NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which entity acts as the central counterparty guaranteeing settlement of trades on a recognised stock exchange through novation?
The clearing corporation acts as the central counterparty. Through novation it becomes the seller to every buyer and the buyer to every seller, thereby guaranteeing settlement and removing counterparty risk between the original trading parties.
- AThe depository participant
- BThe clearing corporationCorrect
- CThe stock broker of the buyer
- DThe registrar and transfer agent
Explanation
The clearing corporation interposes itself between buyer and seller through novation, becoming the buyer to every seller and seller to every buyer. This guarantees settlement. A depository participant only handles demat accounts, and a broker or RTA does not guarantee trades.
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