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.
Glossar
Central Clearing Counterparty
Framework ⎊ The Central Clearing Counterparty (CCP) within cryptocurrency derivatives, options trading, and broader financial derivatives represents a critical infrastructural element designed to mitigate counterparty credit risk.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Credit Rating Downgrade
Signal ⎊ A Credit Rating Downgrade serves as a powerful, public Signal from an independent agency indicating a deterioration in the financial health or debt-servicing capacity of a reference entity.
Risk Factor
Variable ⎊ A risk factor is a variable that influences the value of a financial instrument or portfolio, contributing to potential losses.