NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which of the following best describes the role of a clearing corporation after trades are novated in the cash segment?
After novation, the clearing corporation steps in as the buyer to every seller and the seller to every buyer, guaranteeing settlement of trades. This central counterparty role is supported by margins and the Settlement Guarantee Fund, and it is distinct from the depository's custody function.
- AIt becomes the counterparty to both the buyer and the seller, guaranteeing settlementCorrect
- BIt only records trades and has no obligation to guarantee them
- CIt acts as the client's investment adviser for the settlement
- DIt acts as the depository holding clients' shares
Explanation
Through novation, the original contract between buyer and seller is replaced by two contracts with the clearing corporation, which becomes the central counterparty. This is how it guarantees settlement, backed by its Settlement Guarantee Fund. It does not hold demat balances; depositories do.
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