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

In the Indian equity derivatives segment, which entity interposes itself between the buying and selling clearing members and becomes the legal counterparty to every trade after novation?

The clearing corporation is the central counterparty. Through novation it becomes the seller to every buyer and the buyer to every seller, so it guarantees performance of trades and removes counterparty risk between the original trading parties.

  1. AThe stock exchange trading system
  2. BThe clearing corporationCorrect
  3. CThe depository
  4. DThe custodian of the client

Explanation

Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This guarantees settlement and removes bilateral counterparty risk. The exchange trading system only matches orders, the depository holds securities and a custodian only settles for its institutional clients.

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