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Netting
       
 
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Netting

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Netting
The settlement of obligations between two parties that processes the combined value of transactions.
    
It is designed to lower the number of transactions required. For example, if Bank A owed Bank B $100,000, and Bank B owed Bank A $25,000, the value after netting would be a $75,000 transfer from Bank A to Bank B ($100,000 - $25,000).
    
In general, netting means to allow a positive value and a negative value to set-off and partially or entirely cancel each other out.
    
In the context of Credit risk, there are at least three specific types of netting:
    
Close-out netting: In the event of counterparty Bankruptcy, all transactions or all of a given type are netted at Market value. The alternative would allow the liquidator to choose which contracts to enforce and which not to. There are international jurisdictions where the enforceability of netting in Bankruptcy has not been legally tested.

Netting by novation: The legal obligations of the parties to make required payments under one or more series of related transactions are canceled and a new obligation to make only the net payments is created.

Settlement or payment netting: For Cash settled trades, this can be applied either bilaterally or multilaterally and on related or unrelated transactions.

Netting decreases credit exposure, increases business with existing counterparties, and reduces both operational and Settlement risk and operational costs.
Posted by  Privatebanking.com
 
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