Netting 
Use
If netting agreements exist between two business partners, then if it is legally permissible (for example, the German Banking Act I §12) payments and receivables between partners can be netted off. This has the effect of reducing the counterparty/issuer risk of a bank's transactions with a particular counterparty.
In the Default Risk and Limit System, netting refers to bilateral liquidation netting, which means an agreement is made with the contract partner that in the case of the termination of the entire contract (in the case of bankruptcy, for example) all mutual claims and receivables are terminated, fall due, are valued at market conditions, and the resulting balance is calculated (balancing by netting). This has the effect of reducing the attributable amount for the credit risk. Settlement risk is unaffected.
Prerequisites
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1. The determination procedure must permit netting.
When you define the determination procedure in Customizing by choosing... ® Basic Settings ® Definitions ® Define Determination Procedures you need to set the Netting Active indicator.
In addition you need to make an entry in the Add-On Weighting field. The weighting factor shows to what extent the total add-on affects the calculation of the netting add-on. The total add-on is derived from the total of all open transactions that can be netted, and that involve the same counterparty.
2. Definition of a netting group
In Customizing choose: ® Basic Settings ® Definitions ® Define Netting Group. You need to set up a netting group that defines for which business partner the transactions are to be balanced.
When you define the netting group, you also store the default risk rule, which the system uses to calculate the netting attributable amount. Any transactions in the netting group that are in a different currency are converted to the currency of the netting group, and then netted.
3. The financial object of the transactions that are to be netted contains either the netting ID or the collateral ID. This is stored in the data for the default risk limit part in the data group Transaction assignment.
The system permits a two-level netting procedure. Within a netting group, collateral can be provided in the form of a collateral agreement. When you create collateral agreements, you need to assign them to the relevant netting group.
Features
If netting is active, the system calculates the attributable amount as follows:
1. Determination of all open (still valid, not yet due) single transactions concluded with the business partner in a certain company code.
2. From the selected open transactions, the system then finds all the transactions that assigned to one netting group (can be netted), and all unassigned (cannot be netted) transactions.
Then, it calculates the attributable amounts of all transactions that cannot be netted. The total of the attributable amounts of these single transactions is calculated and then displayed.
For the transactions that can be netted, the system first finds all the single transactions that belong to a netting group. The following figures are then calculated for the transactions of this netting group:
§ Total of all net present values (total (net present values))
§ Total of all positive net present values (total (net present values_pos))
§ Total of all add-ons (total (add-ons))
§ Net/gross ratio (NGR)
NGR = max (0, total (NPV) / total (NPV_pos)) if the total of the NPVs (pos) is equal to or greater than zero; otherwise zero.
§ Add-on netting
Add on Netting = total (add-on) single transaction x (a + b x NGR) where b = 1 - a
a = weighting factor for the entire add-on
b = weighting factor for the net/gross ratio (NGR)
§ Average probability factor