Netting
Netting is offsetting what parties owe each other so that only the net difference is paid, reducing the number and value of payments needed to settle. It can be bilateral, between two parties, or multilateral, across many.
How it works
The CPMI defines bilateral netting as offsetting obligations between two parties, and multilateral netting as offsetting obligations among many participants to give a single net position for each. Payment netting settles payments due on the same date and in the same currency on a net basis. Position netting nets instructions without discharging the original obligations and does not typically create legally binding net obligations; the CPMI notes it is also called payment netting when applied to payment instructions, so an agreement should say which one it means.
Netting saves liquidity. CLS says its multilateral netting reduces members' FX funding requirements by over 96%. Faster Payments credits customers in seconds but settles net between participants in the Bank of England's RTGS three times each business day, and UPI settles between banks on a deferred net basis.
For payment firms, netting with a partner that moves money in both directions cuts prefunding. A firm that pays out in a corridor and also collects there can settle only the difference with a two-way partner. Where amounts are large, a written netting agreement matters, because netting that is only a calculation leaves each party owing and owed the gross amounts.
Example
Over a week a firm owes its Philippine partner $6,200,000 for payouts, and the partner owes the firm $4,700,000 for inbound transfers it collected. With netting, the firm makes one payment of $1,500,000 instead of $10,900,000 moving in two directions.
Frequently asked questions
Is netting the same as settlement?
No. Netting works out who owes what; settlement moves the money. A netted amount still needs a final transfer.
What is the risk in netting?
If the netting is not legally binding and a party fails, the gross obligations remain. Use a written netting agreement for large two-way flows.
Where Polynopsis fits
Polynopsis shows gross balances at every bank and partner, so the team can see what netting changes and what still has to be funded.
Compared with
Related terms
Sources
- A glossary of terms used in payments and settlement systems · Committee on Payments and Market Infrastructures, Bank for International Settlements
- CLSSettlement · CLS Group
- Payment and settlement · Bank of England
- Fast payments: design and adoption, BIS Quarterly Review, March 2024 · Bank for International Settlements
Know where all your money is.
Polynopsis gives cross-border payment teams one live position across every bank, payout partner, exchange and wallet, including money in flight, and warns before a corridor runs dry.
About Polynopsis
Polynopsis is liquidity management software for cross-border payment companies. The name joins poly, many, and synopsis, a seeing together: one live view of money spread across many banks, payout partners, exchanges and stablecoin wallets, including money in flight, with a warning before any corridor runs dry.
Why it is called Polynopsis · About Polynopsis · Glossary · Corridor runway calculator