Counterparty credit risk

What is counterparty credit risk?

Counterparty credit risk is the risk that the other party to a contract or transaction fails to meet its financial obligation — paying late, paying partially, or not at all — before the deal is settled. It applies whenever you extend credit, payment terms, or unsettled exposure to a specific company.

It is a specific form of credit risk that centres on a named trading partner rather than a loan book: a supplier prepaying a manufacturer, a bank facing a derivatives counterparty, or a business invoicing a client on net-30 terms all carry it.

Assessing it well means looking past whether a company exists to how it has actually behaved — its litigation, judgments and regulatory history are direct evidence of whether it honours obligations, which is the question counterparty credit risk ultimately asks.