OTC clearing: untangling the netting

I mentioned ‘netting sets' in a previous blog on OTC clearing as a key focus of much debate at a recent OTC derivatives conference. To me, there seems to be some confusion around usage of the term within the subject of OTC clearing, and I've heard it used in a number of contexts.

We can potentially talk about the netting of ‘positions' as well as ‘collateral' and also of netting performed for the calculation of regulatory capital. We refer to the netting of cleared transactions for the calculation of initial margin at an aggregated portfolio level. However, netting also occurs for calculation of collateral available under netting agreements for the determination of counterparty exposure within a bank's potential future exposure (PFE) model. Another use of ‘netting' occurs in the cross-product margining process where risk exposures and sensitivities are netted at a client portfolio level.

From these many examples of the term ‘netting' one can see how important it is to provide context and to be precise. After all...one wouldn't want to be netting collateral when you should be netting position!