If bank A and bank B enter into a criss-cross of foreign exchange or derivatives transactions, it makes sense for them to agree to tot up what each owes the other and for the balance – the net amount, rather than the gross – to be paid over by one to the other. This is payment netting. It reduces the delivery exposure to each party by substituting net for gross amounts. It cuts transaction costs by reducing payment flows and cross-currency conversions.
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