Netting/Netting Agreement
A netting agreement between two parties, say A and B means that on payment default by the counterparty A, B can legally offset that default by the same amount which it owes to A. Without a netting agreement B still has to pay what it owes to A even if A has defaulted payment on other trades.
So if you say that a trade is NETTED, that means it is covered by the netting agreement.
One of the major reasons for netting is that it adds additional security in the event of a bankruptcy to either party. By netting, in the event of bankruptcy, all of the swaps are executed instead of only the profitable ones for the company going through the bankruptcy. For example, if there was no bilateral netting, the company going into bankruptcy could collect on all in the money swaps while saying they can’t make payment on the out of the money swaps due to the bankruptcy.
No comments yet.
Leave a comment
You must be logged in to post a comment.