NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Introduction to Securities Markets
Which of the following best describes the role of a stock exchange's clearing corporation in the secondary market?
A clearing corporation guarantees the settlement of trades by acting as the central counterparty to both buyer and seller. This novation removes counterparty risk. It does not issue shares, declare dividends or price IPOs, which are functions of issuers and their merchant bankers.
- AIt guarantees settlement of trades by acting as the counterparty to buyers and sellersCorrect
- BIt issues new shares on behalf of listed companies
- CIt sets the dividend payable by listed companies
- DIt decides the price at which an IPO is offered
Explanation
A clearing corporation becomes the central counterparty through novation, guaranteeing trade settlement and reducing counterparty risk. Issuing shares, dividends and IPO pricing are matters for issuers and merchant bankers, not the clearing corporation.
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