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E. Netting
1. Types of Netting
a. Closeout Netting
When a dealer has several swaps with a single counterparty,
it is common for some of the swaps to have positive value and for
others to have negative value. If the counterparty were to
default, it would owe money to the dealer with respect to some
swaps, and the dealer would owe money to the counterparty with
respect to other swaps. In the event of a bankruptcy proceeding,
a dealer would want to offset the positive-valued swaps against
the negative-valued swaps. Otherwise, the dealer might have to
pay in full its obligations to the counterparty on the negative-
valued swaps, while possibly receiving little or no payment on
the positive-valued swaps. Such a right of setoff is called
closeout netting.
Closeout netting is an enforceable right, and market
participants placed significant stress on the use of netting
agreements. Closeout netting occurs where the counterparties
agree that, in the event of a default or triggering event, all
contracts between the counterparties will be terminated at the
option of the nondefaulting party, and the reciprocal claims
under the contracts will be netted. By facilitating closeout
netting and its legal enforceability, the ISDA form agreements
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