Bilateral Netting

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.

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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.