Explain the Concept of Novation as Performed by a Clearing House

Novation is the legal process where the clearing house steps in and legally substitutes itself as the counterparty to both the original buyer and the original seller of a derivatives contract. The original contract is discharged and replaced by two new contracts: one between the clearing house and the buyer, and one between the clearing house and the seller.

This standardizes and guarantees the performance of the obligations.