Definition
Netting
Netting is the offsetting of a member's buy and sell obligations in the same security and settlement so that only the net quantity of shares and net amount of money change hands.
After novation, the Indian clearing corporation nets each member's positions: if a member bought 1,000 and sold 600 shares of a stock for the same settlement, only 400 shares net are to be received. This dramatically reduces the volume of securities and cash that must actually move at settlement.
Netting lowers settlement risk, operational load and liquidity needs, since gross flows are collapsed into net obligations. It is fundamental to the efficiency of rolling settlement and the move to T+1/T+0, where the system must move only net positions quickly between depositories and banks.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- Settlement Cycle (T+1/T+0)The settlement cycle is the time between trade execution and final settlement of money and securities, expressed as T plus the number of business days, such as T+1 for next-day settlement.
- NovationNovation is the legal process by which the clearing corporation replaces a single trade between two members with two new trades, becoming the counterparty to each side and assuming the settlement obligation.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.