Advisory netting is an arrangement in which two or more parties, or a service provider acting for them, calculate the net amount each party owes or is owed, and use that figure to guide payments, while the original gross obligations remain legally intact. The net figure is advice, not a new contract. Banks, corporate treasuries and some clearing services have used it to cut the number and size of transfers they make without changing the legal basis of their trades.
The term sits at the weakest end of the netting spectrum. Payments specialists often call it position netting or payment netting. It differs from netting by novation, where offsetting obligations are legally replaced by a single new one, and from close-out netting, which applies when a counterparty defaults. Because it does not change legal rights, advisory netting offers operational savings but little protection against credit loss.
Advisory netting in plain terms
Two friends keep a running tab. One owes the other 50 for concert tickets, and the other owes 30 for dinner. They agree it is simpler for one person to hand over 20 than to swap 50 and 30. That is the convenience of netting.
With advisory netting, though, the two debts still exist separately on paper. If one friend goes bankrupt before the 20 changes hands, the bankrupt friend's trustee could demand the full 50 and leave the other friend to queue for the 30 with everyone else. The net figure made daily life easier but did not protect anyone when things went wrong.
How advisory netting works
The mechanics are simple. Each party records its trades or payment obligations with the others. At an agreed time, the parties or a central calculator add up what each owes to each counterparty and subtract what it is owed. The result is a set of net positions that are reported back to the participants. Each party then makes one payment per counterparty, or one payment overall, instead of many.
The critical point is that the participants have not signed an agreement under which the gross amounts are discharged and replaced. Until each underlying obligation is actually paid, it survives in its original form. If settlement goes smoothly, the outcome looks the same as with legally binding netting. The difference only appears when one party fails.
The legal weakness
If a participant becomes subject to insolvency proceedings before settlement, its liquidator is generally not bound by an informal net figure. The liquidator may be able to enforce the contracts that favour the failed firm and reject those that do not, a practice known as cherry-picking. The solvent counterparty then faces its gross exposure, which can be many times the net amount it expected to settle.
This is why the Bank for International Settlements and central bank committees have long distinguished between netting arrangements that are legally robust and those that are not. The 1990 Lamfalussy Report on interbank netting schemes stressed that netting must have a well-founded legal basis in all relevant jurisdictions before it can be relied on to reduce credit risk and liquidity risk. Bank capital rules follow the same logic: supervisors only let banks measure exposures on a net basis where the netting is legally enforceable, supported by legal opinions.
How it differs from other forms of netting
| Type | Legal effect | Typical use |
|---|---|---|
| Advisory (position) netting | None; gross obligations survive until paid | Reducing payment traffic between parties that trust each other |
| Netting by novation | Offsetting obligations replaced by one new obligation as each trade is booked | FX and forward contracts between banks |
| Bilateral netting (binding) | Net amount between two parties is the only claim | Interbank and corporate trading relationships |
| Multilateral netting | Each participant owes or is owed one net amount, often to a central party | Deferred net settlement systems and clearing houses |
| Close-out netting | On default, all contracts are terminated, valued and reduced to one sum | Derivatives under master agreements |
Where advisory netting appears today
Most large interbank systems moved away from purely advisory netting after the 1990s, either to binding multilateral netting with risk controls or to real-time gross settlement. Advisory netting still appears in corporate treasury, where group companies use intercompany netting runs to decide how much cash to move, and in some bilateral settlement practices between banks in markets where the legal framework is uncertain. In these settings it remains a useful operational tool, as long as the parties understand that their exposure to each other is still gross until every leg has settled.
Firms that rely on advisory netting usually still measure counterparty risk on a gross basis and may ask for collateral to cover it. Where they want the risk benefit as well as the operational one, they move to a written netting agreement, ideally backed by a legal opinion for each jurisdiction involved.