Counterparty

Parties that engage with each other to transact are referred to as counterparties. In bilateral trades, each counterparty bears counterparty credit risk to each other and this will typically be mitigated by the posting of collateral. In certain markets, such as listed derivatives and cleared OTC derivatives, a central clearing house stands between buyer and seller and takes on the role of counterparty i.e. the CCP is buyer to the seller and seller to the buyer so neutralises counterparty credit risk