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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Clearing Process

In the context of the clearing process for exchange-traded securities in India, which entity acts as the legal counterparty to every trade once it is accepted for clearing, through a process called novation?

The clearing corporation is the legal counterparty to every accepted trade. Through novation it becomes the buyer to every seller and the seller to every buyer, which guarantees settlement and removes bilateral counterparty risk between the original trading parties.

  1. AThe trading member who executed the order
  2. BThe clearing corporationCorrect
  3. CThe depository participant of the buyer
  4. DThe stock exchange's listing department

Explanation

Through novation, the clearing corporation interposes itself between the buyer and seller and becomes the buyer to every seller and seller to every buyer. This guarantees settlement. Trading members and depository participants do not take on this role.

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