A process of replacing a contract or a series of contracts with a new one(s), whereas a third party takes the place of an original party. This has the effect of canceling agreements that have been already offset with other agreements. In credit derivatives, for example, the novation process is the substitution of one debt with another, such as a new contract for an old one as well as switching one party in a contract with some other party. The exiting party, with its counterparty’s consent, transfers its rights and obligations to a new party. The exiting party receives (pays) the current mark-to-market value of the transaction from (to) the new counterparty. The original party and the new counterparty become parties to the credit derivative contract, and the exiting party’s role ends at this point.
Partial novations are common in the credit default swap market.
