Novation

Novation is a legal process in which a new contractual obligation is substituted for an old one, effectively replacing one of the original parties with a new party, which requires the explicit consent of all three parties involved: the original obligor, the original obligee, and the new obligor. In financial markets, particularly in the trading of Treasury securities, bonds, and repurchase agreements (repos), novation is primarily executed by a Central Counterparty Clearing House (CCP) to manage counterparty risk by interposing itself between the buyer and seller.