How Does the Use of a ‘Master Netting Agreement’ Reduce Counterparty Exposure for a Prime Broker?

A Master Netting Agreement (like the ISDA Master Agreement) legally allows the prime broker to aggregate all outstanding financial obligations with a single counterparty into a single net amount. In the event of a counterparty default, instead of having to pursue multiple claims for each individual trade, the prime broker only has a single claim or obligation.

This reduces the prime broker's gross credit exposure and simplifies the legal process during insolvency.