NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
In an exchange-traded futures contract, which feature mainly protects the clearing corporation against default by a counterparty?
Daily collection of margins and mark-to-market settlement protects the clearing corporation. Losses are recovered from members as they arise, and initial margin covers potential price moves, so defaults cannot build up over time. Lot size, brokerage and expiry features play no role in controlling counterparty default risk.
- ADaily collection of margins and mark-to-market settlementCorrect
- BHigher brokerage charged to clients
- CFixed lot size across all stocks
- DAbsence of an expiry date
Explanation
Exchange-traded derivatives are guaranteed by the clearing corporation, which collects initial margin and settles mark-to-market gains and losses daily. This limits accumulation of losses and counterparty risk. Lot size, brokerage and expiry do not provide this protection.
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