Counterparty Credit Risk

Overview

Counterparty credit risk arises when a borrower, trading partner, exchange, broker, bank, issuer, or derivatives counterparty may default before completing its obligations. Exposure can change with market prices, settlement timing, collateral, netting, and replacement cost.

A position may have little current exposure but large potential future exposure if market conditions move favorably before the counterparty fails. Wrong-way risk occurs when exposure increases precisely as the counterparty’s credit quality deteriorates.

Controls include due diligence, limits, collateral, margin, netting agreements, diversification, settlement design, monitoring, and stress testing. Credit ratings and public accounts help but may lag rapid deterioration, particularly in opaque or highly leveraged crypto businesses. Contract enforceability also affects recoveries.

For Counterparty Credit Risk, unmatched records need owners and deadlines because apparent technical success can coexist with unresolved financial or compliance impact.

Counterparty credit risk is the possibility that the other party to a financial agreement cannot meet payment or delivery obligations. Counterparty credit risk depends on both default probability and exposure at default, including market-driven future obligations and collateral quality.

For Counterparty Credit Risk, the assessment should evaluate the possibility that the other party to a financial agreement cannot meet payment or delivery obligations. The assessment record should separate observed evidence supporting the possibility that the other party to a financial agreement cannot meet payment or delivery obligations from assumptions, state the time horizon and existing controls, and identify who owns any remaining exposure. Monitoring should test whether the conditions described in the possibility that the other party to a financial agreement cannot meet payment or delivery obligations have changed enough to require a new rating, treatment, or approval.