NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which entity guarantees the settlement of trades executed on a recognised stock exchange, even if one of the counterparties defaults, through novation?
The clearing corporation guarantees settlement. Through novation it becomes the counterparty to both sides of each trade, and it backs this guarantee using margins and the settlement guarantee fund, so a defaulting party does not stop the other side from being settled.
- AThe clearing corporationCorrect
- BThe depository participant
- CThe investor's bank
- DThe listed company
Explanation
The clearing corporation becomes the central counterparty by novation, acting as seller to every buyer and buyer to every seller. It guarantees settlement, supported by margins and the settlement guarantee fund. A depository participant only handles securities accounts.
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