What is novation of a swap position and what consent is required?

Question

AcadiFi · Accepted Answer

Novation transfers all rights and obligations of a swap from the transferor to a transferee, with the remaining counterparty consenting. The original contract is extinguished; a new contract is created between the remaining party and transferee. ```mermaid flowchart LR A[Party A
remaining] -- original --> B[Party B
transferor] B -- novation fee --> C[Party C
transferee] A -- new contract --> C B -. extinguished .-> A ``` Three-way consent: all three parties sign an ISDA Novation Confirmation. The transferee steps into transferor's shoes at prevailing MTM, paying (or receiving) the MTM amount plus any novation fee to close the economics. Example: Petrali Trading wants to exit a 6-year pay-fixed swap with Bank Osterling. Current MTM is -$2.3M to Petrali (they owe). Bank Raynfield agrees to step in. Petrali pays Raynfield $2.3M to assume the liability, plus a $60K novation fee reflecting Raynfield's credit utilization. Osterling consents because Raynfield's credit is comparable or better. Why novate vs. enter offsetting swap: (1) Reduces gross notional on Petrali's books; (2) Releases CVA capital charges; (3) Eliminates double counterparty exposure; (4) Frees ISDA line capacity. Post-EMIR novations must be reported to trade repositories within T+1. Novation is the dominant exit mechanism for bilateral uncleared swaps where compression isn't available.

What is novation of a swap position and what consent is required?

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