Payment Netting is used by the financial institutions on daily basis to combine different types of payments into one single net payment.
For Example on a particular day,
Company A is expected to pay USD 10 Million as floating rate swap payment and USD 5 million as fixed rate swap payment and expected to receive USD 12 Million from another fixed rate swap. If payment netting is used for that particular day, effective payment reduces to only USD 3 million which Company A is expected to pay. Here total payment reduced significantly and number of transactions reduced to 1 from 3.
Benefits of Payment Netting:
⦁ Combines multiple Cash Flows into one netted single cash flow
⦁ Reduces settlement risk by reducing number of transactions
⦁ Improves Operational Efficiency
⦁ Reduces transaction cost and other associated administrative costs