diff --git a/instantout/reservation/interfaces.go b/instantout/reservation/interfaces.go
index 04bf830d..23658d5a 100644
--- a/instantout/reservation/interfaces.go
+++ b/instantout/reservation/interfaces.go
@@ -8,14 +8,18 @@ import (
 )
 
 var (
-	ErrReservationAlreadyExists = fmt.Errorf("reservation already exists")
-	ErrReservationNotFound      = fmt.Errorf("reservation not found")
+	ErrReservationAlreadyExists  = fmt.Errorf("reservation already exists")
+	ErrReservationNotFound       = fmt.Errorf("reservation not found")
+	ErrTooManyActiveReservations = fmt.Errorf(
+		"too many active reservations",
+	)
 )
 
 const (
-	KeyFamily         = int32(42068)
-	DefaultConfTarget = int32(3)
-	IdLength          = 32
+	KeyFamily             = int32(42068)
+	DefaultConfTarget     = int32(3)
+	IdLength              = 32
+	maxActiveReservations = 1000
 )
 
 // Store is the interface that stores the reservations.
diff --git a/instantout/reservation/manager.go b/instantout/reservation/manager.go
index 930dff7b..2f4c80c4 100644
--- a/instantout/reservation/manager.go
+++ b/instantout/reservation/manager.go
@@ -26,6 +26,28 @@ type Manager struct {
 	activeReservations map[ID]*FSM
 }
 
+// finalStateObserver removes a reservation FSM from the active set once it
+// reaches a terminal state.
+type finalStateObserver struct {
+	manager *Manager
+	id      ID
+	fsm     *FSM
+}
+
+// Notify implements the fsm.Observer interface.
+func (o *finalStateObserver) Notify(notification fsm.Notification) {
+	if !isFinalState(notification.NextState) {
+		return
+	}
+
+	o.manager.Lock()
+	defer o.manager.Unlock()
+
+	if o.manager.activeReservations[o.id] == o.fsm {
+		delete(o.manager.activeReservations, o.id)
+	}
+}
+
 // NewManager creates a new reservation manager.
 func NewManager(cfg *Config) *Manager {
 	return &Manager{
@@ -134,9 +156,19 @@ func (m *Manager) newReservation(ctx context.Context, currentHeight uint32,
 		m.Unlock()
 		return nil, ErrReservationAlreadyExists
 	}
+	if len(m.activeReservations) >= maxActiveReservations {
+		m.Unlock()
+		return nil, ErrTooManyActiveReservations
+	}
 	m.activeReservations[reservationID] = reservationFSM
 	m.Unlock()
 
+	reservationFSM.RegisterObserver(&finalStateObserver{
+		manager: m,
+		id:      reservationID,
+		fsm:     reservationFSM,
+	})
+
 	initContext := &InitReservationContext{
 		reservationID: reservationID,
 		serverPubkey:  serverKey,
@@ -187,6 +219,16 @@ func (m *Manager) RecoverReservations(ctx context.Context) error {
 		return err
 	}
 
+	activeCount := 0
+	for _, reservation := range reservations {
+		if !isFinalState(reservation.State) {
+			activeCount++
+		}
+	}
+	if activeCount > maxActiveReservations {
+		return ErrTooManyActiveReservations
+	}
+
 	for _, reservation := range reservations {
 		if isFinalState(reservation.State) {
 			continue
@@ -199,6 +241,11 @@ func (m *Manager) RecoverReservations(ctx context.Context) error {
 		reservationFSM := NewFSMFromReservation(m.cfg, reservation)
 
 		m.activeReservations[reservation.ID] = reservationFSM
+		reservationFSM.RegisterObserver(&finalStateObserver{
+			manager: m,
+			id:      reservation.ID,
+			fsm:     reservationFSM,
+		})
 
 		// As SendEvent can block, we'll start a goroutine to process
 		// the event.
diff --git a/instantout/reservation/manager_test.go b/instantout/reservation/manager_test.go
index 0437955e..bf1d1a46 100644
--- a/instantout/reservation/manager_test.go
+++ b/instantout/reservation/manager_test.go
@@ -97,6 +97,11 @@ func TestManager(t *testing.T) {
 	// We'll now expect the reservation to be expired.
 	err = reservationFSM.DefaultObserver.WaitForState(ctxb, 5*time.Second, Spent)
 	require.NoError(t, err)
+
+	testContext.manager.Lock()
+	_, ok := testContext.manager.activeReservations[defaultReservationId]
+	testContext.manager.Unlock()
+	require.False(t, ok)
 }
 
 // TestManagerContinuesAfterInvalidNotification verifies that a malformed
@@ -173,6 +178,38 @@ func TestManagerRejectsDuplicateReservation(t *testing.T) {
 	)
 }
 
+// TestManagerLimitsActiveReservations verifies that server notifications
+// cannot grow the active FSM set without bound.
+func TestManagerLimitsActiveReservations(t *testing.T) {
+	testContext := newManagerTestContext(t)
+
+	for i := range maxActiveReservations {
+		var id ID
+		id[0] = byte(i)
+		id[1] = byte(i >> 8)
+		testContext.manager.activeReservations[id] = NewFSM(
+			testContext.manager.cfg,
+		)
+	}
+
+	reservationFSM, err := testContext.manager.newReservation(
+		t.Context(), uint32(testContext.mockLnd.Height),
+		&swapserverrpc.ServerReservationNotification{
+			ReservationId: defaultReservationId[:],
+			Value:         uint64(defaultValue),
+			ServerKey:     defaultPubkeyBytes,
+			Expiry: uint32(testContext.mockLnd.Height) +
+				defaultExpiry,
+		},
+	)
+	require.ErrorIs(t, err, ErrTooManyActiveReservations)
+	require.Nil(t, reservationFSM)
+	require.Len(
+		t, testContext.manager.activeReservations,
+		maxActiveReservations,
+	)
+}
+
 // ManagerTestContext is a helper struct that contains all the necessary
 // components to test the reservation manager.
 type ManagerTestContext struct {