Counterparty risk

Counterparty risk is the risk that a market participant defaults and is unable to fulfill its obligations with respect to an investment fund.  
The investment fund may, for example, engage in temporary purchases and sales of securities and/or over-the-counter derivative instruments, such as total return swaps.  
These transactions are concluded with a counterparty and expose the investment fund to the risk of counterparty default, which can reduce the net asset value of the fund.  

Under the UCITS Directive, counterparty risk cannot exceed 10% of the fund's assets when the counterparty is a credit institution, or 5% with other counterparties.