How Does a Prime Broker’s Clearing Service Mitigate Risk for Its Clients?

The clearing service ensures that the trade is executed and settled according to the agreed terms. By interposing itself, the prime broker guarantees the performance of the trade to its client, effectively shielding the client from the counterparty's potential default.

This process often involves posting and managing collateral to cover potential losses. It reduces the client's direct exposure to the credit risk of their trading partner.