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

Novation is the legal substitution of the CCP as the counterparty, replacing the original two-party contract with two new ones.
Greeks.Live03.11.25

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

Novation is the legal process where the original bilateral contract between the buyer and seller is discharged and replaced by two new contracts. The CCP becomes the counterparty to both the original buyer and the original seller.

This substitution means that the buyer and seller no longer have credit exposure to each other, but only to the CCP. It is the core mechanism by which the CCP centralizes and manages counterparty risk.

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