Define ‘Close-out Netting’ and Its Significance in an ISDA Master Agreement

Close-out netting is a contractual provision that, upon an event of default by a counterparty, allows the non-defaulting party to immediately terminate all outstanding transactions, determine a single net amount owed (by calculating gains and losses across all contracts), and pay or receive only that net amount. Its significance is that it drastically reduces the potential loss exposure and is a cornerstone of OTC derivatives risk management.