How Does the Counterparty Risk Factor into an RFQ-based Trade?

In an RFQ-based trade, especially in the OTC market, counterparty risk is significant because the trade is a bilateral agreement between two parties. The risk is that the counterparty may default before settlement.

This risk is typically mitigated by trading through a central clearing counterparty (CCP) or by requiring collateral (margin) to be posted. The perceived creditworthiness of the market maker can influence the quoted spread.