How Is Counterparty Credit Risk Managed When a Prime Broker Acts as a Central Counterparty?

When a prime broker acts as a central counterparty (CCP), they interpose themselves between the buyer and seller, becoming the counterparty to both sides. They manage the resulting credit risk primarily through margining requirements, collateral management, and default fund contributions.

By standardizing contracts and requiring collateral, the CCP guarantees the trade's execution, significantly reducing the bilateral credit risk between the original counterparties.