motpartsrisk

Motpartsrisk, or counterparty risk, is the risk that the other party in a financial contract will fail to fulfill its contractual obligations. It is a key consideration in markets where performance depends on ongoing cash flows or delivery of securities.

The risk is particularly relevant for over-the-counter derivatives, securitized products, repurchase agreements, securities lending, and some trade-finance arrangements where the counterpart's credit quality directly affects the value and timing of payments.

Counterparty risk comprises several elements, including default risk (the party’s inability or unwillingness to make payments), settlement risk (risk that payments and deliveries do not occur as agreed), and replacement risk (the cost of replacing a contract after a default).

Measurement uses exposure at default, probability of default, and loss given default, often combined into metrics such as credit valuation adjustment (CVA) for derivatives and potential future exposure (PFE) in ongoing contracts.

Mitigation focuses on reducing exposure and improving resilience. Methods include collateralization through margin calls, netting agreements, limits on counterparties, diversification, timely collateral management, and, for standardized products, central counterparty clearing and standardized documentation such as ISDA master agreements.

Regulatory frameworks, including Basel III in banks and equivalent regimes elsewhere, require capital to cover counterparty risk and promote practices like CCP clearing, stress testing, and regular risk reporting to ensure adequate buffers against losses from counterparty defaults.