Currency trading is bilateral and credit-based: each side must be willing to face the other. A fund cannot negotiate credit lines with twenty banks individually, so a prime broker stands in the middle, guaranteeing settlement and netting exposures.
Prime brokerage sets the practical minimum for institutional FX access. After heavy losses in the swiss-franc-unpeg, several banks tightened or withdrew FX prime services, pushing smaller firms toward a prime-of-prime.
Example: a fund with $50,000,000 posts collateral with its PB and receives a credit line allowing $500,000,000 of notional across twelve bank counterparties, all netted into one daily settlement.
Related: prime-of-prime, interbank-market, counterparty-risk, swiss-franc-unpeg