Netting

What is 'Netting'

Netting is consolidating the value of two or more transactions, payments or positions in order to create a single value. Netting entails offsetting the value of multiple positions, and can be used to determine which party is owed remuneration in a multiparty agreement.

BREAKING DOWN 'Netting'

Netting is a general concept that has a number of more specific uses. In a case in which a company is filing for bankruptcy, parties that do business with the defaulting company will offset any money owed to the defaulting company with any money owed by the defaulting company. The remainder represents the total amount owed to the defaulting company or money owed by it, and can be used in bankruptcy proceedings.

Companies can also use netting to simplify third-party invoices, ultimately reducing multiple invoices into a single one. For example, several divisions in a large transport corporation purchase paper supplies from a single supplier, but the paper supplier also uses the same transport company to ship its products to others. By netting how much each party owes the other, a single invoice can be created for the company that has the outstanding bill. This technique can also be used when transferring funds between subsidiaries.

Netting is also used in trading. An investor can offset a position in one security or currency with another position either in the same security or another one. The goal in netting is to offset gains in one position with losses in another.

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RELATED FAQS
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  3. What are the benefits of financial netting?

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