Counterparty
Investopedia Financial Dictionary:
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Counterparty
The other party that participates in a financial transaction. Every transaction must have a counterparty in order for the transaction to go through. More specifically, every buyer of an asset must be paired up with a seller that is willing to sell and vice versa.
Investopedia Says:
All trades require some sort of counterparty. For example, the counterparty to the option buyer would be the option writer. One of the risks involved in any transaction is counterparty risk, which is the risk that the counterparty will be unable to fulfill his or her duties. However, in many financial transactions the counterparty is unknown.
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Wikipedia on Answers.com:
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Counterparty
A counterparty (sometimes contraparty) is a legal and financial term.
Any legal entity can be a counterparty. Examples of legal entities are a person, a married couple, a corporation, a limited partnership, a city, etc.
Usually, to say that there are counterparties to an arrangement means that there is some potential for conflict between them. Well-drafted contracts usually attempt to spell out in explicit detail what each counterparty's rights and obligations are in every conceivable circumstance, though there are of course limits. There are general provisions for how counterparties are treated under the law, and (at least in common law legal systems) there are many legal precedents that shape the common law.
Financial services sector
Within the financial services sector, the term market counterparty is used to refer to governments, national banks, national monetary authorities and international monetary organisations such as the World Bank Group that act as the ultimate guarantor for loans and indemnities. The term may also be applied, in a more general sense, to companies acting in this role.
Also within financial services, counterparty can refer to brokers, investment banks, and other securities dealers that serve as the contracting party when completing "over the counter" securities transactions. The term is generally used in this context in relation to "counterparty risk", which is the risk of monetary loss a firm may be exposed to if the counterparty to an over-the-counter securities trade encounters difficulty meeting its obligations under the terms of the transaction.
Insurance sector
Within the insurance sector, this term is extended to include companies offering or requiring high-level retrocession of insurance risk to insurance companies in a role similar to that offered by governments. This term, over time, has become more generally applied to companies offering or requiring retrocession and other forms of reinsurance.
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