Multilateral settlement netting is multilateral netting applied at the point of settlement: the amounts that three or more participants owe one another in cash or securities are offset, so that each participant settles one net position per currency or security against the system as a whole. The main entry describes the general technique and its uses.
The settlement form is used by clearing houses and payment systems. In securities markets, a central counterparty becomes buyer to every seller and seller to every buyer, nets each member's trades in each security, and sends only the net deliveries and payments to the depository. In retail payment systems, a clearing house totals the payments exchanged during a cycle and settles each bank's net balance across central bank accounts, an arrangement known as deferred net settlement.
It differs from bilateral settlement netting, in which offsetting happens only between each pair of counterparties, and it achieves a larger reduction in the value and number of settlements. The saving comes with a dependency: if one participant fails to meet its net obligation, the positions of the others may need to be recalculated or covered by a default fund, which is why such systems require collateral and loss-sharing rules as part of wider settlement netting arrangements.