What Is ‘Settlement Risk’ and How Does a Prime Broker Help Manage It?
Settlement risk, also known as Herstatt risk, is the risk that one party to a trade pays or delivers their side of the obligation, but the counterparty fails to deliver their side, typically due to insolvency. A prime broker manages this by guaranteeing the settlement of trades between the client and the execution venue.
By interposing itself, the prime broker becomes the central counterparty for the client, reducing the client's exposure to the risk of default by multiple trading venues.
Glossar
Settlement Cycle
Duration ⎊ The settlement cycle defines the time required for a transaction to be finalized, transferring ownership of assets between buyer and seller.
Settlement Risk
Exposure ⎊ Settlement risk in cryptocurrency, options, and derivatives arises from the failure of a counterparty to fulfill contractual obligations post-trade, specifically during the settlement period.
Decentralized Finance
Architecture ⎊ Decentralized Finance, or DeFi, fundamentally reimagines traditional financial infrastructure through blockchain technology, specifically leveraging smart contracts to automate and execute financial agreements without intermediaries.
Central Counterparty
Risk Mitigation ⎊ Central Counterparty, or CCP, refers to an entity stepping between the buyer and seller in a derivatives transaction, guaranteeing performance obligations even if one party defaults.
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.