The potential loss that results from a counterparty to a derivative contract (specifically a forward contract or swap) unfulfilling its obligations towards the other party. That happens when a financial counterparty defaults on contractual obligations, i.e. stops paying out what it turned to be owing to the other counterparty. For example, in an option contract, the counterparty risk arises when the option writer refrains from buying or selling the underlying security as defined in the contract.

This risk can be eliminated or reduced by the intervention of an intermediary (literally a clearinghouse) between the two counterparty, whereby it guarantees the performance of the parties to each transaction, as is the case with futures contracts.