Counterparty risk is the probability that the other party in an investment, credit, or trading transaction may not fulfill its part of the deal and may default on the contractual obligations.

See also Counterparty Risk Management Policy Group (CRMPG) and Bank for International Settlement

References
BC=Banking Circular
OCC=Bulletin

Risk Management of Financial Derivatives and Bank Trading Activities (OCC 1999-2, Supplemental Guidance)
Summarizes key lessons learned and fundamental control issues reaffirmed by financial institutions' experience since mid-1997

Credit Derivatives – Guidelines for National Banks (OCC 1996-43, August 1996); Risk Management of Financial Derivatives (BC 277, November 1993)
Covers supervisory guidance on issues related to bank participation in the developing market for credit derivatives

External References

Containing Systemic Risk: The Road to Reform (Counterparty Risk Management Group III, August 2008)
Discusses five core precepts for containing systemic risk and provides an overview of emerging issues

Toward Greater Financial Stability: A Private Sector Perspective (Counterparty Risk Management Group II, July 2005)
Examines private sector activities that promote the efficiency, effectiveness, and stability of the global financial system