What is Bilateral Netting?

Bilateral netting is the consolidation of all scheduled payments between two counterparties, with only the net difference being paid. This typically calls for the use of a netting agreement that both parties commit to follow.

Advantages of Bilateral Netting

Bilateral netting greatly reduces the amount of foreign exchange flows between two parties, thereby reducing foreign exchange transaction fees and risks. The concept works best when all payments and receivables generated within an entity are centralized, so that the information can be more easily aggregated.

Disadvantages of Bilateral Netting

To gain the maximum benefit from bilateral netting, the counterparties need to closely coordinate their payables and receivables. This can be difficult when the number of transactions involved is substantial. It is especially difficult when each of the parties has multiple subsidiaries, all of which transact business with each other - coordinating the scheduled payments of these many entities can be close to impossible, unless their payment systems are centralized.