1) The risk that a party to a contract will fail to make a payment when required to do so. Usually associated with an inability to make the payment due to insolvency or bankruptcy. When used in this way, the term is synonymous with credit risk.
2) In swap markets, the term is used more broadly to describe the risk of an “event of default.”
3) In swap markets the term is sometimes used to describe a swap bank’s exposure from the combination of credit risk and market risk.