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The other party in a financial transaction or contract.
Save conceptA counterparty is the other party to a financial transaction. If a fund borrows from a bank, each is the other's counterparty. The term becomes especially useful when obligations continue after the trade date, as in a loan or . It identifies whose failure to pay, deliver or perform could affect the transaction.
Counterparty arises when that other party fails to meet an obligation while the transaction has value to you. The exposure can change with market prices. , credit limits and legally effective netting can reduce potential losses. They do not eliminate every loss: may be inadequate, hard to sell or difficult to enforce when the counterparty fails.
Imagine a currently worth €200,000 to a company because its bank counterparty owes that amount. The bank has posted €150,000 of usable . If it defaults and no other protections or costs apply, the company has €50,000 of exposure beyond the . The contract's large reference amount is not necessarily the amount currently at risk.
A counterparty is not simply any company mentioned in an article or the exchange on which a security trades. Central clearing changes the structure by interposing a central counterparty between trading parties. That transfers and manages particular risks; it does not make the transaction risk-free. Distinguish the identity of the counterparty from the size and legal treatment of the exposure.
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