Okuzeka
Finance & Banking vocabulary · Risk Management

Counterparty risk

Meaning in finance & banking, with examples

nounAdvanced term

In finance & banking, counterparty risk means: The risk that the other party in a financial deal, such as a derivative, repo or FX trade, fails to pay or deliver what it owes before the deal is completed.

In Turkish: karşı taraf riski, karşı taraf kredi riski

How it is used

Used in treasury, risk management and regulation. Banks set counterparty limits for other banks and clients, and reduce the risk with collateral, netting agreements and central clearing. Basel rules call it counterparty credit risk (CCR). Settlement risk, when one side pays and the other does not, is closely related.

Example sentences

  1. We cut our counterparty risk limit for that bank after its rating downgrade.

  2. Central clearing reduces counterparty risk in derivatives markets.

Common collocations

  • counterparty risk limit
  • counterparty credit risk
  • netting agreement
  • central clearing
  • credit riskThe risk that a borrower or another party will not pay back money it owes on time or in full, causing a loss for the lender.
  • derivativeA financial contract whose value depends on the price of something else, such as a currency, interest rate, share or commodity.
  • settlementThe final step of a payment or trade, when money or securities actually move from one party to the other and the deal is complete.
  • exposureThe amount of money a bank could lose to a particular borrower, sector, country or market if things go wrong.
  • collateralAn asset, such as property, cash or securities, that a borrower pledges to a lender and that the lender can sell if the loan is not repaid.

More terms: Risk Management

Practise with graded reading

Reading at the right level is the fastest way to make new words stick. Pick free English books by level:

This page explains English vocabulary for learners. It is not financial advice.