What does Bilateral Netting mean?
Settlement of mutual obligations between two parties through netting. All swap agreements between two parties are consolidated and one net payment is made from one party to the other. This is governed through a master agreement. Bilateral Netting is widely used in futures markets.
Futures Knowledge Explains Bilateral Netting
Bilateral netting is done to settle multiple transactions between two parties. This is done under a master agreement between them. There are two main reasons to use bilateral netting, the first is to clean up the accounting entries for both parties. Secondly it provides protection in the event of bankruptcy, because multiple positions might be "in" or "out" of the money for the bankrupted party. In this event all the positions are 'netted' and the counterparty receives any net positive funds. One single payment is required in place of multiple payments.