Risk
Counterparty risk
The risk that the other side of a contract fails to do what it promised.
How it works
It matters wherever value depends on somebody else performing: derivatives, securities lending, synthetic ETFs, and cash held at a bank.
Central clearing exists to reduce it. A clearing house stands between the two parties so that neither depends directly on the other’s solvency.
Related terms
- DerivativeA contract whose value comes from the price of something else.
- Securities lendingLending out shares you own, for a fee, usually to someone who wants to sell them short.
- Synthetic ETFAn ETF that uses a swap to deliver an index return rather than holding the constituents.
- CustodianThe institution that physically safeguards the securities you own.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.