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Counterparty risk

The risk that a counterparty to a derivative trade will be unable or unwilling to make payments due under the terms of the contract. In most credit derivatives, the main counterparty risk is the protection buyer's exposure to the protection seller. Credit default swaps are often collateralised using credit-linked notes or a credit support annex to address the risk that the protection seller will fail to make good the protection buyer in the event of a default by the reference entity.

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