The risk of losing part or all of the principal of a financial asset.

It is the risk that the seller of a financial asset such as securities will not receive payment after delivery on its obligations. It may also refer to the risk that the buyer will pay, but not get the underlying assets delivered, either on time or if any. In such a situation, the full value of the securities or amounts paid/ transferred will be at risk.

Principal risk may also arise from any potential loss of the full value (or contractual rights) involved in a transaction, typically as a result of the default or insolvency of a counterparty.

More specifically, it means the risk of outright loss of the full value of a transaction resulting from a counterparty’s failure to settle its dues o countervalue. This can arise from a market participant having paid the currency being sold but not being able to receive the currency being bought in a foreign exchange transaction (also known as “Herstatt risk”). The principal risk exposure to a counterparty comes into play when a market participant is no longer guaranteed that it can unilaterally stop or cancel the payment of the currency it sold (the unilateral cancellation deadline) until the market participant receives the purchased currency with finality.

The principal risk is a type of settlement-related risks.