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How Does Novation Reduce the Overall Number of Counterparty Relationships in a Market?

Novation reduces the potential N (N-1) / 2 bilateral relationships to just N relationships with the single CCP.
Greeks.Live22.11.25

How Does Novation Reduce the Overall Number of Counterparty Relationships in a Market?

Without novation, a market with N participants would have up to N (N-1) / 2 bilateral counterparty relationships. With novation, every participant only has one counterparty: the clearing house (CCP).

This reduction in relationships simplifies risk management and dramatically lowers the complexity of the credit exposure matrix.

What Is the Concept of ‘Novation’ in the Context of a Central Counterparty Clearing?
What Is ‘Novation’ in the Context of a CCP?
How Does Novation Simplify the Netting of Obligations between Multiple Market Participants?
What Role Does a Central Counterparty Clearing House (CCP) Play in Ensuring DVP?

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