Business and Personal Finance Dictionary

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• BILATERAL NETTING
  
  A legally enforceable arrangement between two parties to two or more swaps that creates a single legal obligation covering all of the individual swap contracts. This means that the size of the risk that one party is exposed to for the default or insolvency of the counterparty is net of all of the positive and negative values of the contracts included in the bilateral netting arrangements. Parties that engage in numerous swap contracts may use bilateral netting agreements to be able to recognize only the net sum of their obligations rather than the gross total of the individual swap contracts. Bilateral netting is also used by a party that wishes to cancel a swap contract, in which case the party can enter into a new swap that is an equal but offsetting swap with the same counterparty. The two parties can then enter into a bilateral netting agreement under which the two equal but offsetting swap contracts net to zero.
  
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