A type of risk that arises from the probability that a counterparty to a transaction (investment, lending/ borrowing, trading, etc.) may not fulfill its respective part of the contract/ agreement and may not be able to meet (or at times refrain from meeting) its contractual obligations.

Broadly speaking, it captures the potential expected losses that would arise for a party to a transaction on account of inability of the counterparty to perform its respective contractual obligations on a timely basis or by the maturity date of the contract. For example, in a derivative transaction, a counterparty risk (called a counterparty credit risk, CCR) may reflect the potentiality that, on or before the maturity of the derivative contract, a counterparty may end up in default. This situation may arise from an actual default or by deterioration in a counterparty’s credit quality.