Multilateral netting offsets gross payment obligations among several counterparties with new transactions. By keeping a running total for monies owed between all participants, multilateral netting allows for three or more parties to reduce multiple transactions to a single pay or collect per...

This paper develops a model that explains how the creation of a futures clearinghouse allows traders to reduce default and economize on margin. We contrast the collateral necessary between bilateral partners with that required when multilateral netting occurs. Optimal margin levels balance the...