Settlement netting
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ISDA Anatomy™
then those obligations will be satisfied and replaced by an obligation on the party owing the larger amount to pay the difference. The parties may net payments across multiple specified Transactions by applying “Multiple Transaction Payment Netting” (and clause 2(c)(ii) will therefore not apply).
Multiple Transaction Payment Netting arrangements may apply to different groups of Transactions, will apply separately to each pairing of specified Offices and will take effect as agreed between the parties.
by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by which the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount and payment obligation will be determined in respect of all amounts payable on the same date in the same currency in respect of those Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or any Confirmation by specifying that “Multiple Transaction Payment Netting” applies to the Transactions identified as being subject to the election (in which case clause 2(c)(ii) above will not apply to such Transactions). If Multiple Transaction Payment Netting is applicable to Transactions, it will apply to those Transactions with effect from the starting date specified in the Schedule or such Confirmation, or, if a starting date is not specified in the Schedule or such Confirmation, the starting date otherwise agreed by the parties in writing. This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries.
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Settlement netting, aka payment netting, is a practical operational step that parties take to minimize daily payment flows between them by agreeing to net down opposing payment flows due in the same currency on the same day under different transactions.
It is popular in master trading arrangements where parties have lots out outstanding transactions with lots of payments flowing between them each day.
In the context of an ISDA Master Agreement is the ability, vouchsaved in Section 2(c) of the ISDA Master Agreement, to offset cashflows due between parties to the agreement on the same day in the same currency but in respect of different Transactions.
It isn’t really, a legal right so much as an operational convenience. If both parties do it, they do it. If one doesn't, then the other can't. It’s like clapping: you can't do it one-handed.
Settlement netting is not the same as close-out netting
Settlement netting should not be, but routinely is, confused with the much more drastic close-out netting, which is the termination of all outstanding transactions and the calculation of a single net Early Termination Amount under section 6(e) of the ISDA Master Agreement, which is something that only happens in the unhappy situation that one or other party has terminated following an Event of Default under Section 5(a) or a Termination Event under Section 5(b). A trick for young players there.