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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Clearing and Settlement System

In the equity derivatives segment of an Indian stock exchange, which entity becomes the legal counterparty to every trade after novation?

The clearing corporation becomes the legal counterparty to every trade through novation. It acts as buyer to every seller and seller to every buyer, so the original parties no longer face each other's default risk and the trade's performance is guaranteed by the clearing corporation.

  1. AThe clearing corporationCorrect
  2. BThe trading member's depository participant
  3. CThe clearing bank 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 removes bilateral counterparty risk. The other entities do not take on the legal obligation of the trade.

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