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

In the equity cash segment, which entity becomes the legal counterparty to every trade for settlement purposes once a trade is accepted for clearing by the clearing corporation?

The clearing corporation becomes the counterparty to every accepted trade through novation. It acts as buyer to every seller and seller to every buyer, thereby guaranteeing settlement and removing counterparty risk between the original trading parties.

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

Explanation

Through novation, the clearing corporation interposes itself between the original buyer and seller, becoming the seller to every buyer and the buyer to every seller. This is how it guarantees settlement. Trading members and DPs do not become the legal counterparty to the trade.

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