Payment netting operates day to day: instead of paying $8 million and receiving $7.4 million, one party pays $600,000. Close-out netting operates on default, terminating every trade under the agreement and reducing them to one net claim.
The effect on measured exposure is large. A book of thousands of offsetting trades can have gross positive value in the billions and net exposure in the tens of millions. Capital rules recognise netting only where it is legally enforceable in the relevant jurisdiction, which is why legal opinions on enforceability are a standing requirement.
Netting is what makes isda-master-agreement documentation valuable rather than merely convenient, and it is the reason trades are booked under a master rather than as standalone contracts.
Related: isda-master-agreement, counterparty-risk, novation, central-counterparty, collateral, credit-support-annex