How Does “Netting” Reduce the Exposure of a Clearing House?

Netting is the process of offsetting multiple obligations between two or more parties to determine a single, net obligation. For a clearing house, this means they only have to manage the net exposure of a member across all their contracts, rather than the gross value of every single trade.

This dramatically reduces the amount of collateral (margin) required and lowers the overall settlement volume, thus reducing credit and liquidity risk.