A counterparty (sometimes contraparty) is a

legal entity In law, a legal person is any person or legal entity that can do the things a human person is usually able to do in law – such as enter into contracts, lawsuit, sue and be sued, ownership, own property, and so on. The reason for the term "''le ...

unincorporated entity An unincorporated entity is an organisation that has not been granted formal corporate status by incorporation. Description The most common and traditional unincorporated entities are sole traders, partnerships, and trustees of trusts. Modern ...

, 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 financi ...

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 minimu ...

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 Common law (also known as judicial precedent, judge-made law, or case law) is the body of law primarily developed through judicial decisions rather than statutes. Although common law may incorporate certain statutes, it is largely based on prece ...

legal systems) there are many

legal precedent Precedent is a judicial decision that serves as an authority for courts when deciding subsequent identical or similar cases. Fundamental to common law legal systems, precedent operates under the principle of ''stare decisis'' ("to stand by thin ...

s that shape the common law.

Financial services sector

Within the

financial services Financial services are service (economics), economic services tied to finance provided by financial institutions. Financial services encompass a broad range of tertiary sector of the economy, service sector activities, especially as concerns finan ...

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 (polity), state. In the case of its broad associative definition, government normally consists of legislature, executive (government), execu ...

public bank A public bank is a bank, a financial institution, in which a State (polity), state, municipality, or public actors are the owners. It is an enterprise under government control.

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 Group ...

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 traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

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 Credit risk is the chance that a borrower does not repay a loan or fulfill a loan obligation. For lenders the risk includes late or lost interest and principal payment, leading to disrupted cash flows and increased collection costs. The loss ...

", 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 protect ...

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

References

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