Firstly, what exactly does Counterparty Risk mean? Counterparty risk is the probability that the other party in an investment, credit, or trading transaction may not fulfil its part of the deal and may default on the contractual obligations. Simply stated the risk of not being repaid.
While this seems like it only applies to institutions giving credit, it encompasses a much wider scope. Bonds are rated by agencies, such as Moody’s, and the status conveys the amount of risk but more than that, this status can change. Stock’s values rise and fall with the company’s performance and even its reputation or the reputation and performance of its CEO or founder’s actions and other interests, look at Elon Musk as an example.
How exactly is it relevant to you and your international transfers? When making an international transfer, you are sending your money to a beneficiary offshore and this has the potential of counterparty risk. Let’s look at some examples:
- You pay an invoice to a company or individual for services or goods. There is a possibility that you do not receive the goods or they are of substandard quality.
- You invest in a Traditional Broker’s Fund as a long-term investment for retirement. The fund underperforms or the company goes bankrupt.
- You are trading for Crypto Arbitrage and the markets were not on your side, or an exchange faces bankruptcy as evidenced in the recent FTX collapse, and you lose money on the trade.
Now that you know you are engaging in transactions that have counterparty risk, what is your next step? It is imperative that you understand the risks involved with your specific transactions and the roles of the parties involved. As your FX Intermediary, Currency Assist’s duty is to perform the execution only of the trade or transaction acting upon the client’s instructions. What does that mean? It is not the bank nor Currency Assist’s responsibility to validate the credibility of the counterparty and the risk lies with you, as the client.
Understanding that it is your responsibility, now you would need to know how do you mitigate the risk. To start with, you can do the necessary validity checks with regard to all counterparty relationships. Some examples of this are: checking the company’s published financials, keeping up to date with the news and markets, and referring any questions to professionals in the industry like to your qualified personal Financial Advisor.
For more information about your international transfers and how Currency Assist can help, contact our offices on 087 135 5978 orinfo@currencyassist.com You can also click on the green “Contact” button at the top of the page to leave your details for us to get back to you.