Following formal agreement of the trade details with the counterparty, it is generally accepted as beneficial to both parties if a trade can be netted with another trade or with an existing position. Such netting is applicable to both buy-side and sell-side firms.
Trade/Portfolio netting is the process of offsetting trades that contain the same details as an existing position in the same OTC derivative product and updating that existing position to a new net position, whilst terminating (cancelling) the original trades. This netting process is commonly known as portfolio compression.
The holding of OTC derivative trades to their scheduled maturity date, especially when trades have a lifetime of up to 50 years, carries significant annual maintenance costs and risks, which can be ...