NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Clearing Process
In the clearing process of an Indian stock exchange, which entity acts as the legal counterparty to every trade by way of novation once the trade is accepted for clearing?
The clearing corporation is the legal counterparty to every accepted trade through novation. It becomes buyer to the seller and seller to the buyer, which removes bilateral counterparty risk and guarantees settlement of the trade.
- AThe trading member's depository participant
- BThe clearing corporationCorrect
- CThe stock exchange's listing department
- DThe investor's custodian bank
Explanation
Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This removes bilateral counterparty risk between the original trading parties. A depository participant or custodian only handles securities or funds movement and does not guarantee settlement.
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