What Is ‘Counterparty Risk’ and How Does a Prime Broker Help Mitigate It?
Counterparty risk is the risk that the other party in a financial transaction will default on their contractual obligations. In large OTC trades, this risk is significant.
A prime broker mitigates this by stepping in as the central counterparty for their clients. By guaranteeing the settlement and clearing of the trades, the prime broker effectively substitutes the credit risk of multiple counterparties with their own, generally higher, creditworthiness.
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.
Broker
Delegation ⎊ In the context of decentralized finance, the function of a broker is often delegated to smart contracts or non-custodial execution layers, removing direct counterparty risk.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.