Counterparty

A counterparty is the other party on the opposite side of a financial transaction, the seller to a buyer's purchase, or the party on the other end of a derivatives contract or loan. Every trade needs a counterparty willing to take the other side.

Counterparty risk is the risk that the other party in a transaction fails to hold up its end, for example a firm on the other side of a derivatives contract going bankrupt before paying out. This risk is a bigger concern in less regulated, over-the-counter markets than on a standard exchange, where the exchange itself typically guarantees trades are settled.