Does Cash Settlement Eliminate Counterparty Risk Entirely?

No, cash settlement does not eliminate counterparty risk entirely; it merely shifts and centralizes it. The risk is primarily concentrated on the clearinghouse or the exchange, which guarantees the payment between the buyer and seller.

If the clearinghouse fails, or if a large participant defaults and the clearinghouse's guarantee fund is insufficient, counterparty risk still exists. However, it is generally much lower than in an over-the-counter physically-settled trade.