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What Is FOREX?

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Counterparty Risk

Because there is no official exchange overseeing transactions and clearing FOREX trades, there is also no exchange guarantee. As a result, traders in the FOREX market are exposed to counterparty risk, which is not necessarily the case in stock or futures trading.

In essence, traders exposed to counterparty risk could find themselves in a situation in which they are not entitled to the profits earned on a particular trade should the market maker on the other side of the transaction fail to live up to his end of the bargain. Although, this scenario is extremely rare, it must be acknowledged as a potential risk and considered when choosing a currency trading arena.

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