilaterally and ends when the purchased currency is received with finality.
- Consequence
- On 26 June 1974, Herstatt’s closure left counterparties that had paid Deutsche Marks in the morning without the expected dollars in New York.
EVIDENCE & LIMITS
Keep the denominator attached.
The manuscript reports a BIS estimate of approximately US$200 million in stranded same-day payments and a sharp short-term drop in New York gross transfers.
The manuscript says primary sources do not state a total creditor loss for Herstatt; this page does not supply one. The case concerns settlement exposure, not a complete accounting of bank failure.
SOURCE TRAIL · The Last Undo, Chapter 5, draft v0.5.1, notes 4–6.