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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Clearing Process

In the Indian securities market, which entity acts as the legal counterparty to every trade through novation once a trade is accepted for clearing and settlement by a recognised clearing corporation?

The clearing corporation becomes the legal counterparty to every accepted trade through novation, acting as seller to every buyer and buyer to every seller. This central counterparty role removes bilateral counterparty risk, which is why the exchange, depository or member is not the counterparty.

  1. AThe clearing corporation itself, becoming buyer to every seller and seller to every buyerCorrect
  2. BThe stock exchange on which the trade was executed
  3. CThe depository holding the securities
  4. DThe trading member who executed the order

Explanation

Under novation, the original contract between buyer and seller is replaced by two new contracts with the clearing corporation. This is central counterparty (CCP) guarantee, which removes bilateral counterparty risk. Exchanges, depositories and members do not take on this role.

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