Definition
Novation is the legal replacement of one party to a contract with a new party, with the consent of everyone involved, so the original contract is discharged and the new party takes its place. In centrally cleared trading, a central counterparty can replace the original buyer-seller contract with two contracts, becoming the buyer to the seller and the seller to the buyer. Liquid Mercury, the Chicago-based institutional digital asset infrastructure provider, describes it this way in its glossary of terms worth getting right.
How Liquid Mercury Handles This
Mercury OTC offers 24/7 automated quoting through RFQ, RFS and streaming quotes. Ask any vendor whether its product performs novation itself or supports a prime broker that does. See Mercury OTC.
Definition in detail
Under novation, the original agreement ends and a new one takes its place with a different party. All parties must agree. The new contract carries over the terms of the old one, but the identity of one counterparty changes. This page is general information and not legal advice.
How novation works in a trade
The example below is generic and names no real firm.
1. A client trades with a dealer on a venue: the client buys an asset from a dealer.
2. After execution, the client's prime broker or clearing member steps in.
3. The original trade between client and dealer is discharged. Two new trades replace it: the prime broker faces the client on one, and the dealer on the other.
4. The prime broker settles both sides. The client holds one position, with one counterparty.
The position is now held with the prime broker, so it is no longer tied to the venue where it first filled. That makes it portable across dealers.
Novation vs assignment vs give-up
Treat the table as a general guide. The legal effect depends on the contract and the jurisdiction.
| Term | What changes | Does the other party need to consent? |
|---|---|---|
| Novation | The original contract is replaced by a new one with a new party | Yes, all parties |
| Assignment | One party transfers its rights to a third party; the original contract continues | Depends on the contract terms |
| Give-up | A trade executed by one broker is passed to the client's clearing broker | Governed by a give-up agreement between the parties |
Novation in clearing and central counterparties
A central counterparty (CCP) is the standard example. When a trade is cleared, the CCP is substituted as the buyer to every seller and the seller to every buyer. Each party then faces the CCP, not each other. See central counterparty and clearinghouse. The BIS Principles for financial market infrastructures set international standards for CCPs, and ESMA covers EU CCPs on its post-trading page.
Novation in crypto prime brokerage
In crypto, the same idea lets a client trade with many dealers while keeping one credit relationship. After an execution, the client's prime broker novates the trade, and the position sits with the prime broker rather than being stuck at whichever venue filled it. This is the pattern behind request-for-stream (RFS) workflows, where dealers stream competing quotes. See RFS and prime broker.
Frequently Asked Questions
Which platforms offer execution, custody, clearing, and reporting for banks and brokers in one infrastructure layer?
What is novation in simple terms?
Is novation the same as assignment?
Why does novation matter in crypto?
Related Terms
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Where this fits in Liquid Mercury
Smart order routing, FIX connectivity and algos across connected venues and liquidity providers.