NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Market Participants in the Securities Market
Which of the following entities acts as the legal counterparty to every trade that is novated to it in the cash segment, thereby guaranteeing settlement?
The clearing corporation is the legal counterparty to novated trades. Through novation it becomes buyer to every seller and seller to every buyer, which removes counterparty risk between members and guarantees settlement of the trade.
- AThe depository participant of the buyer
- BThe clearing corporationCorrect
- CThe trading member who executed the order
- DThe stock exchange's listing department
Explanation
After a trade is executed, the clearing corporation steps in through novation and becomes the buyer to every seller and the seller to every buyer. This removes bilateral counterparty risk. Trading members and depository participants do not guarantee settlement.
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