Counterparty risk: who is holding your money

Every cost calculation assumes something nobody writes down: that when you want your money back, you get
it. Counterparty risk is the name for that assumption — the chance that the broker holding your money cannot
pay, not the chance that the market goes against you. The two are separate, and no stop loss stops the second
one.

This article splits counterparty risk into the parts you can actually check: where your money sits, whether
client-money segregation applies to your account, whether a compensation scheme covers it, and which warning
signs are worth stopping for. All of it is work to do before you deposit, not after there is a problem.

Why it is missing from every cost table

Trading CFDs, you are not buying an asset on an exchange. You are entering a contract with the broker
itself: the two sides agree to settle the price difference. That means the counterparty to every one of your
trades is that company, not a market.

The consequence: if the company becomes insolvent, your profit becomes a claim, and your deposit depends on
where it was held. This is a legal and organisational risk, not a market one — so it does not shrink when you
trade more carefully or place tighter stops. It is also why it appears in no cost comparison: spread, commission,
swap and rebates all measure in money, while counterparty risk has no unit. The way to handle it is not to
quantify it but to check each protection mechanism and see whether it applies to your account.

Client-money segregation: the most important mechanism

Segregation means the money you deposit is held in a separate bank account, not mixed with the firm’s
operating capital. The purpose is specific: if the firm runs into financial trouble, that money is not treated
as a company asset available to its other creditors.

This is the first thing to check because it protects the principal, not just the profit. Stricter regulatory
frameworks make it a condition of licensing, alongside capital requirements and the retail limits set out in
ESMA’s
product intervention measures.

Two things to get right. Segregation is not insurance: it keeps your money out of the company’s assets, but
it does not guarantee you get all of it back, or quickly — identifying and distributing client money in an
insolvency still takes time, and procedural costs may be deducted. And the requirement is not applied evenly
across jurisdictions. Some impose it strictly with supervision behind it; some impose it loosely or not at all.
So the question is not “does this broker segregate client money” but “is the entity serving me required to”.

Compensation schemes: whether, and up to what

Some frameworks run a compensation scheme for retail clients: when a licensed firm becomes insolvent, the
scheme pays part of what clients are owed, up to a limit. This is the second layer, sitting behind segregation.

Three things to check, in order. Whether the entity serving you falls within the scheme’s cover at all — this
is the gating question, because many entities outside the stricter regions fall under no scheme. What the
per-client cap is. And which client category is covered, since some schemes apply only to retail and not to
professional clients. The practical consequence of the cap: any balance above it is not protected by this layer,
which is a concrete reason not to keep all of your capital in one place, independent of how much you trust the
broker.

And the reverse needs saying too: a brand having an entity covered by a scheme does not mean your account is
covered by it. This is where the mistake is made most often, and it leads straight to the next section.

The legal entity decides everything above

A broker brand is usually several companies, each licensed in a different region and serving different groups
of clients. The licence shown on the home page is typically that of the most strictly regulated entity — and
typically not the entity that opens accounts for clients outside that region.

Both protections above therefore rest on one fact: which company name appears in your contract. Checking it
takes about two minutes. Open the terms or legal documents in the client area and find the entity name at the
head of the agreement, not the brand name. Write down the full name and licence number — one brand often has
several companies with near-identical names. Then look that name up on the relevant regulator’s register: the
FCA register for a UK entity,
ASIC’s register
search for an Australian one, or the
CySEC list of
licensed investment firms for a Cypriot one. Check that the company name, licence number and approved domain all
match.

If the entity in your contract is not on any register you can search, that is not automatically a sign of
dishonesty — plenty of entities operate legally under other frameworks. But it does mean the two protections above
do not apply to you, and you should know that before depositing rather than after.

Five signs worth stopping for

Counterparty risk rarely appears suddenly. It has precursors, and what they have in common is that they
concern getting money out, not trading conditions: withdrawals that stall past the stated timeline with no
explanation, terms that change after you have asked to withdraw, a withdrawal made conditional on depositing more,
support that stops answering in writing, and marketing that leans on a headline number rather than on terms.

The third one deserves a line of its own. A withdrawal should never depend on depositing more, under any wording
— including when it is explained as a volume requirement, a processing fee or a verification step. When you meet
any of these signs, the order matters more than the speed: save the evidence first, then check the terms, then
complain.

Reduce the risk by managing your own money

You cannot control a broker’s financial health. You can control how much of your money is sitting there, and
that is the only practical lever.

The short rule: keep on the account the margin your open positions need plus a buffer, and withdraw the excess
on a regular rhythm. This does not lower the chance of a problem; it lowers the amount of your money exposed to one.
Second, make a small test withdrawal as soon as verification is complete and before adding capital — it checks three
things at once: that your documents qualify you to withdraw, that the channel works, and what the real timeline is.
Third, do not withdraw below the margin you need: overdoing it drops your margin level and can trigger a warning or a
close-out, creating a bigger problem than the one you were guarding against.

Finally, keep this decision separate from how you feel about the broker. Holding less money in one place is a rule
that applies even to the places you trust most, because its purpose is not to guard against a particular company but
against a situation you cannot predict.

This article is for information only and is not investment advice. Regulatory protections, compensation schemes and broker terms vary by entity and by date — check the current terms of the entity named in your own contract. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.