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What is counterparty risk in forex and how is it managed?

Counterparty risk is the chance that the other party in a forex trade defaults. In OTC markets, this is critical—if a bank or broker fails, traders may lose funds. Institutions mitigate with collateral agreements (CSA), central clearing, and diversification. Retail traders face counterparty risk through brokers; protections include regulated brokers with segregated accounts and compensation schemes. Benefits of managing it: safety of capital. Risks: unregulated brokers or weak banks increase exposure. Counterparty risk teaches traders that choosing partners matters as much as strategy. Trustworthy counterparties ensure survival in global markets.