Counterparty Risk Definition
Learn the definition of counterparty risk and other ETF terminology from the etf.com glossary.
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Learn more about Counterparty Risk
Counterparty risk in ETFs refers to the potential for loss if the entity on the other side of a financial transaction, such as a derivatives contract or a securities lending agreement, fails to meet its obligations. In ETFs, this risk arises when the fund engages in activities like trading futures or participating in swap agreements. If the counterparty defaults or faces financial distress, the ETF may incur losses. To mitigate this risk, investors assess the creditworthiness of counterparties and monitor the ETF's risk management practices. Counterparty risk underscores the importance of due diligence in evaluating an ETF's overall risk profile.
