Investing · Jurisdiction EU

Counterparty risk

Counterparty risk is the risk that the other side of a contract does not pay or deliver. For a UCITS it concerns especially over-the-counter derivatives and securities lending or repos.

In more detail

The ESMA guidelines require the prospectus to describe this risk and conflicts of interest when the fund uses such techniques. Exposures from over-the-counter derivatives and from efficient portfolio management are combined for the limit in Article 52 of the UCITS Directive. Collateral can reduce the exposure. It does not erase the risk. Finmon names no counterparty.

Background

Read next to replication, risk and bonds: with a swap, the counterparty is its own question, beside the securities in the index. With a bond, the issuer is the side that owes interest and repayment.

An example

A fund tracks an index with a swap. The counterparty owes the index path. If it fails, the prospectus helps only as far as collateral and the rules reach. Finmon does not rate the counterparty.

A common misconception

If there is collateral, there is no counterparty risk left.

Collateral can reduce the exposure. ESMA still requires the risk to be described and the exposures to be combined.

Source: ESMA · ETF and UCITS guidelines. Last reviewed: 2026-10-29. Editorially reviewed on 2026-10-29. Next review 2027-10-29. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.