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?

mp3bu

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

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.

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.