A counterparty is a financial institution or individual that enters into a financial transaction with another party. In the context of a financial contract, such as a loan or derivative, the counterparty is the entity on the other side of the transaction. For example, if an individual takes out a loan from a bank, the bank is the counterparty to the loan agreement. In the case of a derivative contract, such as a futures or options contract, the counterparty is the entity that is responsible for fulfilling the terms of the contract when it matures.

Counterparties play a crucial role in the financial system, as they provide the other side of a financial transaction and help to facilitate the flow of money and credit in the economy. However, the risk of counterparty default is also an important consideration in financial transactions, as it can have significant consequences for both parties involved. To mitigate this risk, financial institutions often use collateral and other risk management techniques to protect against potential losses.