Novations increase as risk of Bear Stearns increases

Increasingly, these traders also are charging hedge-fund clients a fee for novations, or situations in which the fund asks Deutsche Bank to take its position as a counterparty to Bear on a particular transaction. One group of traders worked late Tuesday to review thousands of individual transactions in which Bear was the counterparty, said one person familiar with the situation. Novations occur frequently and for a variety of reasons, according to traders. During calmer times in the credit markets, approval for novations usually is handled by back offices or operations departments, said Mark Beeston, president of T-Zero, an electronic platform that helps dealers and money managers confirm derivative trades. Given the market's current volatility, it would be natural for higher-ranking risk managers to be much more involved in the consent process, he added.