How Does the Concept of “Netting Set” Apply to a Portfolio of Derivatives?
A netting set is a group of derivatives transactions between two counterparties that are covered by a single, legally enforceable netting agreement, such as the ISDA Master Agreement. For risk and capital calculation purposes, all the trades within a netting set are treated as a single exposure, allowing losses and gains to be offset.
Glossar
Netting Agreement Impact
Exposure ⎊ Netting Agreement Impact refers to the substantial reduction in counterparty credit exposure achieved by legally aggregating all outstanding obligations under a master agreement, such as an ISDA Master Agreement, to a single net figure.
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.
Legally Enforceable Netting
Enforcement ⎊ Legally enforceable netting refers to the legal certainty that a master agreement between two counterparties will be recognized in a court of law, allowing for the calculation of a single net payment obligation upon default.