WHAT IS NETTING?

Multilateral Netting is a process by which companies within a corporate group can make substantial savings on foreign exchange payments and receipts.

This is achieved by summing and converting each participant's inter-company and (optionally) third party payments and receipts into a single local-currency amount.

A properly implemented and run netting system can be the most profitable corporate treasury vehicle.

BEFORE NETTING

Each of the blue balls represents a subsidiary company in a corporate group. The companies may be located throughout the world and they may be invoicing each other in many different currencies.

Before implementing a netting system each company may have several payments to make to the other companies in the group. Each payment may cover many invoices. They will have to make the payments and then inform all the receivers of the specific invoices that are covered by the payment, which in turn need to be reconciled. (Figure 1)

This is expensive both in terms of administrative costs and in the cost of making the actual payment.

AFTER NETTING

Instead of making the payments directly, each company sends the payment information (or invoices themselves) to the Netting Centre.

The Netting Centre calculates each subsidiaries net position in its home currency and makes the payment to the company or, in the case of a receipt, instructs the company to send the payment to the Netting Centre. (Figure 2)

The savings as a result of netting come from many factors including, reduction in number of payments, reduction in float, reduction in FX requirement, less spread on FX. The savings can be considerable and are explained in more detailed in the section entitled Benefits of Netting.

NT Netting caters for netting pools (also known as Sub-Netting Centres). For a corporate with many subsidiaries in a given country, establishing a netting pool reduces the number of international payments. This can clearly be seen in Figure 2.