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How Do Netting Agreements Reduce the Capital Requirements for a Prime Broker?

Regulatory capital requirements for financial institutions are often based on their gross credit exposure. By legally enforcing netting agreements, the prime broker can calculate its exposure based on the net amount owed by a counterparty, rather than the sum of all individual obligations.

This lower net exposure directly translates to a lower required capital reserve under regulations like Basel III.

How Does Netting Impact the Calculation of Capital Requirements under Basel III?
Explain the Concept of “Netting” in Collateral Management
How Does Collateral Management by a Prime Broker Mitigate Credit Risk?
Define the ‘Netting’ Principle as It Applies to the ISDA Master Agreement