settlement risk: The risk is that one party could be in the process of paying the counterparty while the counterparty is declaring bankruptcy.
This sounds to me is a good news to the paying party since it doesn’t need to pay at the moment.
Someone please correct me
I believe it should be the party that is supposed to pay goes into bankruptcy and no longer has capacity or legal ability to pay.
An example might be a situation where you deliver a security with the expectation of recieving cash. The counterparty goes bankrupt after having recieved the security, but before paying you cash. As a result settlement does not occur properly and you have to go through bankruptcy court to reclaim either the cash or your security.