Counterparty

In basic terms, a counterparty is one of the parties involved in a trade. For instance, in a seller-buyer transaction, the seller’s counterparty is the buyer. Counterparties can range from individuals to businesses to even government entities and carry inherent risks, typically financial, associated with the possibility of the other party failing to fulfil their obligations in a transaction.

In contemporary finance, counterparty risk may be mitigated through intermediaries such as clearing firms, central counterparties, or central counterparty clearing houses (CCPs). These entities, usually financial institutions, are registered and regulated specifically to manage counterparty credit risk between multiple parties in transactions. They facilitate trading activities in derivatives, equities, foreign exchange, securities, options, and derivative contracts by providing clearing and settlement services. Given the substantial financial risks often involved in development and construction projects, both the terms “counterparty” and “clearing house” are pertinent.

Within the European Union, there exists a Central Counterparties (CCPs) list comprising institutions authorised to offer services and activities in compliance with Regulation (EU) No. 648/2012. This regulation pertains to over-the-counter (OTC) derivatives, central counterparties, and trade repositories under the European Parliament and Council directive.

Upon the UK’s departure from the European Union, the European Union (Withdrawal) Act 2018 (EUWA) nullified the European Communities Act 1972 and transposed the corpus of directly applicable EU law into UK domestic law. The EUWA’s objective was to ensure a functioning legal framework immediately post-Brexit. Specific guidance on these matters is outlined in the government’s The Investment Exchanges, Clearing Houses, and Central Securities Depositories (Amendment) (EU Exit) Regulations 2018. Under the EUWA, ministers have the authority to issue Statutory Instruments (SIs) to address any deficiencies or inefficiencies in retained EU law. Contingency plans for financial services legislation, in this context, are termed “onshoring.”