Month End Glossary

Netting Agreement

A netting agreement is a legal arrangement between parties that consolidates their mutual financial obligations to streamline payments.

A netting agreement acts as a foundational contract between two or more parties, typically in financial contexts, that outlines how non-settled obligations between them will be mutually offset. This mechanism minimizes unnecessary exchanges of funds by determining a net balance owed, which helps in improving cash flow efficiency and reducing counterparty risk. For instance, in a trading relationship where two parties have multiple trades resulting in various payments owed to one another, this agreement allows them to compute the difference between payments rather than settling each trade individually. Its usage is prevalent in derivatives and finance agreements such as ISDA Master Agreements. By agreeing to offset obligations, parties not only reduce administrative overhead but also gain predictability in their financial settlements.

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