Settlement netting is the application of netting to obligations that fall due for settlement on the same date: amounts that parties owe each other in the same currency or security are offset, and only the difference is paid or delivered. The main entry explains netting in general, including its legal forms and its other uses.
The qualifier "settlement" separates this use from close-out netting, which applies when a counterparty defaults and all outstanding contracts are terminated and reduced to a single amount. Settlement netting, sometimes called payment netting, operates in the normal course of business. Its purpose is to cut the number and value of transfers, which lowers liquidity needs, operational effort and settlement risk.
It can be arranged between two parties, as described under bilateral settlement netting, or across many participants in a system, as described under multilateral settlement netting. A central counterparty nets its members' securities trades in this way before instructing settlement, and many retail payment systems settle net positions between banks at fixed times in the day.