NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
Which party in an exchange-traded derivatives trade guarantees settlement by becoming the buyer to every seller and seller to every buyer?
The clearing corporation guarantees settlement. Through novation it becomes the counterparty to both sides of every trade, which removes counterparty risk between the original buyer and seller and supports the integrity of exchange-traded derivatives markets.
- AThe stock exchange trading member
- BThe clearing corporationCorrect
- CThe depository participant
- DThe portfolio manager
Explanation
Through novation, the clearing corporation interposes itself between the original parties and guarantees performance. Trading members and portfolio managers only execute trades, and depository participants handle securities accounts rather than derivative guarantees.
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