The process that is typically arranged at the contract date (not at settlement date) for the purpose of replacing all agreements between two parties with a single agreement and a single net payment stream (the new contract subsumes the obligations of the original contracts). Netting by novation takes place on an ongoing basis, whereas for each value date, the parties agree that all existing contracts will be terminated and simultaneously replaced by a new, legally-binding contract that aggregates and nets all of the payment obligations of the original contracts. When the new contract is concluded by novation, the obligations of all previous contracts are legally discharged. Formal netting by novation is often viewed as a response to financial distress on the part of one party.
Finance
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