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Counterparty risk is the risk of one or more parties in a financial transaction defaulting on or otherwise failing to meet their obligations on that trade. Counterparty risk is especially relevant to derivatives markets, where notional values can far exceed the size of the underlying securities. To help alleviate this risk, derivatives trades must be cleared via central counterparties, or CCPs, where possible. In derivatives markets, the terms ‘counterparty risk’ and ‘counterparty credit risk’ are used synonymously.
Credit risk is a separate term which denotes the risk of a borrower defaulting on a loan.
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