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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 after it is novated, thereby guaranteeing settlement?

The clearing corporation becomes the legal counterparty to every trade through novation. It steps in as seller to every buyer and buyer to every seller, guaranteeing settlement and removing bilateral counterparty risk between the original trading parties.

  1. AThe trading member who executed the order
  2. BThe clearing corporation of the exchangeCorrect
  3. CThe custodian of the client
  4. DThe depository participant of the client

Explanation

Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This removes bilateral counterparty risk, and it guarantees settlement of trades. Trading members, custodians and DPs do not take on this role.

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