hardConceptScenarioMidSeniorStaff
When a clearing house novates a trade, what has it taken on, and what can still go wrong afterwards?
4 min readUpdated 2026-08-15
Answer
Short answer
Novation tears up the bilateral contract and replaces it with two contracts facing the clearing house, which then guarantees performance and charges for that guarantee in initial and variation margin.
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Likely follow-ups
- Why does netting reduce a clearing member's contribution to systemic risk, and what does it not reduce?
- Who bears the loss when a defaulting member's margin is insufficient to close out its book?
- Why would a clearing house call margin intraday rather than waiting for the end-of-day cycle?
- If a fail is economically neutral because the trade is marked to market daily, why do markets bother penalising it?
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