NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which entity guarantees the settlement of trades executed on a stock exchange by becoming the central counterparty to every trade through novation?
The clearing corporation guarantees settlement. Through novation it steps in as the counterparty to each trade, becoming seller to the buyer and buyer to the seller, which removes counterparty risk between members and is supported by the settlement guarantee fund.
- AClearing corporationCorrect
- BDepository participant
- CCustodian of the buyer
- DRegistrar and transfer agent
Explanation
Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer, guaranteeing settlement. Depository participants, custodians and RTAs do not act as central counterparty.
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