A counterparty (sometimes contraparty) is a

legal entity In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...

unincorporated entity An unincorporated entity has not been granted formal corporate status by incorporation. An unincorporated entity will generally be a separate entity for accounting purposes, but may or may not be a separate legal entity. For example, partnership ...

, or collection of entities to which an exposure of

financial risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financia ...

may exist. The word became widely used in the 1980s, particularly at the time of the

Basel I Basel I is the first Basel Accord. It arose from deliberations by central bankers from major countries during the late 1970s and 1980s. In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum ...

deliberations in 1988. Well-drafted contracts usually attempt to spell out in explicit detail what each counterparty's rights and obligations are in every conceivable circumstance, though there are limits. There are general provisions for how counterparties are treated under the law, and (at least in

common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omniprese ...

legal systems) there are many

legal precedent A precedent is a principle or rule established in a previous legal case that is either binding on or persuasive for a court or other tribunal when deciding subsequent cases with similar issues or facts. Common-law legal systems place great valu ...

s that shape the common law.

Financial services sector

Within the

financial services Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, ...

sector, the term market counterparty is used to refer to

government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...

national bank In banking, the term national bank carries several meanings: * a bank owned by the state * an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally) * in the United States, an ordinary p ...

s, national monetary authorities and international monetary organisations such as the

World Bank Group The World Bank Group (WBG) is a family of five international organizations that make leveraged loans to developing countries. It is the largest and best-known development bank in the world and an observer at the United Nations Development Gr ...

that act as the ultimate guarantor for loans and indemnities. The term may also be applied, in a more general sense, to companies acting in this role. Also within financial services, counterparty can refer to brokers,

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

s, and other securities dealers that serve as the contracting party when completing "over the counter" securities transactions. The term is generally used in this context in relation to "

counterparty risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...

", which is the risk of monetary loss a firm may be exposed to if the counterparty to an over-the-counter securities trade encounters difficulty meeting its obligations under the terms of the transaction.

Insurance sector

Within the

insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...

sector, this term is extended to include companies offering or requiring high-level

retrocession The act of cession is the assignment of property to another entity. In international law it commonly refers to land transferred by treaty. Ballentine's Law Dictionary defines cession as "a surrender; a giving up; a relinquishment of jurisdicti ...

of insurance risk to insurance companies in a role similar to that offered by governments. This term, over time, has become more generally applied to companies offering or requiring retrocession and other forms of

reinsurance Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event. With reinsurance, the company passes on ("cedes") some part of its own ins ...

References

{{reflist Contract law Swaps (finance) Derivatives (finance)