What Is Novation in the Context of a Clearinghouse? ▴ Learn

What Is Novation in the Context of a Clearinghouse?

Novation is the legal process where the original contract between the buyer and seller is discharged, and a new contract is simultaneously created between each original party and the clearinghouse (CCP). Essentially, the CCP legally steps into the middle of the trade.

For example, a trade between Party A and Party B becomes two new contracts: one between Party A and the CCP, and one between Party B and the CCP. This legal substitution is what eliminates the bilateral counterparty risk.

How Does ‘Novation’ Change the Legal Relationship between Trading Parties in a CCP Environment?

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

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

What Is the Process of Novation in a CDS Trade Cleared through a CCP?