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NISM Certifications · NISM-Series-VI: Depository Operations · Introduction to the Indian Capital Market

Mr. Iyer asks his DP why a stock exchange's clearing corporation, rather than the two trading parties, becomes the counterparty to each trade in the cash segment. Which function of the clearing corporation does this describe?

This describes novation. The clearing corporation steps in between the original buyer and seller, becoming seller to the buyer and buyer to the seller, and thereby guarantees settlement of the trade. It is not a depository or DP activity such as account maintenance or dematerialisation.

  1. ANovation, guaranteeing settlement of tradesCorrect
  2. BDematerialisation of physical certificates
  3. CMaintaining beneficial owner accounts
  4. DRegistering transfers of unlisted shares

Explanation

Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer, and guarantees settlement. Maintaining BO accounts is a depository participant function, and dematerialisation is processed through DP, issuer and RTA. Hence novation is correct.

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