Define the ‘Netting’ Principle as It Applies to the ISDA Master Agreement

The netting principle, as codified in the ISDA Master Agreement, allows two counterparties to offset their mutual obligations in the event of default or termination. Instead of each party having separate claims for the gross amount owed on every transaction, only a single net payment is made or received.

This legally reduces the overall credit exposure between the parties, making derivatives trading safer and more capital efficient.