Mechanics
Close-out netting is a technique used in markets for derivatives, repurchase agreements and other financial contracts. Parties trade under a master agreement, such as an ISDA Master Agreement, that treats all individual transactions between them as a single relationship. If one party defaults or another agreed event occurs, the non-defaulting party can terminate every outstanding transaction, value each at its replacement cost, and combine the resulting gains and losses into one net amount payable in a single direction. Instead of many gross claims flowing both ways, there is one net sum.
Why it matters in resolution
Netting is fundamental to how financial firms measure and manage counterparty exposure, so resolution law is careful not to disturb it arbitrarily. When a resolution authority carries out a partial property transfer, moving some but not all of a failing bank's contracts to a purchaser or bridge institution, there is a risk of cherry-picking: transferring the contracts that are in the money to the bank while leaving the out-of-the-money ones behind, thereby breaking a netting set. The BRRD prohibits this. It requires that arrangements protected as a class, including netting and set-off arrangements, be respected: the authority must transfer all the rights and liabilities under a netting agreement together, or none of them.
Interaction with stays
These protections operate alongside the resolution authority's power to impose a temporary stay on early termination rights. A counterparty's contractual right to close out and net upon the bank's entry into resolution can be suspended for a short, defined period so that contracts can be transferred in an orderly way. If a clean transfer is completed, the termination right may fall away; if it is not, the counterparty's netting rights revive. The safeguard for netting and the temporary stay thus work together to preserve financial-market stability while still allowing the resolution tools to be used.
Relevance
For counterparties and their credit teams, the protection of close-out netting in resolution underpins the enforceability opinions on which collateral and regulatory capital treatment depend. A netting set that is respected in resolution supports the reduction of gross exposures to a net figure for capital and margin purposes, so uncertainty about its treatment would raise the cost of dealing with the bank. For resolution planners, respecting netting sets is a constraint on how a bank's liabilities can be split, and it shapes the design of partial transfers and the drafting of contractual recognition and stay clauses in cross-border contracts.