What Is “Counterparty Risk” and How Do Regulated Exchanges Mitigate It?

Counterparty risk is the risk that the other party to a financial transaction will fail to fulfill their contractual obligations. Regulated futures exchanges mitigate this by acting as the central counterparty (CCP) through a clearing house.

The clearing house guarantees the trade, interposing itself between the buyer and seller, and uses margin requirements to cover potential losses.