Prefunding Mechanism

Definition ∞ A prefunding mechanism requires participants to deposit assets or collateral before initiating a transaction or engaging in a financial activity. This process ensures that sufficient funds are available to cover potential obligations or losses, thereby reducing counterparty risk. It serves as a critical safeguard in various financial systems to enhance security. This approach minimizes settlement risk.
Context ∞ In traditional finance, prefunding is common in clearing and settlement systems, and its application is being explored for digital asset markets, especially for large institutional transactions. News reports on the integration of digital assets into existing financial infrastructure might discuss the implementation of prefunding mechanisms to manage settlement risk. This approach aims to enhance the security and reliability of digital asset transfers and trading.