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 at a clearing corporation?
The clearing corporation becomes the legal counterparty to every accepted trade through novation. It steps in as buyer to the seller and seller to the buyer, so the original parties no longer face each other and counterparty default risk is removed.
- AThe trading member who executed the trade
- BThe clearing corporation itselfCorrect
- CThe depository participant of the buyer
- DThe stock exchange's listing department
Explanation
Through novation, the original contract between buyer and seller is replaced by two contracts, with the clearing corporation becoming the seller to every buyer and the buyer to every seller. This removes bilateral counterparty risk. The trading member and DP do not take over the contract.
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