Securing Crypto Trading: The Role of Prime-Broker Financing

In our ongoing commitment to advancing the cryptocurrency markets, M11 Credit is proud to advocate for Prime-Broker (PB) Financing methods to provide trading firms and hedge funds with the capital they need for their trading strategies. As highlighted in our recent article, PB Financing is a cornerstone of traditional finance, offering trading firms the leverage necessary to support their strategies.

We find it concerning that, in the cryptocurrency markets—an asset class inherently riskier than traditional equity markets—financing is still being provided to trading firms through aggressive methods like unsecured and under-collateralized loans based solely on credit reviews and scores. This practice is uncommon in traditional finance. We strongly encourage lenders to consider PB Financing methods and similar structures, which are designed to fund trading firms in a more prudent and secure manner.

Our collaboration with PB partners has led to the development of an institutional-grade financial structure, closely resembling a Collateralized Loan Obligation (CLO), with the following key features:

• Special Purpose Vehicle (SPV): An SPV is created to ensure bankruptcy remoteness, making it legally distinct and financially independent from the PB.
• Equity Tranche: The PB contributes an equity tranche to the SPV, aligning its interests with those of the LPs.
• Collateralization: The SPV includes PB loans, collateral backing these loans, and the equity tranche, creating an "over-collateralization" structure where no funds leave the PB’s controlled ecosystem, thus adding a layer of security for LP capital deposits.
• Lending and Risk Management: The SPV is structured to lend funds to trading firms, utilizing the PB's sophisticated lending framework and risk engine. This ensures robust, real-time risk management to handle the dynamic nature of crypto markets.

PB Pool Structure 

PB SPV borrows and draws down USDC from the PB Pool and then lends it to trading firms through its PB ecosystem.

Key Advantages include:

• Loans from PB Credit Pool to PBs are backed by a Pool of SPV PB Loans:
  • PBs establish a bankruptcy-remote SPV for PB Credit Pool loan and add equity tranche / first loss capital support
  • PB Loans, collateral, and equity tranche held within the SPV's controlled ecosystem together offer a layer of security for the capital deposits made by capital providers
• Strict covenants including information requirements on PB loan book reporting to monitor adherence to agreed parameters / frameworks / use of funds

We conduct thorough due diligence on our PB partners, including reviews of PB risk methodologies, SPV structures, legal agreements, collateralization frameworks, exchange risk frameworks, and custody and asset protection measures. We also scrutinize loan terms such as durations, withdrawal/deposit cycles, and repricing methods. 

For more information about our due diligence process and the monitoring and reporting for this structure, please contact us. We are actively collaborating with various PB partners and are eager to present the options we are exploring.