What is counterparty risk?

Counterparty risk specifically refers to the likelihood that one party in a transaction will not fulfill their contractual obligations, thus impacting the other party involved. In the context of financial transactions, this risk can arise when a counterparty, such as a borrower or a seller in a trade, fails to meet their obligations, which could involve failing to deliver securities or make payment. Therefore, option B accurately captures this concept.

While other risks mentioned, such as the risk of a borrower defaulting on a loan or risks related to technological failures and compliance violations, are significant to financial transactions and payment systems, they do not directly define counterparty risk. For instance, the risk related to a borrower defaulting is a specific type of credit risk, but counterparty risk encompasses a broader range of potential failures between involved parties in various types of transactions.