The parties to a contract (financial or non-financial), ultimately obligated by contractual terms, sign the contract in their own capacity, whether or not they directly negotiated and drafted its terms and each party’s obligations.

It also means that a transaction involves no middlemen or agents. In this sense, a principal means the two parties to a transaction without the services of agents being engaged.

For example, OTC derivatives are concluded on a principal-to-principal basis, and each party is exposed to credit risk/ counterparty risk– the risk of loss arising from the other party’s failure or inability to meet its financial obligations. In which case, no clearinghouses go between the two parties.