Mark-to-Market with periodic Settlement Vs Netting equivalent, manage, credit, separate

yuoska

Why are these two cited as separate ways to manage credit risk (2008 Exam Q 9 A. answer choices)?

* Mark-to-Market with periodic Settlement
* Payment Netting

Aren't they equivalent?

Valores

Interesting. Same concept that's for sure. When I hear mark to market I think of an organized exchanged whereas with payment netting I think of any OTC contract. Not sure though.

pennyless

in exchange you have no credit risk...

both are used in OTC

mtm for long term cross ccy swaps mainly
netting -you agree to net payments ocurring on the same day, or there is also so called close-out netting, not sure what the book says about it.

but these are different

we use it at work...

mcmc

There is some difference:

Marking to market is periodically revaluing an OTC contract (swap, forward, etc.) to fair value (current price) and making the necessary payments, in effect resetting the contract to 0 value. Has to do with accounting concepts but its also a type of netting.

Payment netting is just that - you actually pay only the net amount without exchanging the full amounts between two parties. Actually the settlement risk is reduced here.

mp3bu

One can be done anytime, one is relevant for the exact payment dates, I think.