A counterparty is the other party on the opposite side of a trade. If you buy a Futures contract, the person or entity who sold it to you is your counterparty, and vice versa.
Why It Matters
For a hedger to reduce their risk, someone else — often a speculator — needs to be willing to take the opposite side as counterparty. Without willing counterparties, trades couldn’t execute efficiently.
Related Reading
See how hedgers and speculators act as counterparties to each other in Why Do Futures and Options Exist? Hedging vs Speculation.