NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which statement about the role of a clearing corporation as the central counterparty (CCP) in settlement is correct?
After novation the clearing corporation becomes the buyer to every seller and the seller to every buyer. This central counterparty role removes bilateral counterparty risk and lets it guarantee settlement, backed by margins and the settlement guarantee fund.
- AIt acts as buyer to every seller and seller to every buyer after novation, guaranteeing settlementCorrect
- BIt only records trades and bears no responsibility for completion
- CIt acts only as the seller to all buyers
- DIt replaces the depository in holding investor securities
Explanation
Through novation, the clearing corporation becomes the legal counterparty to both sides, so each member faces the corporation rather than the original counterparty. This enables guaranteed settlement supported by the settlement guarantee fund. It does not hold investor demat balances, which is the depository's job.
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