How Does Novation Impact the Credit Exposure of Market Participants?
Novation significantly reduces the credit exposure of market participants by replacing the risk of dealing with an individual firm with the risk of dealing with the highly capitalized and regulated CCP. This standardizes the counterparty risk to a single, robust entity, making it easier to manage and quantify.
Glossar
Credit Risk
Exposure ⎊ Within cryptocurrency derivatives and options trading, exposure to credit risk arises from counterparty obligations, particularly when dealing with leveraged instruments or decentralized exchanges.
Market Participants
Agency ⎊ Market participants functioning as agents, including brokers and clearing firms, facilitate transactions for end-users in cryptocurrency derivatives markets, managing order flow and counterparty risk through established protocols.
Credit Exposure
Risk ⎊ Credit exposure quantifies the potential financial loss a counterparty faces if the other party defaults on their contractual obligations, particularly relevant in over-the-counter crypto derivatives markets.