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

In the Indian equity derivatives market, which entity acts as the legal counterparty to every trade by becoming the buyer to the seller and the seller to the buyer after trade novation?

The clearing corporation is the legal counterparty to every trade. Through novation it becomes seller to the buyer and buyer to the seller, guaranteeing settlement and removing bilateral counterparty risk, while the exchange merely provides the trading platform.

  1. AThe stock exchange on which the trade was executed
  2. BThe clearing corporationCorrect
  3. CThe trading member's custodian
  4. DThe depository participant of the buyer

Explanation

Through novation, the clearing corporation interposes itself between the original parties and becomes the central counterparty. This guarantees settlement and removes bilateral counterparty risk. The exchange only provides the trading platform and does not guarantee settlement.

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