DEFINITION of 'Multilateral Netting'

An arrangement among multiple parties that transactions be summed, rather than settled individually. Multilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated. Generally speaking, multilateral netting is enabled via a membership organization like an exchange.

BREAKING DOWN 'Multilateral Netting'

Although multilateral netting offers a host of advantages to member parties, it also has some disadvantages. To begin with, risk is shared; hence, there is less incentive to carefully evaluate the credit worthiness of each and every transaction. Secondly, there are sometimes legal issues to consider. Not all closeout bilateral netting arrangements are recognized by law. In fact, some argue that such arrangements undermine the interests of third-party creditors.

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