Multilateral Netting

Multilateral netting allows a multinational firm to reduce the transaction costs that arise when many transactions occur between its subsidiaries. These transaction costs are the commissions paid to foreign exchange dealers for foreign exchange transactions and the fees charged by banks for transferring cash between locations. The volume of such transactions is likely to be particularly high in a firm that has a globally dispersed web of interdependent value creation activities. Netting reduces transaction costs by reducing the number of transactions.
Multilateral netting is an extension of bilateral netting. Under bilateral netting, if a French subsidiary owes a Mexican subsidiary $6 million and the Mexican subsidiary simultaneously owes the French subsidiary 44 Million, a bilateral settlement will be made with a single payment of $2 million from the French subsidiary to the Mexican subsidiary the remaining debt being canceled.
Under multilateral netting, the simple concept is extended to the transactions between multiple subsidiaries within an international business. Consider a firm that wants to establish multilateral netting among four European subsidiaries based in Germany, France, Spain, and Italy. These subsidiaries all trade with each other, so at the end of each month a large volume of cash transactions must be settled.