NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Clearing Process
In the clearing process of a stock exchange in India, which entity interposes itself between the buying and selling clearing members and becomes the legal counterparty to each trade after novation?
The clearing corporation is the correct answer. Through novation it steps between the original buyer and seller, becoming seller to the buyer and buyer to the seller, which removes bilateral counterparty risk and lets it guarantee settlement of trades.
- AThe clearing corporationCorrect
- BThe depository participant
- CThe stock broker's compliance officer
- DThe listed company's registrar
Explanation
Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer, guaranteeing settlement. Depository participants only handle securities accounts, and registrars and compliance officers have no role in counterparty substitution.
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