What is a counterparty
A counterparty is the person or company on the other side of a trade or contract: the party that sells when you buy, or owes you money when the contract settles.
Every trade has at least two sides. When you place an order, the counterparty is whoever legally takes the opposite position and must deliver cash or the asset to you.
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Worked example (hypothetical)
Ayesha opens a buy CFD on gold with a broker. A CFD (contract for difference) is a contract to exchange the change in an asset's price, not the asset itself.
- In most retail CFD setups, the broker is Ayesha's counterparty. Her buy is matched by the broker's sell.
- Suppose gold rises and she closes in profit. The broker owes her the price difference multiplied by her position size.
- Suppose gold falls. She owes the broker the difference, which is taken from her margin.
- If the broker cannot or will not pay her profit, she has a loss that has nothing to do with the gold price. That is counterparty risk.
Leveraged CFD and forex trading can lose money fast, and counterparty risk adds to market risk rather than replacing it.
Counterparty risk
Counterparty risk, also called counterparty credit risk, is the risk that the other side defaults before the trade's final cash flows are settled. Main forms:
| Type | What happens |
|---|---|
| Pre-settlement risk | The counterparty fails while the contract is still open, so you lose any unrealised gain and must replace the position |
| Settlement risk | You deliver your side, but the counterparty does not deliver theirs |
| Wrong-way risk | Your exposure to a counterparty grows just as its ability to pay gets worse |
For Pakistani residents using foreign platforms, the legal side matters too: per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse. See Regulation and Safety.
Where the term appears
- Client agreements and execution policies: wording like "the company acts as principal and counterparty to your trades" means the broker takes the other side. Compare this with A-book and B-book.
- Bank and broker reports: sections on "counterparty credit risk" or "exposure to counterparties" show how much is owed by others and what collateral is held.
- News: when a bank or fund fails, reports often focus on which counterparties were exposed and whether losses spread. See financial contagion.
Formal definition and edge cases
In law, a counterparty is the legal entity with which a contract is entered into and against which claims can be enforced.
- Exchanges: on a cleared market, a central counterparty steps between buyer and seller through novation (replacing the original contract with new ones). Each side then faces the clearing house, not each other. See clearing and settlement.
- Hedging brokers: a broker may pass your trade on to a liquidity provider, but it can still be your legal counterparty. Your claim stays against the broker.
- Agent vs principal: a broker acting as agent only arranges the trade, and the counterparty is someone else. A dealer acting as principal is the counterparty.
- OTC contracts: a forward contract or other OTC derivative is usually bilateral, so each side carries the other's default risk directly.
Related terms
Custodian · Exposure · Credit spread · Trading glossary
Frequently asked questions
What is a counterparty in simple words?
It is the other party in your trade, the one that takes the opposite side and must pay or deliver to you.
Is counterparty risk the same as market risk?
No. Market risk comes from price moves. Counterparty risk is the chance that the other side does not pay, even when the price moved in your favour.
Who is my counterparty on a stock exchange?
On a cleared exchange it is usually the central counterparty, which stands between buyers and sellers.
Is a CFD broker always my counterparty?
Not always. It depends on whether the broker acts as principal or as agent. The client agreement states which.