Counterparty risk

Also found in: Dictionary, Wikipedia.
Related to Counterparty risk: 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 ?
To aid traders in the decision making process, Numerix Counterparty Risk computes the incremental effect of a potential new trade on a portfolio's total counterparty exposure, allowing traders to determine which trading partner will provide the best balance of overall risk.
On this point, he adds a growing number of buy-side firms are acutely aware of this, with over 25% revamping risk processes, particularly counterparty risk and operational controls.
7 The Counterparty Risk of Credit Derivative Products Jon Gregory
Hence, a growing number of banks have turned to business solutions like Quantifi to provide a single, flexible counterparty risk solution across trading, risk, accounting, and regulatory reporting which includes xVA, IFRS13, EMIR, MiFID 2, CRD4, Dodd-Frank and Basel lll, where the cost of meeting new regulations and market changes is shared across all clients.
The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.
Within its platform, Blacklight features a number of distinct customized tools for investment managers that encompass all the major elements of financing, trading and counterparty risk.
Ends/MS/FS Muscat, Oct 27 (ONA) The Central Bank of Oman (CBO) in collaboration with the Arab Banks Union will organize a Seminar on Credit Risk Modeling: Internal Rating Based Approach (IRB) & Counterparty Risk Analysis during the period from November 10th to 13th 2013.
Gary Anderson, CEO of DGCX said, "The global financial crisis has highlighted the counterparty risk and lack of transparency associated with transacting trades over the counter, and thus the role played by regulated Exchanges and CCPs has assumed even more significance.
Since 2008, treasurers have focused on a far wider range of risks than in the past--most notably in the area of counterparty risk.
The central bank said that the US bank failed to manage, monitor and report accurately its regulatory counterparty risk capital requirement during an 18-month period between July 2008 and December 2010.
Since the risk of both substantial market volatility and counterparty uncertainty increases over time, counterparty risk is greater the longer the time between trade date and settlement date.