Netting Agreement

A netting agreement is a legal contract between two or more parties that allows them to offset their financial obligations to each other. Instead of settling every individual trade, the parties calculate the net difference and settle only that amount.

This significantly reduces the number of transactions and the total capital required for settlement. It is a common practice in derivative markets to manage counterparty risk and liquidity.

Netting can be bilateral, between two parties, or multilateral, through a clearing house. It is essential for the efficient functioning of high-volume trading platforms.

By simplifying the settlement process, it reduces operational costs and the risk of settlement failure. It is a core component of modern financial market architecture.