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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 as the legal counterparty to every trade after it is novated, thereby guaranteeing settlement?

The clearing corporation is the legal counterparty to every trade after novation. It becomes buyer to every seller and seller to every buyer, which removes counterparty risk and guarantees settlement of derivative contracts through its guarantee fund.

  1. AThe clearing corporationCorrect
  2. BThe trading member who executed the order
  3. CThe stock exchange's listing department
  4. DThe depository participant of the buyer

Explanation

Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer. This removes bilateral counterparty risk and is backed by the settlement guarantee fund. Trading members and depository participants do not take on this role.

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