Finance glossary
Counterparty Risk
Definition
The risk the other party in a contract fails to fulfill its obligation.
Counterparty risk is the danger that the entity on the other side of a trade or contract defaults before settling. It is significant in over-the-counter derivatives and lending. Clearinghouses and collateral requirements exist largely to reduce this risk.
In a sentence
Trading through a clearinghouse reduced the counterparty risk that the other side might default.
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