Market participants are categorized on the basis of their role and the nature of their dealings in the marketplace. These will influence their risk appetite, policies and controls in managing risk with each participant in the market.

Market participants should, in addition to clearly understanding their own role in the market, know the role in the marketplace of the other party to the transaction and ensure their expectations are aligned.

The following categories of counterparties are based on the ‘Guidelines of Transactions Involving Intermediaries’ produced by the New York Foreign Exchange Committee.

Counterparties

Any individual, corporation, partnership or trust, government or other entity that engages regularly in one or more types of transactions as principal with a dealer.

Counterparties can be sophisticated or unsophisticated end users. Their risk appetite can vary, ranging from high to very low. The reason they enter into financial transactions will usually be either to hedge underlying market risks or to speculate on future changes in the marketplace.

Dealers

With respect to any transaction, a person who presents themselves as being in the business of entering into similar transactions as principal with counterparties.

Dealers trade with counterparties to receive margin income. Dealers have a responsibility to ensure the counterparty understands the risks and that the transactions they are entering into are suitable for them.