NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which of the following best describes the role of the clearing corporation through novation in settlement?
Through novation, the clearing corporation steps in as the counterparty to every trade, becoming seller to the buyer and buyer to the seller, and thereby guarantees settlement and removes direct counterparty risk between market participants.
- AIt becomes the counterparty to both buyer and seller, guaranteeing settlementCorrect
- BIt only records trades without assuming any obligations
- CIt sets the share prices for settlement
- DIt acts solely as a depository holding securities
Explanation
Through novation, the original contract between buyer and seller is replaced by two contracts, with the clearing corporation as the seller to the buyer and buyer to the seller. This removes counterparty risk and underlies the settlement guarantee. It does not set prices or act as a depository.
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