Jurisdiction(s):
United Kingdom

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Key definition

Counterparty definition

What does Counterparty mean? In legal practice, the counterparty is the other person or entity with whom a party enters into a contract or completes a transaction. The term is descriptive and used across contracts, corporate deals, banking, insurance and derivatives. It is not generally defined in contract law, but specific financial services legislation uses defined variants, such as eligible counterparty under MiFID II and financial/non-financial counterparty and central counterparty (CCP) under EMIR. A transaction may have multiple counterparties. Correctly identifying the counterparty (legal name, capacity and authority) is essential for due diligence, KYC/AML, service of notices, performance and enforcement. Lawyers assess counterparty risk...

Counterparty Risk in Derivatives: Assessment, Monitoring and Mitigation via ISDA Master Agreements, Collateral, Hedging, Exposure Limits, Credit Rating/NAV Triggers and UK EMIR Central Clearing

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Practice notes

Defining Counterparty risk

It is the exposure assumed when one enters into Derivative agreements with a specified party. Such arrangements can give rise to several forms of risk, notably reputational and legal, yet the dominant concern is credit risk. That is the possibility that the counterparty does not honour obligations as they fall due. Reputational issues can be addressed at the outset of discussions by deciding whether to trade with that party, while legal risk can likewise be managed through specialist legal advice and detailed negotiated terms. By contrast, credit exposure persists for the full duration of the transaction or deal and therefore demands ongoing, proactive surveillance and the capacity to revisit transactions with that counterparty if the risk is judged to have altered in a material way.

Measuring counterparty risk

The creditworthiness of a derivative counterparty can shift over the term of the Contract. This is especially the case for derivative arrangements with long-dated maturities, where exposures endure. Accordingly, the counterparty’s credit quality must be assessed on a regular, ongoing basis and reviewed at set intervals...

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Web page updated on 21/05/2026

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