Netting
Netting

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Netting
  • What is set-off?
  • What is netting?
  • How netting differs from set-off
  • Why do parties net?
  • Netting and insolvency
  • A note on the Corporate Insolvency and Governance Act 2020 and ipso facto clauses
  • Derivatives—the key type of transaction involving netting
  • Key types of netting arrangements
  • Settlement netting or payment netting
  • More...

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marks the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see Practice Note: What does IP completion day mean for lending lawyers?

In finance transactions, the terms 'netting' and 'set-off' are sometimes used interchangeably even though they are not the same thing. The confusion comes from the fact that netting and set-off can result in the same economic outcome for the parties involved.

This Practice Note explains the difference between netting and contractual set-off and how netting is commonly used in commercial finance transactions.

What is set-off?

To understand netting it is first important to understand set-off and, in particular, contractual set-off.

Set-off is the discharge of reciprocal monetary obligations where one monetary amount is discharged to the extent of the other monetary amount.

A right of set-off allows one of the parties (Y) to apply the amount owed to it by the other party (X) against the amount owed by it to that other party (X), enabling Y to reduce or extinguish its liability to X

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