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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 becomes the legal counterparty to every trade once it is accepted for clearing, thereby guaranteeing settlement?

The clearing corporation becomes the counterparty to every accepted trade through novation. It acts as buyer to every seller and seller to every buyer, which removes bilateral counterparty risk and guarantees settlement, whereas the exchange merely provides the trading platform.

  1. AThe stock exchange on which the trade took place
  2. BThe clearing corporation through novationCorrect
  3. CThe trading member who executed the order
  4. DThe custodian of the buyer

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 exchange only provides the trading platform and does not guarantee settlement.

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