What Is “Novation” in the Context of a Clearing House?
Novation is the legal process by which a clearing house interposes itself between the original buyer and seller of a derivative contract. The original contract is legally discharged, and two new contracts are created: one between the clearing house and the buyer, and one between the clearing house and the seller.
This makes the clearing house the sole counterparty to both sides.
Glossar
Novation
Substitution ⎊ Novation is the legal act of substituting a new party for an original party in a financial contract, effectively creating a new contract and extinguishing the old one.
Clearing House
Role ⎊ The Clearing House acts as a central counterparty (CCP) in traditional and centralized crypto derivatives markets, interposing itself between buyers and sellers to guarantee the performance of the contract.