Netting
Netting is offsetting mutual obligations so that only the difference actually moves. Two parties that have been paying each other all day settle one payment for the net amount, which cuts both the funds transferred and the liquidity each side must hold to support them.
Also called: netting off · net settlement
Two parties transacting with each other through the day accumulate obligations in both directions. Settling each one separately means moving the full value of every transaction and funding both sides of the flow. Netting replaces that with a single figure: total owed one way, minus total owed the other, paid once.
Bilateral netting covers two parties. Multilateral netting covers a group, with each member settling one net position against a central point rather than against every other member — the arrangement card schemes and automated clearing systems are built on. In a payment corridor, partners at either end commonly net a day’s or a week’s traffic instead of wiring each transaction as it arises.
What it buys, and what it costs
The gain is liquidity. Less cash has to be in the right place at the right time, which reduces what must be held on account or prefunded. The cost is exposure in between: from the moment the trades are done until the net payment arrives, each side is relying on the other to be good for its gross position. RTGS systems exist precisely because some payments are too large to carry that exposure at all.
In practice
Netting reduces the money that moves, not the obligations owed: until the net payment is made, each side is still exposed to the other for its full gross position. Whether the netting itself holds up if a counterparty fails depends on the governing law and on what the agreement actually says.
Example
Across a day, Partner A owes Partner B 3.0 million and B owes A 2.6 million over several hundred transactions. Settled gross, 5.6 million moves and both sides must fund their whole leg. Netted, one payment of 0.4 million goes from A to B. The other 5.2 million of obligations were still incurred, still had to be recorded, and still left each side exposed to the other until the 0.4 million landed.
Commonly confused with
| Term | How it differs |
|---|---|
| Settlement | Netting works out the single figure to be paid; settlement is that figure actually moving and the obligation being discharged. |
| RTGS | An RTGS system deliberately does the opposite — each payment settles individually and in full, removing the interim exposure that netting creates. |
See also
- SettlementSettlement is the point at which value actually moves between parties and the obligation between them is discharged. It is a separate step from clearing, which only works out who owes what, and from finality, which is the moment the transfer can no longer be reversed.
- PrefundingPrefunding means placing money with a payout partner or correspondent before transactions are sent, so the partner can release funds locally without waiting for settlement to arrive. The balance is drawn down as payouts are made and topped up before it runs out.
- RTGSRTGS stands for real-time gross settlement: a system that settles each payment individually and finally in central bank money, rather than offsetting many payments against each other and settling only the difference at the end of a cycle.
- ReconciliationReconciliation is matching what your own system says happened against what the bank or partner says happened, and resolving every difference that remains. In payments it runs daily, on every account and every partner file, and its output is a list of unexplained breaks rather than a signed-off balance.