How Does 'Novation' Fundamentally Change the Counterparty Risk Profile for a Trader? ▴ Learn

How Does ‘Novation’ Fundamentally Change the Counterparty Risk Profile for a Trader?

Novation legally substitutes the CCP for the original counterparties in a trade. The trader's obligation shifts from the initial unknown counterparty to the financially secure and highly regulated CCP.

This transfer means the trader is no longer exposed to the default risk of the original counterparty, which is the core benefit of exchange-cleared trading.

What Is “Novation” and Why Is It Fundamental to a CCP’s Function?

What Is the Role of a Central Counterparty (CCP) in Exchange-Traded Derivatives?

What Is ‘Novation’ and How Does It Relate to the Function of a CCP?

What Are the Primary Mechanisms a CCP Uses to Manage a Member’s Default?