The master agreements for OTC derivatives require the party stepping out to obtain its counterparty's prior written consent. Around 2005, in the CDS market, novations were often accepted without evidence of that consent, and it became unclear who the counterparty was1.

Submitting a trade to a central counterparty, which replaces the original parties' trade with trades against the central counterparty, also ends the original trade2.

In a partial novation, where only part of a trade is transferred, the original trade does not end and remains in place3.

Notes

  1. Board of Governors of the Federal Reserve System, "Over-the-counter derivatives" (testimony by Patrick M. Parkinson before a subcommittee of the U.S. Senate, July 9, 2008), "Supervisory Efforts to Strengthen the Infrastructure of the OTC Credit Derivatives Market," second paragraph. ↩

  2. Financial Services Agency, "店頭デリバティブ取引等の規制に関する内閣府令第４条第１項で定める作成・保存・報告事項 ガイドライン" (Guidelines on the items to be prepared, retained, and reported under Article 4, paragraph 1 of the Cabinet Office Order on the regulation of OTC derivatives transactions, our translation) (December 2022), reporting item 102 "Event type" (page 27), Novation and Clearing; the term "更改" appears in item 3 "Early termination date" (page 4) (in Japanese). ↩

  3. Financial Services Agency, "店頭デリバティブ取引等の規制に関する内閣府令第４条第１項で定める作成・保存・報告事項 ガイドライン" (Guidelines on the items to be prepared, retained, and reported under Article 4, paragraph 1 of the Cabinet Office Order on the regulation of OTC derivatives transactions, our translation) (December 2022), Attachment 2 "固有取引識別子（UTI）の付番等の考え方" (Approach to assigning UTIs), page 7, footnote 10 (in Japanese). ↩