Credit Risk
The risk that the counterparty defaults. The counterparty to an off-exchange transaction may not, for a variety of reasons, be able to complete a transaction. Such non completion of any portion of a transaction may be to the detriment to the other party. In such cases, the other party will be subject to all or partial loss.
In the event of bankruptcy of the counterparty the trader may be unable to recover assets held at the counterparty (for example, the Refco scandal). Generally there is no segregated customer protection in the event of a bankruptcy. However, in many cases, credit risk for many forex transactions is restricted because of the short term contract execution.
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