Bilateral Netting


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Bilateral Netting

Bilateral netting - the consolidation of all swap agreements between two counterparties into one master agreement. The result is that if one counterparty bankrupts, that counterparty cannot seek to collect on any swaps that are in-the-money to them while at the same time refusing to pay out on any that are out-of-the-money. Instead, the master agreement sets out that in this event all swaps between the two counterparties will be netted; only then will the bankrupt company receive money, and then only if they are net in-the-money.

Bilateral Netting

Given two parties who carry a set of swaps between each other, an agreement to consolidate all the swaps into one net payment from one party to the other. That is, if, in a given period, the net swap favors one party, that party is paid the amount; however, if, during the next period, the net swap favors the counterparty, then the counterparty is paid. This tidies the accounting for both parties, and protects both in the event of bankruptcy. If one party declares bankruptcy, the counterparty only has to continue paying if the net swap favors the first party.

bilateral netting

see MULTILATERAL NETTING.
References in periodicals archive ?
Allowing some bilateral netting for repos and reverse repos could ease pressure on the banks and the market.
DTCC Deriv/SERV provides automated, end-to-end post-trade processing solutions for a wide range of over-the-counter derivatives, and helps bring greater efficiency and reduced operational risk to the market through a comprehensive suite of services, including automated matching and confirmation, as well as payment matching and bilateral netting for credit default swaps.
Society for Worldwide Interbank Financial Telecommunication), and VALUNET provide bilateral netting services for banks engaged in foreign-exchange trading (Bank for International Settlements, 1996, p.
the laws governing bilateral netting arrangements and those
The proposal also requests comment on collecting information on exposures reflecting bilateral netting agreements and on the effect of derivatives activities on interest income, interest expenses, and trading revenues of the institution.
Duffie and his co-author built a theoretical model to clarify an important tradeoff between two types of netting opportunities, "namely bilateral netting between pairs of dealers across different underlying assets, versus multilateral netting among many dealers across a single class of underlying assets, such as credit default swaps.
This includes the affirmation and confirmation of credit default swap trades as well as payment matching and bilateral netting.
To reduce the costs of transactions and limit the size of these losses, some banks engage in bilateral netting of their foreign exchange transactions.
Such arrangements typically have the potential to reduce the number and the overall value of settlements well beyond the reductions that can be realized through bilateral netting (see boxes 1 and 2 for examples).
With the new service, bilateral netting and settlement is completed and reports generated for counterparties early in the morning on settlement day.
CLSS will continue to provide bilateral netting via the Valunet system currently utilised by MIB, which has principal operations in New York and is supervised by the New York State Banking Department and the Federal Reserve Bank of New York.
The first bilateral netting, whereby all trades in the same security and between the same parties to the trade are netted to one final delivery versus payment (DVP).

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