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.