A Counterparty is (in general) any natural or legal person (Legal Entity that is party to a legal Contract. In Credit Risk context is denotes any party to which another Natural Person or legal person has credit Exposure (faces credit risk).
The term Counterparty is used in particular in the context of bilateral financial contracts (usually a derivatives contract) where the relationship is symmetric (the two involved entities may have comparable risk profiles and there is no explicity lender / borrower relation).
Issues and Challenges
- When contracting with a complex corporate entity there may be ambiguity as to who precisely is the counterparty, due to the existence of many Related Counterparties