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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 interposes itself between the buyer and the seller after a trade is executed, becoming the legal counterparty to each?

The clearing corporation becomes the central counterparty through novation. Once a trade is executed, it steps in as seller to the buyer and buyer to the seller, which removes counterparty risk between the original parties and guarantees settlement of the trade.

  1. AThe clearing corporation through novationCorrect
  2. BThe trading member of the buyer
  3. CThe custodian of the seller
  4. DThe stock exchange's surveillance department

Explanation

After a trade is matched, the clearing corporation becomes the buyer to every seller and the seller to every buyer through novation. This removes bilateral counterparty risk. Trading members, custodians and surveillance departments do not take on this legal role.

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