A counterparty (sometimes contraparty) is a legal and financial term. It means a party to a contract. A counterparty is usually the entity with whom one negotiates on a given agreement, and the term can refer to either party or both, depending on context.
Any legal entity can be a counterparty. Examples of legal entities are a person, a married couple, a corporation, a limited partnership, a city, etc.
Usually, to say that there are counterparties to an arrangement means that there is some potential for conflict between them. Well-drafted contracts usually attempt to spell out in explicit detail what each counterparty's rights and obligations are in every conceivable circumstance, though there are of course limits. There are general provisions for how counterparties are treated under the law, and (at least in common law legal systems) there are large amounts of case law to refer to for legal precedents.
Financial services sector
Within the financial services sector, the term market counterparty is used to refer to governments, national banks, national monetary authorities and supranational monetary organisations such as the World Bank Group that act as the ultimate guarantor for loans and indemnities. The term may also be applied, in a more general sense, to companies acting in this role.
Also within financial services, counterparty can refer to brokers, investment banks, and other securities dealers that serve as the contracting party when completing "over the counter" securities transactions. The term is generally used in this context in relation to "counterparty risk", which is the risk of monetary loss a firm may be exposed to if the counterparty to an over-the-counter securities trade encounters difficulty meeting its obligations under the terms of the transaction.
Insurance sector
Within the insurance sector, this term is extended to include companies offering or requiring high-level retrocession of insurance risk to insurance companies in a role similar to that offered by governments. This term, over time, has become more generally applied to companies offering or requiring retrocession and other forms of reinsurance.
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