Bilateral Credit Limit

Bilateral Credit Limit

The credit limit two banks extend to each other for securities trades that occur during a single day. That is, one bank may only borrow from the other up to the bilateral credit limit. Most of the time, the credit is netted at the end of the trading day, which allows one bank to borrow more than the credit limit in absolute terms, provided the other bank borrows an equivalent amount to bring it under the credit limit. For example, if the bilateral credit limit is $1 million, bank A may borrow $1.5 million from bank B provided bank B borrows at least $500,000 from bank A on the same trading day. See also: Bilateral netting.
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In simple terms once a trade is executed, the clearing house becomes buyer to the seller and the seller to the buyer and then it does all the collections and payouts and there is no need for bilateral credit limits.
By 1984 the New York Clearing House had implemented bilateral credit limits among participants in CHIPS, and by 1986 it had implemented net debit caps.
Some clearing organizations require each participant to establish bilateral credit limits with every other participant whereby the volume of payments received from each other participant can exceed the volume sent to each other participant only by a predetermined amount.
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