How Does Collateral Management by a Prime Broker Mitigate Credit Risk?

Collateral management involves the prime broker receiving and holding assets (collateral) from the client to cover the client's potential obligations in derivatives trades. By valuing the collateral daily and requiring top-ups (margin calls) when its value falls, the prime broker ensures it is protected against the client's default.

This secured position drastically reduces the credit risk assumed by the prime broker.