What Is Multilateral Netting?

Multilateral netting makes it easier for affiliated companies to trade with each other.

Multilateral netting is a system in which affiliated companies can buy from, or sell to each other internationally, without using traditional payment methods. It involves a mediating entity, called a netting center, that receives and documents the terms of each transaction and maintains the settlement terms for each party involved.

Process

When a company decides to do business with another affiliate, it must first contact the netting center to confirm the details of the deal. The netting center documents the specifics and converts all money involved to a common exchange rate. It also maintains account receivable receipts in each company's local currency and handles the payments for the transaction.

Outsourcing

Multilateral netting can be outsourced to banks or private firms. Netting software is available, but, because the netting process is complex, companies tend to allow a third party to handle netting transactions.

Benefits

Using multilateral netting helps companies avoid dealing with banks and other financial entities, whereby reducing bank fees and currency conversion expenses. Also, netting systems establish clear guidelines and time frames for affiliated companies in regard to payment for goods and services.

References

• Phoenix Hecht: Multilateral Netting
• Treasury Alliance: Multilateral Netting, A Global Treasury Essential