What is Counterparty Credit Risk?

28 February 2018 Amelia Henderson

Counterparty credit risk determines the likelihood of a counterparty failing to meet their financial obligations or repay their debt, causing losses to the other party.

For example, if a business buys a corporate bond from a company, they are exposed to the risk that the return on it may not be as high as the value agreed at the time of sale.

This type of credit risk usually relates to derivative contracts, meaning the level of exposure is often uncertain due to the nature of the deals.

Read on to find out more about Counterparty Credit Risk, or click here to learn about the DueDil Credit Risk solution.

Why is it important to measure Counterparty Risk?

There are many reasons that measuring counterparty credit risk is important for your organisation. These include:

● Enabling you to get a better understanding of the risks involved with partnering with or investing in a counterparty.
● Helping to inform your decision on what to set the interest rate as, if loaning money.
● Allowing you to prepare if a counterparty defaults, so there are no nasty surprises.
● Providing your organisation with a comprehensive view of the financial health of a counterparty.

How to measure Counterparty Credit Risk?

Counterparty credit risk is affected by several different variables, which can make counterparty credit management challenging.

The main way to measure counterparty credit risk is to conduct credit checks. This usually involves examining the counterparty’s credit rating, credit history and scrutinising their latest financial data.

It’s also useful to conduct background checks on the counterparty’s reputation to gauge how reliable they are at paying their creditors. If not managed properly, counterparty credit risk can lead to significant, and potentially catastrophic losses, as witnessed with the financial crash in 2007.

How DueDil can help?

DueDil provides a comprehensive and consistent source of accurate data that can be used by your team to conduct in-depth credit checks on a counterparty to establish what the credit risk is.

With an advanced feature set and authoritative data sources, DueDil makes it easy to access vital financial data and credit information on a counterparty, including credit score and benchmarks, outstanding and satisfied charges and document filing history which can help to inform your credit-decisioning process.

Get started with DueDil today.