Bilateral clearing reduces the total number of transactions between the two counterparties. As a result, the actual volume of transactions between the two is declining. This also applies to the amount of accounting activity and other fees and charges related to an increase in the number of trades. Multilateral clearing consists of more than two parties, probably through a clearing house or central exchange, while bilateral clearing is between two parties. Instead of sending two payments, Company B with bilateral compensation would send $2,083.33 ($833.33 + $1,250) or $25,000 ($10,000 + $15,000 per year) each month. The payment is not equal when each counterparty aggregates the amount due to the other on the day of payment and only the difference between the amounts and the figure is provided by the party. This is also called settlement clearing. The term bilateral itself means “to have two sides or to refer to them; “concerns both parties.” Net clearing or netting refers to the difference between all swap payments, which generates a (net) sum. Bilateral clearing is the process of consolidating all swap agreements between two parties into a single or master agreement.
For the first swap, Company A agreed to pay a fixed rate of 3% at $1 million, while Company B pays a variable libor rate plus 2%. Assuming LIBOR is currently 2%, Company B`s variable interest rate is 4%. Netting consolidates all swaps into one, so the bankrupt company can only collect swaps in the money after all out-of-the-money swaps have been fully paid. .