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The Importance of Close-Out Netting

Research
Research Notes February 1, 2010
< 1  min.read
  • Close-out netting has reduced over-the-counter derivatives credit exposure by over 85%. Without the benefits of netting, banks worldwide might face a capital shortfall of over $500 billion.
  • Close-out netting is necessary because it enables derivatives participants to protect against adverse market changes following default of a counterparty.
  • Policy-makers have consistently supported the enforceability of close-out netting because it promotes financial system stability.
  • Current proposals designed to promote orderly resolution of failed financial institutions should be crafted carefully to avoid weakening the benefits of close-out netting.

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