When you invest or trade, the assumption is simple. If you’ve done your homework, you’ll be rewarded with outsized returns in the long-term. For investors, this can mean choosing the right stock, bond, fund, or ETF. For traders, this may involve reading stock charts and fine-tuning your entry and exit strategies.
Yet, in financial markets, investors and traders can make the all “right” calls on their investment strategy but still lose money. The reason for this often boils down to something that isn’t discussed enough; counterparty risk.
In Singapore’s dynamic and trustworthy financial ecosystem, where investors and traders rely on brokers, fund managers, custodians, and counterparties to execute and safeguard transactions, you have to remember that counterparty risk is still always present.
What Is Counterparty Risk When Investing Or Trading?
At its core, counterparty risk is the possibility that the other party in your investment agreement fails to meet their obligations. You might buy the right asset, at the right price, at the right time but if the broker you rely on defaults, delays, or mishandles your money, you could suffer capital loss.
This is very different from market risk, which is more about the asset’s price moving against you. Meanwhile, counterparty risk is about trust in the infrastructure around your investment and where it’s housed.
Read Also: Singapore Online Stock Brokerage Account Fees Comparison (2025 Edition)
Examples Of Counterparty Risk
#1 The Lehman Brothers Minibond Saga In Singapore
Perhaps the most vivid example for Singapore investors is the 2008 collapse of Lehman Brothers.
Thousands of retail investors here had put money into so-called “minibonds” linked to Lehman’s credit standing. These products were marketed as relatively safe, income-generating investments. Of course, we all know what happened and it definitely wasn’t “relatively safe”.
When Lehman collapsed, the minibonds became almost worthless overnight, leaving investors with heavy losses. It didn’t matter that some of the investors wanted to be conservative by avoiding stocks and instead choosing fixed income. It also didn’t matter that some of the investors were not buying the product through Lehman directly, but other MAS-licenced financial institutions in Singapore.
That’s because the counterparty, Lehman, could no longer meet its obligations. The upshot was that the Monetary Authority of Singapore (MAS) later stepped in with investigations and compensation arrangements but the damage had been done.
#2 Broker Defaults
Even today, if your broker collapses, you may face risks. For example, Singapore investors might remember the 2020 case of Hin Leong Trading, one of the world’s largest oil traders, which filed for bankruptcy amid allegations of forged documentation.
Banks and counterparties that financed trades faced billions in losses. While retail brokerage accounts in Singapore are generally segregated and safeguarded by rules from both MAS and Singapore Exchange (SGX Group), a systemic event can still cause disruptions.
For ordinary investors and traders in Singapore, broker defaults have largely been isolated to cryptocurrency platforms.
The collapse of cryptocurrency platforms like FTX (2022), Hodlnaut (2022) and Tokenize Xchange (2025), as well as the hacking of Mt Gox in 2014, has also shown how counterparty risk plays out in newer digital asset markets.
Believing that your holdings are safe as long as you buy the right “cryptocurrencies” may not always pan out for you. That assumption proved misguided, even though many exchanges may state that investors’ assets are held with custodians. When the exchange went under, the cryptocurrencies held with them were frozen or lost entirely. Similarly, even when the exchange may not have done anything inherently wrong, a hack on the exchange can lead to loss of assets.
Over the years, MAS has been tightening rules for digital payment token service providers but the lesson is still applicable: even if your investment thesis is correct, you can be undone by who holds your assets.
Read Also: Why You Should Always Trade & Invest Through An MAS-Licensed Broker
#3 MAS Regulations
Another way counterparty risk can show up is through regulatory intervention. If you choose to invest or trade through brokerages or platforms that are not regulated by the Monetary Authority of Singapore (MAS), you run the risk of suddenly losing access to your funds or positions.
In June 2025, for instance, two unregulated platforms — Octa and XM — were blocked in Singapore. Investors who had placed money with them were left scrambling, uncertain about how to withdraw their funds or even whether they could get them back at all. This highlights a critical point: even if a platform appears legitimate and operates smoothly for years, it only takes one regulatory action to upend your investments.
MAS licensing requirements exist to safeguard investors through rules on capital adequacy, segregation of client assets, and dispute resolution. Trading outside of this regulatory perimeter means you may not have these protections. In other words, the risk isn’t just about whether your counterparty defaults — it’s also about whether they’re even allowed to operate here in the first place.
Read Also: Guide To MAS-Licenced CFD Brokers In Singapore
How Investors Can Manage Counterparty Risk
No investor can ever fully eliminate counterparty risk but there are steps to manage it. First off, always choose regulated counterparties.
This means utilising brokers, fund managers, and custodians that are fully-licensed by the MAS. Regulation doesn’t make failure impossible but it creates oversight and clearly-defined rules, such as capital adequacy requirements.
Furthermore, think about diversifying counterparties. Just as you’d diversify your investment portfolio across stocks and bonds, think about diversifying service providers. You may not want to place all your assets with a single broker or bank.
If you are buying more exotic financial products – like structured notes, ETFs, or funds – understand who the issuer is and where the assets are custodied. For example, an ETF listed on SGX may be issued by a global manager and backed by securities held with overseas custodians.
Often, these products can also come saddled with leverage. If we think of CFDs, FX trades, or structured notes, these represent greater counterparty risk. When markets move sharply, weaker counterparties can potentially collapse.
Why It Still Matters, Even For “Safe” Investments
Many Singaporeans think of CPF, bank deposits, or Singapore Government Securities as risk-free which (in a sense) they are. They’re backed by the full faith and credit of the Singapore Government, which has a “AAA” credit rating; the highest possible.
But once you step outside these “risk-free” assets, even into “low-risk” instruments like corporate bonds, you reintroduce an element of counterparty risk.
An investor who bought Hyflux perpetual bonds in 2011 might have thought they were making a sensible income investment. Yet, when Hyflux collapsed spectacularly in 2018, bondholders were left with little of their original principle.
It wasn’t about picking the wrong market trend, but it was about the issuer’s ability to meet its debt repayment obligations.
Be Vigilant To Counterparty Risks
Counterparty risk is a hidden danger that doesn’t show up on a stock chart or bond yield curve. It’s about whether the institutions around your investment ecosystem are strong enough to deliver on promises to keep your money housed safely.
The best strategy? Be as diligent, and vigilant, in choosing your counterparties as you are in choosing your investments. Scrutinise their track record and understand where they custodise assets.
That’s because losing money can sometimes have nothing to do with being wrong about what you’re buying and more to do with who’s holding the other side of the trade.
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