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What Is the Impact of Netting Agreements on Counterparty Risk in OTC Derivatives?

Netting agreements allow counterparties to offset all their obligations with each other under a single master agreement. Instead of settling each trade individually, only the single net difference is exchanged upon default or maturity.

This significantly reduces the potential exposure and therefore the overall counterparty risk, which is a major capital benefit for financial institutions.

How Does Netting Impact the Calculation of Capital Requirements under Basel III?
Explain the Concept of “Netting” in Institutional Derivatives Settlement
How Does the Use of a ‘Master Netting Agreement’ Reduce Counterparty Exposure for a Prime Broker?
How Does Netting Contribute to Reducing Overall Credit Exposure for a CCP?