In foreign exchange markets, transacting across different time zones creates Principal Risk (historically known as Herstatt Risk)—the threat that one party pays their currency leg but the counterparty defaults before delivering the opposing currency.

This vulnerability was exposed in 1974 when German regulators shut down Bankhaus Herstatt after it received German Marks from international counterparties but before it could deliver US Dollars in New York, causing severe disruptions across the interbank system.

German Banks deliver Marks to Herstatt at 10 AM -> Herstatt shut down by regula