Netting

Netting is a method of offsetting obligations between two parties. It is used to reduce the amount of cash that needs to be transferred between the parties. Netting can be done in a variety of ways, but the most common is through a master netting agreement (MNA).

An MNA is a contract between two parties that sets out the terms and conditions for netting. The MNA will typically specify which obligations can be netted, how the netting will be calculated, and how the cash will be transferred.

Netting can provide a number of benefits to businesses. It can reduce the amount of cash that needs to be transferred between the parties, which can save on transaction costs. It can also reduce the risk of default, as the parties are only required to pay the net amount of the obligations.

There are a number of risks associated with netting. One risk is that the netting agreement may not be enforceable. If the agreement is not enforceable, the parties may be required to pay the full amount of their obligations, even if they have already netted them.

Another risk is that the netting agreement may not be complete. If the agreement is not complete, there may be some obligations that are not netted, which could increase the amount of cash that needs to be transferred between the parties.

Netting is a complex financial instrument that should only be used after careful consideration of the risks involved.