Counterparty risk in forex trading refers to the risk that one party involved in a transaction may not be able to fulfill their contractual obligations. In other words, it is the risk that the other party may default on their obligation to buy or sell the currency as per the agreed-upon terms.

Counterparty risk arises because forex trading is an over-the-counter (OTC) market, which means that there is no centralized exchange, and trades are instead conducted between counterparties directly or through a broker. Therefore, traders may face counterparty risk when trading with a forex broker or other financial institution.

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