counterparties

Counterparties are the parties on the opposite sides of a financial transaction or contractual arrangement. In any deal, there are usually two counterparties who owe each other obligations, such as payment, delivery of a good, or performance of a service. They can be individuals, corporations, banks, or other institutions. The term is used across finance, trading, debt and derivative markets, and legal contracts.

In financial markets, counterparties include buyers and sellers, borrowers and lenders, or entrants in a derivatives contract. Counterparty risk is the risk that the other party will default or fail to meet its obligations, potentially causing financial loss or liquidity problems. Institutions manage this risk through credit assessments, setting exposure limits, collateral requirements, margin calls, and netting agreements. Central counterparties or clearinghouses can reduce bilateral risk by becoming the buyer to every seller and the seller to every buyer, a process called novation.

Contracts describe the obligations each party undertakes, including payment terms, delivery, and remedies for breach. Standard forms such as the ISDA Master Agreement define how to close out and net positions in default scenarios. In regulation, counterparties may be categorized for compliance purposes, for example as financial vs non-financial counterparties, with differing reporting and clearing obligations in some jurisdictions.

Ethical and operational considerations include know-your-counterparty due diligence, sanctions screening, and anti-money-laundering controls. The concept emphasizes the interdependence of market participants and the importance of trust, creditworthiness, and legal enforceability in ensuring that trades and contracts are executed as intended.