Glossary · Regulation & Compliance
Counterparty Risk
Also: credit risk, counterparty credit risk
Published
Counterparty Risk — Counterparty risk is the risk that the other party to a trade or a custody arrangement fails to meet its obligations, whether through insolvency, operational failure, or fraud. In digital asset markets it covers exposure to exchanges, OTC desks, custodians, and settlement providers, managed through due diligence, exposure limits, and settlement design.
Where the Exposure Sits
Every place an institution leaves assets or awaits delivery is a counterparty exposure: balances pre-funded on an exchange, assets held by a custodian, the interval between the two legs of an OTC trade, and stablecoin balances that depend on an issuer's reserves. The size of the exposure is the value that could be lost if the counterparty stopped performing at that moment.
Assessing a Counterparty
Due diligence covers the legal entity and jurisdiction, regulatory registrations and licenses that can be verified with the regulator, ownership and governance, the custody and security program and its independent audits, financial resources, documented settlement terms, and operational history. Registration establishes obligations but does not remove risk; it gives the institution something to verify and a framework the counterparty operates under.
Limiting the Exposure
Institutions cap the exposure per counterparty, keep assets in their own custody where the trading model allows, prefer settlement models that shorten the gap between legs, and diversify across providers. The settlement and custody choices covered elsewhere in this glossary are, in practice, counterparty risk decisions.