It is named Herstatt risk after the German bank that did just that in 1974.

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This ought to mean that each party's principal (often hundreds of millions of dollars) can never be lost and Herstatt risk is no more.

ECONOMIST: Foreign exchange

But if they do that, they run the risk that their swap partner will not deliver which reintroduces a fresh element of (you guessed it) Herstatt risk.

ECONOMIST: Foreign exchange

There are also those in the wings with another product to flog: a foreign-exchange derivative which, because it is a bet settled for cash, also reduces Herstatt risk.

ECONOMIST: Foreign exchange