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How Does ‘Novation’ Change the Legal Relationship between Trading Parties in a CCP Environment?

Novation substitutes the CCP for the original counterparties, eliminating bilateral risk and creating two new, standardized contracts.
Greeks.Live14.11.25

How Does ‘Novation’ Change the Legal Relationship between Trading Parties in a CCP Environment?

Novation is the legal process where, upon the execution of a trade, the original bilateral contract between the two counterparties is replaced by two new contracts: one between the buyer and the CCP, and one between the seller and the CCP. This substitution legally interposes the CCP as the central counterparty, extinguishing the original bilateral counterparty risk and creating a new, standardized relationship with the CCP.

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