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‘Bilateral Netting’ exercise appearing in news recently is related to
- a)A process of consolidating all swap agreements between two parties into one single, or master, agreement.
- b)Sharing of data between two parties for streamlining a set of operations.
- c)Cooperation between India-US in defence logistics
- d)None of the above
Correct answer is option 'A'. Can you explain this answer?
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‘Bilateral Netting’ exercise appearing in news recently is related to...
Netting entails offsetting the value of multiple positions or payments due to be exchanged between two or more parties. Netting between two parties is called Bilateral netting.
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Netting can involve more than two parties, called multilateral netting, and generally involves a central exchange or clearinghouse.
Bilateral netting:
Bilateral netting is the process of consolidating all swap agreements between two parties into one single, or master, agreement. As a result, instead of each swap agreement leading to a stream of individual payments by either party, all of the swaps are netted together so that only one net payment stream is made to one party based on the flows of the combined swaps. Hence, option a is correct.
India-US in defence Agreements: - The signing of the Logistics Exchange Memorandum of Agreement (LEMOA) in 2016 and the Helicopter Operations from Ships Other Than Aircraft Carriers (HOSTAC) earlier this year were important steps in this direction. The signing of the Communications Compatibility and Security Agreement (COMCASA) will enable India to access advanced technologies from the US and enhance India's defence preparedness.
KB: Netting is very common in advanced economies where the settlement is based on net positions in bilateral or multilateral financial arrangements rather than by gross positions. A strong netting system generally gives rise to a thriving derivatives market, as it provides the most accurate picture of a company’s financial position, solvency and liquidity risk.
In the absence of bilateral netting, India’s central bank regulations require banks to measure credit exposure to a counterparty for OTC derivative contracts based on gross marked-to-market (MTM) exposure instead of net MTM exposure. This increases credit risk for financial market participants, especially in the event of insolvency of a counterparty, which could then raise systemic risk, according to the latest Economic Survey. The current system of higher obligations requires banks to divert more capital toward collateral requirements than what would be required if bilateral netting is permitted.
Multilateral Netting: Multilateral netting is a payment arrangement among multiple parties that transactions be summed, rather than settled individually. Multilateral netting can take place within a single organization or among two or more parties. The netting activity is centralized in one area, obviating the need for multiple invoicing and payment settlements among various parties. When multilateral netting is being used to settle invoices, all parties to the agreement send payments to a single netting center, and that netting center sends payments from that pool to those parties to which they are owed. Therefore, multilateral netting can be thought of as a way to pool funds to simplify the payment of invoices between parties to the arrangement.
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‘Bilateral Netting’ exercise appearing in news recently is related to...
Bilateral Netting Exercise
Bilateral netting exercise is a process of consolidating all swap agreements between two parties into one single, or master, agreement. It is a financial process that allows two parties to offset their obligations to each other, thereby reducing credit risk and increasing operational efficiency.
Benefits of Bilateral Netting Exercise
There are several benefits of bilateral netting exercise, which are as follows:
1. Reducing Credit Risk: Bilateral netting exercise helps to reduce credit risk by offsetting the obligations of the two parties to each other.
2. Operational Efficiency: Bilateral netting exercise increases operational efficiency by reducing the number of transactions between the two parties.
3. Cost Savings: Bilateral netting exercise helps to reduce transaction costs and other operational expenses by consolidating all swap agreements into one single agreement.
4. Simplification: Bilateral netting exercise simplifies the process of managing swap agreements by consolidating all agreements into one single agreement.
Conclusion
In conclusion, bilateral netting exercise is a financial process that allows two parties to consolidate their swap agreements into one single agreement. This process helps to reduce credit risk, increase operational efficiency, and simplify the process of managing swap agreements.
Bilateral netting exercise is a process of consolidating all swap agreements between two parties into one single, or master, agreement. It is a financial process that allows two parties to offset their obligations to each other, thereby reducing credit risk and increasing operational efficiency.
Benefits of Bilateral Netting Exercise
There are several benefits of bilateral netting exercise, which are as follows:
1. Reducing Credit Risk: Bilateral netting exercise helps to reduce credit risk by offsetting the obligations of the two parties to each other.
2. Operational Efficiency: Bilateral netting exercise increases operational efficiency by reducing the number of transactions between the two parties.
3. Cost Savings: Bilateral netting exercise helps to reduce transaction costs and other operational expenses by consolidating all swap agreements into one single agreement.
4. Simplification: Bilateral netting exercise simplifies the process of managing swap agreements by consolidating all agreements into one single agreement.
Conclusion
In conclusion, bilateral netting exercise is a financial process that allows two parties to consolidate their swap agreements into one single agreement. This process helps to reduce credit risk, increase operational efficiency, and simplify the process of managing swap agreements.
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‘Bilateral Netting’ exercise appearing in news recently is related toa) A process of consolidating all swap agreements between two parties into one single, or master, agreement.b) Sharing of data between two parties for streamlining a set of operations.c) Cooperation between India-US in defence logisticsd) None of the aboveCorrect answer is option 'A'. Can you explain this answer?
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