Loading the player...

What is a 'Counterparty'

A counterparty is the other party that participates in a financial transaction, and every transaction must have a counterparty in order for the transaction to go through. More specifically, every buyer of an asset must be paired up with a seller who is willing to sell and vice versa.

All trades require some sort of counterparty, so for example, the counterparty to an option buyer would be an option writer.

BREAKING DOWN 'Counterparty'

One of the risks involved in any transaction is counterparty risk, which is the risk that the counterparty will be unable to fulfill his duties. However, in many financial transactions, the counterparty is unknown.

The term counterparty can refer to any entity on the other side of a financial transaction. This can include deals between individuals, businesses, governments or any other organization. Additionally, both parties do not have to be on equal standing in regards to the type of entities involved. This means an individual can be a counterparty to a business and vice versa. In any instances where a general contract is met or an exchange agreement takes place, one party would be considered the counterparty, or the parties are counterparties to each other.

Counterparties in Financial Transactions

All financial transactions involving at least two parties has a counterparty. In the case of a purchase of goods from a retail store, the buyer and retailer are counterparties in the transaction. In terms of financial markets, the bond seller and investor are counterparties.

In certain situations, multiple counterparties may exist as a transaction progresses. Each exchange of funds, goods or services in order to complete a transaction can be considered as a series of counterparties. For example, if a buyer purchases a retail product online to be shipped to his home, the buyer and retailer are counterparties, as are the buyer and the delivery service.

In a general sense, any time one party supplies funds, or items of value, in exchange for something from a second party, counterparties exist. Counterparties reflect the dual-sided nature of transactions.

Counterparty Risk

In dealings with a counterparty, there is innate risk that one of the people or entities involved will not fulfill their obligation. Examples of this include the risk that a vendor will not provide a good or service after the payment is processed or that a buyer will not pay an obligation if the goods are provided first. It can also include the risk that one party will back out of the deal prior to the transaction occurring but after an initial agreement is reached.

RELATED TERMS
  1. Counterparty Risk

    The risk to each party of a contract that the counterparty will ...
  2. Replacement Risk

    The risk that a contract holder will know that the counterparty ...
  3. Credit Checking

    A check performed on the financial backing of the counterparties ...
  4. Termination Clause

    A section of a swap contract that describes what will happen ...
  5. Callable Swap

    An exchange of cash flows in which one counterparty makes payments ...
  6. Inflation Derivatives

    A subclass of derivative that is used by individuals to mitigate ...
Related Articles
  1. Investing

    Who is a Counterparty?

    The counterparty is the other party in a financial transaction.
  2. Investing

    Explaining Counterparty Risk

    Counterparty risk is the risk that the other party in an agreement will default, or fail to live up to its contractual obligation.
  3. Financial Advisor

    An Introduction to Wrong Way Risk

    Wrong way risk arises when credit exposure to counterparty during the life of trade is adversely correlated to the counterparty’s credit quality.
  4. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
  5. Investing

    Find The Right Discount Rate Amid Post-2007 Risks

    OIS discounting has become part of standard valuation techniques, in a market in which there is more uncertainty and less proxies for the risk-free rate.
  6. Trading

    Managing Interest Rate Risk

    Interest rate risk stems from the possibility that an interest-bearing asset’s value will change due to changing interest rates.
  7. Trading

    How Are Interest Rate Swaps Valued?

    When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps.
  8. Investing

    Arm's Length Transaction

    An arm’s length transaction describes business deals in which the buyer and seller act independently and with no interest in the other’s benefit.
  9. Investing

    Medici, The Blockchain Stock Exchange

    Overstock CEO Patrick Byrne's revolutionary Project Medici would list Overstock securities on a blockchain-based exchange--a turning point for Bitcoin?
  10. Investing

    Understanding Related-Party Transactions

    In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship.
RELATED FAQS
  1. How do currency swaps work?

    Learn about how a currency swap works, including who uses these transactions, and the mechanics and purpose of the different ... Read Answer >>
  2. Who is the counterparty of a derivative?

    Learn about the counterparty to a derivative contract, and how derivative swap agreements traded over the counter have counterparty ... Read Answer >>
  3. What are the main risks associated with trading derivatives?

    Understand derivatives trading and learn about the primary risks usually associated with trading in the derivatives market, ... Read Answer >>
  4. What are the risks involved with swaps?

    Learn about interest rate risk and counterparty risk for interest rate swap agreements, and understand how the Dodd-Frank ... Read Answer >>
  5. How do I use a rollercoaster swap?

    A rollercoaster swap is the name for a swap (the exchange of one security for another) with a notional principal that differs ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center