Kevin120 Miller#95

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What is counterparty risk in forex markets?

Counterparty risk is the danger that the other party in a trade defaults before settlement. In forex, spot transactions settle T+2, creating settlement risk (Herstatt risk). If one side delivers currency but the other fails, losses occur. Institutions mitigate via CLS (Continuous Linked Settlement), netting payments across currencies globally. For retail traders, counterparty risk arises with brokers—if a broker collapses, client funds may be at risk unless segregated. Regulators enforce safeguards like capital requirements and client fund protection, but offshore brokers may lack these protections. Managing counterparty risk involves selecting regulated brokers, diversifying across accounts, and monitoring regulator warnings. In crises, counterparty failures can cascade, making this risk a systemic concern.