NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process
Which statement best describes the role of the clearing corporation in the guaranteed settlement of trades on a recognised stock exchange in India?
The clearing corporation acts as the central counterparty through novation, becoming the buyer to every seller and the seller to every buyer. This lets it guarantee settlement of trades, supported by margins and the settlement guarantee fund, rather than members bearing each other's default risk.
- AIt acts as the counterparty to each trade by novation, becoming the buyer to every seller and seller to every buyerCorrect
- BIt only records trades and has no financial responsibility for completion
- CIt selects the securities the broker may trade each day
- DIt manages the investors' demat accounts directly
Explanation
Through novation, the clearing corporation replaces the original contract between two members with two contracts, taking on the role of central counterparty. It then guarantees settlement, backed by margins and the settlement guarantee fund. It does not merely record trades, and demat accounts are held with depository participants.
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