What Is the Concept of 'Novation' in the Context of a Central Counterparty Clearing? ▴ Learn

What Is the Concept of ‘Novation’ in the Context of a Central Counterparty Clearing?

Novation is the legal process by which a Central Clearing Counterparty (CCP) steps in 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 CCP and the buyer, and one between the CCP and the seller.

This mechanism is what allows the CCP to guarantee the performance of the trade and manage counterparty risk.

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

How Does Novation by the Clearing House Reduce Counterparty Risk?

How Does a Central Clearing Counterparty (CCP) Facilitate a DVP-like Mechanism?

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