  A counterparty credit limit (CCL) is a limit that is imposed by a financial
institution to cap its maximum possible exposure to a specified counterparty.
CCLs help institutions to mitigate counterparty credit risk via selective
diversification of their exposures. In this paper, we analyze how CCLs impact
the prices that institutions pay for their trades during everyday trading. We
study a high-quality data set from a large electronic trading platform in the
foreign exchange spot market, which enables institutions to apply CCLs. We find
empirically that CCLs had little impact on the vast majority of trades in this
data. We also study the impact of CCLs using a new model of trading. By
simulating our model with different underlying CCL networks, we highlight that
CCLs can have a major impact in some situations.
