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In his book, Gregory describes a netting set as

a set of trades that can be legally netted together in the event of a default

Obviously, the netting agreements (as per ISDA master agreement) need to be compatible.

But are there other requirements?

Is there a generally-accepted algorithm for producing netting sets from a portfolio?

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I believe netting sets are usually provided as inputs to the algorithm in most-cases.

If you were to kind of "guess" netting sets given different trades (in general) data, you could start by grouping them by counterparty. I'm not a legal specialist but my understanding is that counterparty here is to be understood as "legal entity" or something like that, and the fact that one entity defaults doesn't necessarily entitle you not to pay what you may own to some other entity on another leg of the deal.

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    $\begingroup$ I've marked this answer as correct. Here's what I found out: Typically a bank/financial institution will have a system to manage netting sets and collateral (such as "Algo Collateral"). There will be a process in place to ensure a legal agreement (covering netting/collateral) is in-place before trading with a new customer. Usually the combination of product, currency & jurisdiction is sufficient for the collateral management system to assign any new trades to a netting set. $\endgroup$ – eddiewould Aug 31 '15 at 2:54

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