Closeout Netting is used when a counterparty is defaulted on its payment and termination/settlement of all the contracts associated with the counterparty need to be completed. It helps to terminate and settle all the net values of all the trades with the counterparty.
It has two components,
⦁ Closeout- this enables the other party to close/terminate all the transactions with the defaulting counterparty
⦁ Netting – this enables the party to determine the final net balance after considering all positive and negative payment with the defaulting counterparty which can be used as final closeout amount
Closeout netting helps parties to immediately close the positions with the defaulting counterparty, calculate the net amount and then immediately make a bankruptcy claim to move higher in the bankruptcy queue. If the party is expected to pay, he pays the amount else he claims for bankruptcy amount.
Benefits of Closeout Netting:
⦁ Helps to terminate positions quickly with defaulting counterparty and reduce exposure
⦁ Helps to quickly calculate the net payment amount and close all the open positions with the defaulting counterparty
⦁ For payment due after netting, it helps to claim for the money at the earliest to get better position in bankruptcy queue