Explain the Term “Bilateral Netting” in OTC Contracts.
Bilateral netting is a legal agreement between two parties to offset all their outstanding obligations under a master agreement (like an ISDA). If one party defaults, only the single net amount owed between them is due, rather than the gross sum of all contracts.
This significantly reduces credit exposure and is crucial for managing counterparty risk.
Glossar
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.
Legal Enforceability of Netting
Enforceability ⎊ Legal Enforceability of Netting refers to the judicial certainty that, in the event of a counterparty's insolvency, a master agreement's provision to net mutual obligations will be upheld, resulting in a single, legally binding net payment or receipt.