What Is the Difference between Credit Risk and Counterparty Risk?

Credit risk is the general risk that a borrower or issuer will fail to meet their financial obligations, such as bond payments. Counterparty risk is a specific form of credit risk in a bilateral transaction, where one party faces the risk that the other party (the counterparty) will default before the final settlement of the transaction.

In derivatives, central clearing eliminates the bilateral counterparty risk between traders by interposing the clearing house.