Bilateral Netting

The process of consolidating swap agreements between two parties into a single agreement. As a result, instead of each swap agreement leading to a stream of individual payments by either party, all of the swaps are netted together so that only one net payment is being made to one party based on the flows of the combined swaps.

A major reason for netting is that it adds additional security in the event of a bankruptcy to either party. By netting, in the event of bankruptcy, all of the swaps are executed instead of only the profitable ones for the company going through the bankruptcy. For example, if there was no bilateral netting, the company going into bankruptcy could collect on all in the money swaps while saying they can't make payment on the out of the money swaps due to the bankruptcy.