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What Is Counterparty Risk, and Why Is It Higher in OTC Derivatives?

Counterparty risk is the risk of default by the trading partner, which is higher in OTC trades due to lack of a central guarantor.
Greeks.Live22.11.25

What Is Counterparty Risk, and Why Is It Higher in OTC Derivatives?

Counterparty risk is the risk that the other party to a financial contract will fail to fulfill their contractual obligations. It is higher in OTC derivatives because the trades are bilateral, meaning there is no central clearing house to guarantee the contract.

If one party defaults, the other party bears the full loss. This risk is managed through collateralization and netting agreements.

What Is the Primary Difference between a Central Counterparty (CCP) and an Over-the-Counter (OTC) Market?
How Does the Lack of a Central Clearing House Affect Over-The-Counter (OTC) Crypto Derivatives?
How Does a Clearing House Manage Counterparty Risk in Traditional Futures?
What Is the Role of the Counterparty in an Over-The-Counter (OTC) Derivatives Trade?

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