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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process

Which of the following best describes the role of the clearing corporation in guaranteeing settlement of trades on a recognised stock exchange?

The clearing corporation acts as the central counterparty through novation. It becomes the seller to every buyer and the buyer to every seller, so it guarantees settlement of the trade, supported by member margins and the settlement guarantee fund.

  1. AIt acts as the central counterparty, becoming the buyer to every seller and the seller to every buyer after novationCorrect
  2. BIt only maintains records of client addresses
  3. CIt sets the share price at the end of each day for all investors
  4. DIt lends securities to defaulting investors free of cost

Explanation

Through novation, the clearing corporation interposes itself between the original parties and becomes the legal counterparty to each trade. This allows it to guarantee settlement, supported by margins and the settlement guarantee fund. The other options do not describe its function.

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