Counterparty risk

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Related to Counterparty Risks: Counterparty credit risk

Counterparty risk

The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed.

Counterparty Risk

1. In options, the risk that the option holder will not exercise the option. This may be good if the price moves in the option writer's favor, but counterparty risk is small in that situation.

2. More generally, the risk that one party in a contract will default or otherwise not fulfill his/her obligations. Counterparty risk can be diminished when one party mandates a co-signer or highly-rated guarantor. See also: Intermediated market.

counterparty risk

The risk that a party to a transaction will fail to fulfill its obligations. The term is often applied specifically to swap agreements in which no clearinghouse guarantees the performance of the contract.

Counterparty risk.

Counterparty risk is the risk that the person or institution with whom you have entered a financial contract -- who is a counterparty to the contract -- will default on the obligation and fail to fulfill that side of the contractual agreement.

In other words, counterparty risk is a type of credit risk. Counterparty risk is the greatest in contracts drawn up directly between two parties and least in contracts where an intermediary acts as counterparty.

For example, in the listed derivatives market, the industry's or the exchange's clearinghouse is the counterparty to every purchase or sale of an options or futures contract. That eliminates the possibility that the buyer or seller won't make good on the transaction.

The clearinghouse, in turn, protects itself from risk by requiring market participants to meet margin requirements. In contrast, there is no such protection in the unlisted derivatives market where forwards and swaps are arranged.

References in periodicals archive ?
Manageable Counterparty and Forex Risk: TBI's rating also reflects low counterparty risk. Revenue contribution from Indonesian telco operators with investment-grade international ratings was 83% in 2017, higher than Protelindo's 49% and STP's 68%.
Meanwhile, the influences of external market shocks [b.sub.1], [c.sub.1] and counterparty risks [b.sub.2], [c.sub.2] are assumed to be triangular fuzzy numbers, whose membership functions are defined as follows:
Scheduled to become effective at the end of 2013, the TMPG recommendations aim to reduce counterparty risk which may occur if the market value fluctuates significantly for agency MBS securities, which typically settle one month, or later, after the trade execution.
ICAP Futures & Options expects substantial regional demand for these products and is happy to be working with the Singapore exchange in its continuing efforts to provide market place liquidity and reduced counterparty risk within the reformed global regulatory environment," said Richard Vine, Head of APAC Futures at ICAP Singapore.
XYZ managers decided that they needed a new approach to quantifying and pricing counterparty risk. They wanted to select hedge providers based on each provider's all-in costs, including the bank's risk of default.
When buy-side firms set up their broker panels, it is often only with half an eye on counterparty risk - spreading their business around the providers they feel comfortable with in terms of risk and quality, and establishing multiple commission sharing agreements (CSAs) so as not to rely too much on one party through which commission payments flow.
It demonstrates that market, business, and counterparty risks systematically differ in their deterrent effects and social welfare implications.
In January, twelve major internationally active banks and securities firms formed the Counterparty Risk Management Policy Group.
Include collateral to view mitigated counterparty risk exposures
The UBS MTF will use a central counterparty clearing model that is designed to mitigate clients' counterparty risks and contribute to reduced settlement costs.
The nation has launched a process that is expected to tighten capital requirements and limit potential fallout from trading, securitizing and counterparty risks.