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 ?
Multilateral netting offsets obligations between multiple parties as opposed to bilateral netting, which offsets obligations between only two counterparties.
Allowing some bilateral netting for repos and reverse repos could ease pressure on the banks and the market.
Product diversification in clearing will join suit with solutions for bilateral netting and counterparty clearing under exploration and a world-class surveillance system for heightened customer care and market integrity," Castillo said.
If it is on a bilateral net basis, the bilateral netting agreement must be contained in the disclosure statement.
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.
18) Another example of such measures is to increase the use of bilateral netting arrangements between institutions that have many payment orders going both ways within themselves.
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.
For example, the Companies Act requires that, for bilateral netting, the transactions to be netted must be mutual.
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).

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