How Do Prime Brokers Manage Counterparty Credit Risk?

Prime brokers manage counterparty credit risk by setting credit limits for each client based on their financial health and trading strategy. They require clients to post collateral (margin) to cover potential losses.

This collateral is marked-to-market daily, and margin calls are issued if the required margin exceeds the posted amount. Legal agreements, like the ISDA Master Agreement, provide a framework for close-out netting.