Counterparty

A counterparty is the other party involved in a financial transaction or contract — the entity on the opposite side of a trade, agreement, or derivative position. Every financial transaction involves at least two counterparties: a buyer and a seller, a borrower and a lender, or two parties to a derivative contract with opposing obligations. In exchange-traded equity and derivatives markets on NSE and BSE, the clearing corporation (NSCCL or ICCL) effectively becomes the counterparty to all trades — acting as buyer to every seller and seller to every buyer through the process of novation — eliminating the bilateral counterparty risk between individual market participants. In OTC markets — including interbank forex markets, interest rate swaps, and bilateral lending — each party faces direct counterparty risk on the other participant. For corporate treasury teams, managing counterparty risk involves setting credit limits on individual banks and counterparties for OTC derivatives, monitoring their credit ratings, and ensuring master netting agreements are in place to reduce net exposure in the event of default. For retail investors, the primary counterparty consideration is the creditworthiness of their broker and depository participant — regulated by SEBI's client protection framework — and the issuer of any fixed-income instruments they hold in their portfolio.