How Does a Prime Broker’s Internal Risk Model Approve Margin Offsets?
A prime broker's internal risk model approves margin offsets by calculating the Value-at-Risk (VaR) or another portfolio risk measure for the client's entire portfolio, including all positions and correlations. The model identifies positions that naturally hedge each other and calculates the net risk.
This net risk is then used to determine the required margin, which must be approved by the firm's risk committee and often by regulators.
Glossar
Prime Broker
Facilitation ⎊ A prime broker, within cryptocurrency derivatives and options trading, functions as an intermediary providing services to hedge funds and other large institutional investors.
Internal Risk
Exposure ⎊ Within cryptocurrency derivatives and options trading, exposure to internal risk stems from the inherent complexities of self-custodial wallets, private key management, and decentralized exchange protocols.
Margin Offsets
Concept ⎊ Margin Offsets represent the reduction in a portfolio's total initial margin requirement achieved by recognizing the risk-mitigating effects of holding correlated, but opposing, positions.