Payment netting, also called settlement netting, is an arrangement under which parties that owe each other money on the same date and in the same currency combine those amounts and pay only the difference. If one bank owes another 10 million dollars and is owed 8 million dollars on the same day, a single payment of 2 million dollars settles both obligations. It is the routine, day-to-day form of netting.
Between two parties it is bilateral netting; among many, with each participant paying or receiving one net amount, it is multilateral netting, the basis of most retail clearing systems and of corporate group netting centres. In currency markets, FX netting applies the same idea to trades maturing on the same day. Netting reduces the number and value of payments, lowering costs, liquidity needs and settlement risk. It differs from close-out netting, which applies only on default and terminates all outstanding contracts.