A special type of netting which takes place in connection with certain contractually agreed events that trigger specific actions. For example, the netting that involves initiation of insolvency proceedings, whereby all pending obligations are accelerated to fall due immediately.

The netting process entails termination of obligations under a contract with a defaulting counterparty, and subsequently netting all positive and negative replacement value (for determination of a single net figure: a single net payable or receivable amount. The positions involved are terminated, priced, and then netted to determine a single amount due (net obligation of a defaulted party to a transaction, such as a derivative contract). For example, close-out netting enables derivatives market participants to protect against adverse market changes upon default (over-the-counter (OTC) derivatives credit exposure).

This netting method reduces pre-settlement credit risk.