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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 way of novation once a trade is accepted for clearing?

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 removes counterparty risk between the original trading parties and guarantees settlement of the trades.

  1. AThe stock exchange on which the trade was executed
  2. BThe clearing corporationCorrect
  3. CThe trading member who executed the order
  4. DThe depository of the underlying shares

Explanation

Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This removes bilateral counterparty risk between the original parties. The exchange only provides the trading platform and the trading member is not the final counterparty.

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