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Difficulty: EasyDepositories, Clearing Corporations, and Settlement Entities

When two member broker-dealers execute a secondary market trade in corporate stock, which entity serves as the central counterparty (CCP) to clear the transaction, net trade obligations, and guarantee settlement?

  1. National Securities Clearing Corporation (NSCC)Answer
  2. B
    Depository Trust Company (DTC)
  3. C
    Options Clearing Corporation (OCC)
  4. D
    Securities and Exchange Commission (SEC)

Answer

National Securities Clearing Corporation (NSCC)
The National Securities Clearing Corporation (NSCC) acts as the central counterparty for equity transactions between broker-dealers, automating trade clearance, netting settlement obligations through Continuous Net Settlement (CNS), and guaranteeing completion of the trade.

Step-by-Step Solution

1
Identify the primary operational requirement described in the stem.
The trade requires central counterparty clearance, netting, and trade settlement guarantee for corporate stock.
Post-trade processing separates custody/depository functions from clearing/netting functions.
2
Determine which post-trade entity fulfills the clearing and central counterparty role for equities.
The National Securities Clearing Corporation (NSCC) clears equity trades and acts as the central counterparty, whereas DTC handles central custody and book-entry settlement.
NSCC interposes itself between buyers and sellers via novation to ensure settlement completion.

Key Concept

Role of the NSCC as Central Counterparty in Equity Trade Clearance
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Topics

Depositories, Clearing Corporations, and Settlement Entities

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