Consider a hypothetical example in which, on one settlement date, 500 million yen is paid under one trade and 300 million yen is received under another. The difference of 200 million yen is paid in a single payment. Payments in different currencies are not offset, so there is one payment per currency1. Netting requires a legally binding agreement, and the net amount in each currency is confirmed with the counterparty at a cutoff time agreed in advance12.

Payment netting offsets the day's payments in normal times. It is a different mechanism from close-out netting, which, when a petition for bankruptcy proceedings or similar is filed against a counterparty, combines the values of all outstanding trades into a single claim or obligation13.

Notes

  1. Board of Governors of the Federal Reserve System, "Trading and Capital-Markets Activities Manual," Section 2021.1 "Counterparty Credit Risk and Settlement Risk" (March 1999), pages 3–4, "Netting." ↩ ↩2 ↩3

  2. Global Foreign Exchange Committee, "グローバル外為行動規範" (FX Global Code, December 2024 version, provisional Japanese translation by the Tokyo Foreign Exchange Market Committee), Principle 50 (pages 48–49) (in Japanese). ↩

  3. "金融機関等が行う特定金融取引の一括清算に関する法律" (Act on Close-out Netting of Specified Financial Transactions Conducted by Financial Institutions, etc., in Japanese), Article 2, paragraph 4 (close-out netting events) and paragraph 6 (close-out netting). ↩