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Risk

Counterparty credit risk

The risk that the other party to a trade, especially a derivative, defaults before the final settlement of its cash flows.

Counterparty credit risk arises in derivatives and securities financing, where the value owed changes with the market. If the counterparty defaults while it owes you money, you face a loss.

It is managed with collateral, netting agreements and central clearing, and it carries its own capital charge.

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