Netting is the aggregating and offsetting of multiple cash flows between counterparties to arrive at one, or a limited set of physical payments

Detail

There are two distinct sorts of netting:

Settlement Netting - which might also be described as payment netting

All cash flows between two parties are summed (receipts are positive, debits negative) to arrive at one physical payment due

Settlement Netting granularity aggregates cash flows to a single legal entity over one or  more cash flow attributes including:

• Payment Date
• Currency
• Commodity (some times)

The exact terms of Settlement Netting are described in the bilateral Master Agreement that we have in place with the counterparty

Close-out netting - The set of outstanding cash flows that will be netted if our counterparty goes into receivership or liquidation

If we are expecting a payment of £999,999 from our counterparty, and they are expecting £1,000,000 from us, and they go into liquidation - we want to be owing them £1, not £1,000,000.

The liquidator will do his best for all creditors to try and get us to pay the £1,000,000, and have us wait in line with other creditors for the £999,999. Indeed without a legally sound close out netting agreement in place the liquidator would be favouring us as a creditor were they to let us net the outstanding payments