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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

In a standard exchange-traded equity index futures contract in India, which party is exposed to the clearing corporation rather than directly to the opposite trading party for performance of the contract?

Both the buyer and the seller of an exchange-traded futures contract face the clearing corporation, because through novation it steps in as counterparty to each side. This reduces direct counterparty risk, which is managed through margins and daily mark-to-market settlement.

  1. AOnly the buyer of the futures contract
  2. BOnly the seller of the futures contract
  3. CBoth buyer and seller, because the clearing corporation becomes the counterparty to each sideCorrect
  4. DNeither party, as futures carry no counterparty exposure of any kind

Explanation

On novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This is why both sides face the clearing corporation, which manages risk through margins and daily settlement. Option 'neither party' is wrong because exposure still exists but is mitigated by the guarantee mechanism.

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