Counterparty
Tue, Apr 15A counterparty refers to the opposing party in a financial transaction. This implies that both parties involved in a transaction can be designated as a counterparty.
Engaging in a contract with a counterparty creates what is termed counterparty credit risk.
Credit risk is the likelihood that the counterparty in a transaction may fail to meet its obligations, thereby hindering the successful completion of the transaction.
One of the most prevalent counterparty risks is payment default, which occurs when there is an inability to pay outstanding amounts when they are due.
This risk is frequently mitigated by utilizing a Central Counterparty Clearing House.
This third-party intermediary takes on the credit risk of both counterparties and determines what is required from each party for the successful execution of the transaction.
For instance, since the purchaser and supplier of a product, acting as counterparties, are often unfamiliar with each other, a clearing house can be crucial in significantly reducing counterparty risk.
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