What is Counterparty Risk?
Counterparty Risk
Forex Trading Glossary
Quick Answer: Counterparty risk is the chance that the party on the other side of a trade fails to honor its obligations, such as a broker default.
What is Counterparty Risk?
Counterparty risk is the possibility that the party on the other side of a trade fails to meet its obligations. In retail forex, this risk is tied to the broker's solvency and operational stability.
Sources of Counterparty Risk
- Broker failure: Insolvency or fraud.
- Liquidity provider default: Issues at banks supplying pricing.
- System outages: Technical failures during volatile moments.
- Regulatory changes: Sudden restrictions that limit withdrawals or leverage.
Protect Your Funds
Use regulated brokers, segregated accounts, and avoid concentrating large balances with a single counterparty.
Managing Counterparty Risk
- Diversify: Split capital across reputable brokers.
- Monitor health: Watch for news about liquidity providers and broker financials.
- Review agreements: Understand margin clauses and negative-balance protections.
- Have contingencies: Maintain backup funding methods and platforms.
Related Terms
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