Netting Risk

Netting risk refers to the potential for errors or failures in the process of offsetting multiple positions within a single account or across a market. Netting is intended to simplify risk management by reducing the total exposure of a participant, but if the underlying calculations are incorrect or if the legal or technical framework for netting fails, it can create hidden exposures.

In a derivatives context, if a system incorrectly nets positions, it might fail to trigger a necessary liquidation, leaving the protocol exposed to greater losses than anticipated. Effective netting requires precise, real-time synchronization of all positions and a clear, enforceable framework that defines how exposures are combined and mitigated.