Netting by Novation and Bilateral Netting (so also said in German, more rarely Novations-Aufrechnung)

A contract which – by means of a master agreement – links the individual agreements concluded between the parties in such a way that – in the event of termination of the contractual relationship due to default or even insolvency – only the balance from the individual agreements is owed upon settlement. – The conclusion of master agreements with netting clauses has a risk-reducing effect at the level of the individual bank, because it reduces the default risk from a gross amount to a net amount (a legally enforceable arrangement between a bank and a counterparty that creates a single legal obligation covering all included individual contracts. This means that a banks obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement). – The supervisory authorities encourage such agreements and in some cases specify them in more detail. – See Clearing, Compensation, Novation. – See Deutsche Bundesbank’s Annual Report 2006, p. 139 (with reference to TARGET).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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