Bilateral settlement netting is the application of bilateral netting to the settlement of trades: two parties offset what each owes the other in the same security, or the same currency, for the same settlement date, and settle only the difference. If a broker has bought 1,000 shares from a counterparty and sold 600 of the same share back to it, a single delivery of 400 shares and one net cash payment replace two gross settlements in each direction.
The term is used to distinguish this from close-out netting, which applies only on default, and from multilateral settlement netting, in which the obligations of many participants are combined, usually through a central counterparty (CCP). Bilateral arrangements are simpler to set up but reduce volumes less.
Netting lowers the number and value of movements in securities settlement, which cuts funding needs and the risk of fails. It requires a legally sound agreement and matching records on both sides. The general principles are described under settlement netting.