An entity may consider contractual clearing as risk reduction only under the following conditions: taking into account the contractual agreement for cross-product clearing, the entity must continue to meet the requirements for recognition of bilateral clearing and the requirements of BIPRU 4.10 and BIPRU 5 for recognition of credit risk reduction for each bilateral framework contract and transaction. For the purposes of offsetting non-produced products, different product categories include: other bilateral agreements concluded between an undertaking and its counterparty; and companies can also use compensation to simplify third-party invoices and ultimately reduce multiple invoices to one. For example, several departments of a large transportation company purchase paper supplies from a single supplier, but the paper supplier also uses the same transportation company to ship its products to others. By paying the amount that each party owes to the other, a single invoice can be issued for the company that has the unpaid invoice. This technique can also be used to transfer funds between subsidiaries. Also known as net payment, settlement clearing aggregates the amount due between the parties and net cash flow into one payment. In other words, only the net difference in the total amounts is delivered or exchanged by the party with the net liabilities. As a general rule, a settlement agreement must be concluded before the settlement date. Otherwise, each of those payments would be due to all the parties concerned.

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