Drafting a Simple Netting Agreement

06/09/2023

26 min

Guides

Note: Links to our free templates are at the bottom of this long guide.
Also note: This is not legal advice

Introduction

Definitions

Netting Agreement: A contract between two or more parties that allows them to offset their obligations to each other and settle them simultaneously.
Bilateral: An agreement between two parties.
Multilateral: An agreement between three or more parties.
Enforceable: Legally binding and capable of being enforced.
Dispute Resolution Process: The process by which parties involved in a dispute attempt to reach a resolution.
Security Provisions: Rules or conditions that are implemented to ensure the safety and security of the parties involved.

Overview of what a netting agreement is and why it is important
Explain the purpose of a netting agreement
Describe the advantages of having a netting agreement
Identify different types of netting agreements
Explanation of the types of netting agreements, their advantages and disadvantages
Explain the differences between bilateral and multilateral netting agreements
Outline the benefits and drawbacks of each type of agreement
Consideration of the legal and financial implications of the agreement
Review the legal implications of the agreement
Analyze the financial implications of the agreement
Outlining of the key terms and provisions of the agreement
Identify the main provisions of the agreement
Describe the meaning of each provision
Explain the purpose of each provision
Identification of the parties involved in the agreement
Identify the parties that are involved in the agreement
Outline their roles and responsibilities
Review and discussion of the various features of the agreement
Discuss the key features of the agreement
Identify areas of potential dispute or disagreement
Guidance on how to draft a netting agreement
Explain the steps involved in drafting a netting agreement
Provide an example of a netting agreement
Outline the best practices for drafting a netting agreement
Advice on how to negotiate the terms of the agreement
Identify the key points to consider when negotiating the terms of the agreement
Outline strategies for negotiating the terms of the agreement
Advice on how to resolve disputes or disagreements that arise
Explain the most common methods for resolving disputes
Provide guidance on how to resolve disputes in a timely manner
Consideration of local, state, and federal regulations that may affect the agreement
Identify the relevant local, state, and federal regulations
Analyze how the regulations may affect the agreement
Outline strategies for complying with the regulations

Get started

Overview of what a netting agreement is and why it is important

Research the concept of netting and its purpose to gain a better understanding
Research the benefits of netting for parties entering an agreement
Understand the potential risks associated with netting agreements
Review a sample netting agreement to get an idea of what it looks like
When you have an understanding of what a netting agreement is and why it is important, you can check this off your list and move on to the next step.

Explain the purpose of a netting agreement

Understand the purpose of a netting agreement, which is to reduce the risk of default and simplify the settlement process between two or more parties
Identify the obligations of each party and the benefits of netting compared to the traditional settlement process
Be aware of the types of transactions that can be netted, such as forward contracts and exchange-traded derivatives
Know the potential risks associated with netting, such as a counterparty defaulting or a systemic risk

You will know when you can check this step off your list when you have a good understanding of the purpose of a netting agreement and the associated risks.

Describe the advantages of having a netting agreement

Reduces risk of default by allowing counterparties to combine and offset their obligations
Streamlines the process of making payments by simplifying the number of transactions required
Reduces the cost of making payments by eliminating the need for multiple payments
Reduces the amount of time and money spent on administrative costs
Increases the security of payments by providing a more secure method of payment

When you have described the advantages of having a netting agreement, you can check this step off your list and move on to the next step.

Identify different types of netting agreements

Research and understand the different types of netting agreements available, such as bilateral netting, multilateral netting, and netting between two branches of the same bank
Compare and contrast the different types of netting agreements to determine which type is the most suitable for your needs
List out the advantages and disadvantages of each type of netting agreement
Once you’ve identified the type of netting agreement best suited to your needs, you can move on to the next step.

Explanation of the types of netting agreements, their advantages and disadvantages

Understand the different types of netting agreements such as bilateral netting, multilateral netting, and novation netting
Understand the advantages and disadvantages of each type of netting agreement, such as cost savings and credit risk
Understand the implications of using a netting agreement, such as legal and regulatory compliance

You will know you have completed this step when you have a thorough understanding of the types of netting agreements, their advantages and disadvantages, and the implications of using a netting agreement.

Explain the differences between bilateral and multilateral netting agreements

Understand the difference between bilateral and multilateral netting agreements:
Bilateral netting agreements are between two parties and involve a uniform exchange of obligations
Multilateral netting agreements involve more than two parties and involve a complex network of exchanges
Learn the advantages and disadvantages of each type of agreement:
Bilateral agreements are faster and simpler to negotiate and are less risky than multilateral agreements
Multilateral agreements can be more efficient and cost-effective, but may take longer to negotiate and are more complex
When you have a clear understanding of the differences between bilateral and multilateral netting agreements, you can check this step off your list and move on to the next one.

Outline the benefits and drawbacks of each type of agreement

Understand the different benefits and drawbacks of a bilateral netting agreement, such as that it can help manage operational risk while still being legally sound and cost effective.
Consider the potential benefits and drawbacks of a multilateral netting agreement, such as that it can help reduce settlement costs and risks, but may be more difficult to manage due to the complexity of the netting process.
Consider the potential legal and financial implications of a netting agreement, such as the potential impact on credit risk and the potential for legal disputes in the case of a default by one of the parties.
Take into account the potential costs associated with a netting agreement, such as the costs of setting up, administering and managing the agreement.
When you are finished outlining the benefits and drawbacks of each type of agreement, you can check this task off your list and move onto the next step.

Consideration of the legal and financial implications of the agreement

Research the legal implications of the agreement, such as any applicable regulations or laws that may affect the agreement
Research the financial implications of the agreement, such as how it may affect the parties’ credit ratings or their ability to obtain financing
Consider any tax implications that may be associated with the agreement
Discuss any potential risks associated with the agreement with a qualified legal professional
When you have fully considered the legal and financial implications of the agreement, you can check this step off your list and move on to the next step.

Review the legal implications of the agreement

Understand and review the legal requirements associated with the agreement, such as the applicable laws and regulations
Familiarize yourself with any relevant contracts that are related to the agreement
Research any case law that might be relevant to the agreement
Consider any potential tax implications of the agreement
Analyze and assess any potential risks associated with the agreement
Make sure the agreement is in compliance with all applicable laws and regulations
Check that the agreement does not violate any contractual obligations
When you feel confident that you have considered all the legal implications of the agreement, you can move on to the next step.

Analyze the financial implications of the agreement

Research and understand the potential financial impacts of the agreement on both parties
Identify any potential tax implications and other financial risks associated with the agreement
Analyze the financial terms and conditions of the agreement to ensure that they are in line with the parties’ financial objectives
Analyze the financial performance expectations for each party, including any potential revenue-sharing arrangements
Estimate the potential costs associated with the agreement to ensure that the parties are comfortable with the financial implications

When you can check this step off your list and move on to the next step:

Once you have researched and analyzed the financial implications of the agreement and are comfortable with the terms and conditions, you can move on to outlining the key terms and provisions of the agreement.

Outlining of the key terms and provisions of the agreement

Carefully review the agreement to identify the key provisions
Identify the primary objective of the parties involved in the agreement
Determine the terms and conditions of the agreement, such as payment terms, guarantee clauses, and dispute resolution options
List out the key provisions and identify which ones are negotiable and which ones are non-negotiable
Summarize the main points of the agreement in a concise and understandable way
Make a list of items to be addressed in the final agreement

Once the key terms and provisions of the agreement have been outlined and summarized, you can move on to the next step of identifying the main provisions of the agreement.

Identify the main provisions of the agreement

Identify and list the main provisions of the agreement
Read through the agreement and make a note of the key provisions
Consider the purpose of the netting agreement and the goal that needs to be achieved
Make sure to include provisions that define the parties, determine the applicable law, set out the netting procedure, and any other relevant provisions
Once all of the main provisions of the agreement have been identified, move on to the next step

Describe the meaning of each provision

Review the definition of each provision in the agreement, and understand the meaning of each one
Understand the purpose of each provision and the reasons for including it in the agreement
Summarize the meaning of each provision in plain language
Make sure you understand why the provision is included and the purpose it serves in the agreement
Once you have taken these steps, you can check off this step and move on to the next step.

Explain the purpose of each provision

Read each provision of the agreement and make a note of what the provision is meant to do
Think about how each provision is connected and how it fits into the overall agreement
Check if all the provisions are necessary for the agreement to be effective, and if any provisions are missing
Make sure that all the provisions are clear and unambiguous
Make sure that all the provisions are consistent so that they do not create any confusion or overlap
Make a note of any questions you may have regarding the provisions
Once you have finished explaining the purpose of each provision, you can check this step off your list and move on to the next step.

Identification of the parties involved in the agreement

Identify the parties to the agreement (i.e., who will be the parties to the netting agreement)
Include their full legal names, addresses, and contact information
Ensure that each party is legally authorized to enter into the agreement
Ensure that each party has the capacity to perform its obligations under the agreement
When all parties have been identified, check off this step and move on to the next step.

Identify the parties that are involved in the agreement

Identify the full legal names of all parties that are involved in the netting agreement
Contact each party to verify the accuracy of the information provided
Draft a list of all parties involved in the agreement, including their full legal names, contact information, and any other relevant details
Once you have completed the list of parties involved, you can move on to the next step.

Outline their roles and responsibilities

Make a list of the roles and responsibilities of each party involved in the agreement
Ensure that the roles and responsibilities are clearly defined, so that all parties understand their obligations
Make sure that the roles and responsibilities are realistic and achievable
Agree on how the responsibilities will be allocated between the parties in the agreement
Once the roles and responsibilities have been outlined and discussed, create a written document and get it signed by all parties
Check off this step on the list and move on to the next step: Review and discussion of the various features of the agreement.

Review and discussion of the various features of the agreement

• Discuss the various features of the agreement with the other party and take notes of the points discussed.
• Ask questions and seek clarifications to be sure that you have a clear understanding of the agreement.
• Make sure that the agreement is tailored to the specific needs of each party.
• Agree on any changes that need to be made to the terms of the agreement.

Once all the relevant points have been discussed, you can move on to the next step.

Discuss the key features of the agreement

Meet with all parties to identify their goals and objectives for the agreement
Discuss the different aspects of the agreement, such as the duration, payment terms, and other features
Identify any areas of potential disagreement or dispute
Agree on the primary features of the agreement, including who will be responsible for any costs
Record all details in writing and make sure all parties understand and agree to the terms

When you can check this off your list:

When all parties have agreed to the terms and conditions of the agreement
When all parties understand the details and implications of the agreement

Identify areas of potential dispute or disagreement

Identify and categorize each party’s respective obligations
Analyze the legal risks that each party may face in the event of a dispute or disagreement
Consider any potential conflicts of interest and how they may be addressed
Identify any terms or provisions that may be overly complex or difficult to interpret
Review any applicable laws and regulations that could affect the agreement
Check for any instances where the parties’ obligations may overlap or contradict one another

Checklist for when this step is complete:

All potential areas of dispute or disagreement have been identified
All applicable laws and regulations have been reviewed
All potential conflicts of interest have been identified and addressed
All terms and provisions are clear and easy to interpret

Guidance on how to draft a netting agreement

Identify all parties involved in the agreement and include necessary contact information
Determine the scope of the agreement and list all products that are covered
Develop a detailed description of the netting procedure, including applicable laws and regulations
Outline the responsibilities of each party in the agreement
Draft the terms and conditions of the agreement
Review the agreement with all parties and make any necessary changes
Finalize and sign the agreement
When all parties have signed the agreement, the netting agreement is complete and ready to be enforced.

Explain the steps involved in drafting a netting agreement

Understand the scope of the agreement: Determine what each party will be required to provide or do under the agreement.
Clarify the obligations of each party: Draft the obligations of each party in clear and concise language.
Define the terms of the netting agreement: Describe the terms of the agreement, such as the types of transactions that will be netted and the currency denominations of the netting.
Establish the conditions under which the agreement is legally binding: Include terms such as the duration of the agreement, the notification requirements for each party, and the dispute resolution process.
Include a choice of law and jurisdiction clause: Specify the law applicable to the agreement, as well as the jurisdiction in which any disputes will be heard.
Sign the agreement: Have each party sign and date the agreement.

Once you have completed these steps, you can move on to the next step: Provide an example of a netting agreement.

Provide an example of a netting agreement

Obtain a copy of a standard netting agreement, such as the one published by the International Swaps and Derivatives Association (ISDA).
Review the terms of the standard netting agreement and revise it to meet the needs of the relevant parties.
Ensure the netting agreement includes language that covers the applicable laws and regulations.
Include appropriate definitions and terms in the netting agreement.
Review and confirm that all parties agree to the terms of the netting agreement.
Check off this step when you have a fully drafted netting agreement that meets all parties’ needs.

Outline the best practices for drafting a netting agreement

Research applicable laws and regulations that may affect the agreement
Research relevant court rulings that could impact the agreement
Identify key terms, parties, and other information that should be included
Draft the agreement using simple language and avoiding legal jargon
Have the agreement reviewed by an experienced attorney
Make sure the agreement is signed by all parties involved

Checklist for this step:

Research applicable laws and regulations
Research relevant court rulings
Identify key terms, parties, and other information
Draft agreement
Have the agreement reviewed by an attorney
Make sure the agreement is signed by all parties involved

Advice on how to negotiate the terms of the agreement

Understand the benefits of a netting agreement; such as risk reduction, reduced costs, improved liquidity and reduced counterparty exposure.
Determine the scope of the agreement and who will need to be included in the negotiation process.
Consider the various aspects of the agreement, such as the rights and obligations of each party, indemnification, setoff and netting provisions, and dispute resolution.
Draft a list of key points to be agreed upon and discussed during the negotiation process.
Agree upon the terms of the agreement and review any changes to the document.
Consider any additional terms or provisions that may be required and negotiate these accordingly.

Once you have completed the negotiation process and all parties are in agreement, you can check this step off your list and move on to the next step.

Identify the key points to consider when negotiating the terms of the agreement

Identify all of the parties involved in the netting agreement
Determine which type of netting will be employed (i.e. close-out netting, payment netting, etc.)
Review applicable laws and regulations and consider their potential implications for the agreement
Define the scope of the agreement (e.g. what types of transactions will be included, etc.)
Establish the process for settling netting transactions
Finalize the terms of the agreement

Once you have completed these steps, you can move on to the next step: outlining strategies for negotiating the terms of the agreement.

Outline strategies for negotiating the terms of the agreement

Talk to all involved parties and ensure that everyone understands the agreement and its terms
Make sure that all parties know the risks and benefits of the agreement
Set a timeline for when the agreement should be completed
Consider using outside counsel or a mediator to help negotiate the terms
Identify the issues that are most important to all parties
Develop a clear understanding of the terms that all parties can agree to
Outline strategies for resolving any disputes that may arise
Draft a written agreement that outlines the agreed-upon terms

When you can check this off your list and move on to the next step:

When all parties have agreed to the terms
When the written agreement has been drafted and reviewed by all parties

Advice on how to resolve disputes or disagreements that arise

Consider using mediation or arbitration as a way to resolve any disputes or disagreements that arise during the negotiation process
Make sure to include language in the agreement that explicitly outlines the resolution process that will be taken if any disputes or disagreements arise
Be sure to specify which party will be responsible for the costs associated with mediation or arbitration
When these details have been ironed out, you can check this step off your list and move on to the next step.

Explain the most common methods for resolving disputes

Familiarize yourself with the types of dispute resolution methods available, including negotiation, mediation, arbitration, and litigation.
Consider the advantages and disadvantages that come with each, and decide which method is most appropriate for the situation.
Understand the process and timeline associated with each dispute resolution method.
Determine whether any of the methods can be done remotely or must be done in person.
Check to see if any of the dispute resolution methods require the parties to follow certain procedures, such as exchanging documents and attending hearings.
Once you have chosen a dispute resolution method and understand the process, you can check this step off your list and move on to the next step.

Provide guidance on how to resolve disputes in a timely manner

Establish a timeline for resolution of disputes that is reasonable and fair to all parties
Clearly define the process for resolving disputes, including the steps each party must take and the timeframe for each step
Specify a method of communication to ensure that all parties are informed of developments during the dispute resolution process
Develop an alternate dispute resolution process that allows for a neutral third party to settle disputes, if needed
Agree on a method of dispute resolution, such as arbitration, that is acceptable to all parties
Provide contact information for a mediator or arbitrator, if the dispute must be settled outside of court
Make sure the agreement includes a clause stating that the parties will attempt to resolve disputes amicably before going to court
Once all the above points have been addressed, the step can be marked as complete.

Consideration of local, state, and federal regulations that may affect the agreement

Research relevant local, state, and federal regulations that may affect the agreement - this could include regulations on netting, bankruptcy, security interests, taxes, etc.
Consult with a lawyer or legal professional to ensure that all regulations are taken into account and that the agreement is compliant.
Make sure that any changes you make to the agreement take into account the relevant regulations.
When you are confident that the agreement is compliant with all relevant regulations, you can check this step off your list and move on to the next.

Identify the relevant local, state, and federal regulations

Research the applicable local, state, and federal regulations that may affect the agreement
Consult an attorney to help with researching the applicable regulations
Make a list of the regulations that may affect the agreement
Once you have a list of relevant regulations, you can move on to the next step
Check this off your list when you have a comprehensive list of the applicable regulations that may affect the agreement.

Analyze how the regulations may affect the agreement

Review the relevant regulations and identify the ones that are applicable to the agreement.
Take notes on the key aspects that the agreement must comply with.
Determine if any of the regulations may impose additional obligations on either party.
Make a list of any potential issues that could arise from the applicable regulations.
Identify potential solutions for addressing any issues that arise from the regulations.

How you’ll know when you can check this off your list and move on to the next step:

When you have completed your review of the relevant regulations and have identified any potential issues that could arise, as well as any potential solutions for addressing those issues, you will have completed this step and can move on to the next step.

Outline strategies for complying with the regulations

Perform a thorough review of the regulatory requirements, including any relevant laws, regulations and guidance that may apply.
Identify which of the agreement’s terms are subject to the regulations and how they will n