Question $4$

Multilateral netting is a payment arrangement among multiple parties that transactions be summed, rather than settled individually. Multilateral netting can take place within a single organization or among two or more parties. The netting activity is centralized in one area, obviating the need for multiple invoicing and payment settlements among various parties. When multilateral netting is being used to settle invoices, all parties to the agreement send payments to a single netting center, and that netting center sends payments from that pool to those parties to which they are owed. Therefore, multilateral netting can be thought of as a way to pool funds to simplify the payment of invoices between parties to the arrangement.

Multilateral netting can be employed to settle intercompany balances for subsidiaries of a company that transacts with one another in different currencies. Instead of Subsidiary A in one country arranging payment to Subsidiary B in another country for an intercompany transaction, and Subsidiary B arranging payment to Subsidiary C in yet another country for another transaction, these subs can report to a central office or submit into a centralized system for netting. The benefits are clear: time saved and bank fees $($for forex conversions$)$ reduced. Also, the company consolidates a single transaction log with dates, currency conversion rates, and business transaction details, which helps to facilitate the work of auditors when they examine cross$-$border activity.

$4\mathrm{.}1$ Argue the reasons why multilateral netting has become popular. $(10)$

$4\mathrm{.}2$ Assess the problems associated with multilateral netting. $(10)$