Counterparty

From Wikipedia, the free encyclopedia

A counterparty is a legal and financial term. It means a party to a contract. A counterparty is sometimes referred to as a "contraparty."

Example: If you have signed a contract with BigCompany that states that you will buy something from them, you and BigCompany are counterparties.

Any legal entity can be a counterparty. Examples of legal entities are corporations, a married couple, a limited partnership, a city, etc.

Usually, to say that there are counterparties to an arrangement means that there is some potential for conflict between them. Ideally, a contract will spell out in explicit detail what each counterparty's rights and obligations are in every circumstance. However, this doesn't always happen. There are general provisions for how counterparties are treated under the law, and (at least in 'common law' legal systems) there are large amounts of case law to refer to for precedents (previous rulings).

Within the financial services sector, the term market counterparty is used to refer to governments, national banks, national monetary authorities and supranational monetary organisations such as the World Bank Group that act as the ultimate guarantor for loans and indemnities. It may also be applied, in a more general sense, to companies acting in this role.

Also within financial services, Counterparty can also refer to brokers, investment banks 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", 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.

Within the insurance 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.