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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Operational Aspects of Investment Management

In the settlement of a secondary market trade in equity shares, which entity acts as the central counterparty that novates the trade and guarantees its settlement?

The clearing corporation of the exchange acts as the central counterparty. It novates the trade, becoming the buyer to every seller and the seller to every buyer, and guarantees settlement, so that neither trading party carries the other's default risk.

  1. AThe depository participant of the buyer
  2. BThe clearing corporation of the exchangeCorrect
  3. CThe registrar and transfer agent of the company
  4. DThe custodian of the seller

Explanation

After a trade is executed, the clearing corporation steps in between the buyer and the seller through novation and becomes the buyer to every seller and the seller to every buyer. It guarantees settlement, which removes counterparty risk. Depository participants, RTAs and custodians do not provide this guarantee.

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