What Is 'Novation' and How Does It Relate to the Function of a CCP? ⎊ Path

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

Novation is the legal process of replacing one party in a contract with a new party, with the agreement of all parties involved. A Central Clearing Counterparty (CCP) uses novation to insert itself into a trade.

Once the original buyer and seller agree to a trade, the CCP novates the contract, creating two new contracts: one between the original seller and the CCP, and another between the CCP and the original buyer. This act is what makes the CCP the buyer to every seller and the seller to every buyer, effectively centralizing and standardizing counterparty risk.

What Is ‘Novation’ in the Context of a CCP?

Can Smart Contracts Completely Replace Traditional Legal Agreements?

How Does Novation by a CCP Mitigate Settlement Risk in Derivatives?

What Is “Replace-by-Fee” (RBF) and How Does It Affect Miners?

What Role Do Central Clearing Counterparties (CCPs) Play in Managing Collateral for Derivatives?

Why Do Market Makers Often Cancel and Replace Their Orders in a Dynamic Order Book?

How Is the Process of ‘Novation’ Central to the Clearing House’s Role?

How Does “Replace-by-Fee” (RBF) Impact a Miner’s Transaction Selection Process?