What is Counterparty Risk?

Counterparty risk is twofold: the risk of tainted scrip entering the market, and settlement risk. The former involves the sale of tainted (fraudulent) certificates by a seller to a buyer. The latter involves the reneging on a deal by the counterparty to the deal resulting in the buyer / seller having to buy / sell a particular bond at an inferior rate (price).

It is notable that the introduction of an exchange-traded market, accompanied by the certificates of the issuers being dematerialized or immobilized in a CS1D, eliminates the risk of tainted scrip entering the market and settlement risk.