Differentiate between ‘Bilateral Netting’ and ‘Multilateral Netting’.
Bilateral netting involves two parties aggregating their mutual obligations (e.g. all trades between Party A and Party B) into a single net payment. Multilateral netting involves three or more parties, typically facilitated by a central entity like a CCP, where all obligations are netted across the group.
Multilateral netting achieves a much greater reduction in gross exposure and required settlements.
Glossar
Multilateral Netting
Framework ⎊ Multilateral netting, within the context of cryptocurrency derivatives, options trading, and broader financial derivatives, represents a sophisticated risk mitigation technique facilitating the simultaneous exchange of multiple obligations between counterparties.
Netting
Calculation ⎊ This is the mathematical process of offsetting mutual obligations between two counterparties across a portfolio of derivative contracts to determine a single net liability or asset position.
Impact of Netting
Mitigation ⎊ Impact of netting, within cryptocurrency derivatives and broader financial markets, fundamentally alters counterparty credit exposure by offsetting positions before calculating net exposures.