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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Legal and Regulatory Environment

A trading member's client has an open position in Nifty futures. Under the regulatory framework, which of the following correctly describes the role of the clearing corporation in the trade?

The clearing corporation becomes the counterparty to every trade through novation, acting as buyer to every seller and seller to every buyer, and guarantees settlement. It does not match orders, which the exchange trading system does, nor does it negotiate prices.

  1. AIt becomes the counterparty to every trade through novation and guarantees settlementCorrect
  2. BIt sets the price of the futures contract every day by negotiation with the buyer
  3. CIt acts only as an advisor to the client on margin amounts
  4. DIt matches orders on the trading screen

Explanation

Through novation, the clearing corporation becomes the buyer to every seller and seller to every buyer, guaranteeing settlement. Order matching is done by the exchange trading system, and prices are determined by the market, not negotiated by the clearing corporation.

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