NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which of the following best describes the role of the clearing corporation as a central counterparty in settlement of exchange-traded trades?
The clearing corporation acts as central counterparty by novation: it becomes the seller to every buyer and the buyer to every seller. This removes counterparty risk between members and lets it guarantee settlement of trades.
- AIt becomes the buyer to every seller and the seller to every buyer through novationCorrect
- BIt only provides the trading screen to members
- CIt guarantees profits to all clients
- DIt acts as the depository for holding client securities
Explanation
Through novation, the clearing corporation steps in between the original parties, becoming the legal counterparty to each clearing member and guaranteeing settlement. It does not provide the trading platform, guarantee profits, or hold securities as a depository.
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