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

In the Indian securities market, which entity interposes itself between the buying and selling clearing members and becomes the legal counterparty to every trade accepted for clearing, through the process of novation?

The clearing corporation becomes the central counterparty through novation. It steps between the buying and selling clearing members, becoming seller to the buyer and buyer to the seller, which guarantees settlement and removes bilateral counterparty risk between the original trading parties.

  1. AThe depository participant
  2. BThe clearing corporationCorrect
  3. CThe trading member's compliance officer
  4. DThe stock exchange's listing department

Explanation

Through novation, the clearing corporation replaces the original contract between buyer and seller with two new contracts, becoming the seller to every buyer and the buyer to every seller. This guarantees settlement. A depository participant only handles demat accounts and does not guarantee trades.

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