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Difficulty: Very hardDepositories, Clearing Corporations, and Settlement Entities

An institutional investor executes two transactions on a U.S. exchange through a broker-dealer: an order to purchase 1,000 shares of common stock and an order to buy 10 equity call option contracts. In the post-trade settlement lifecycle, which clearing entities act as the central issuer and guarantor for the options contract, and provide central counterparty clearing and trade-netting services for the stock transaction, respectively?

  1. The Options Clearing Corporation (OCC) for the options contract, and the National Securities Clearing Corporation (NSCC) for the equity tradeAnswer
  2. B
    The Depository Trust Company (DTC) for the options contract, and the Options Clearing Corporation (OCC) for the equity trade
  3. C
    The National Securities Clearing Corporation (NSCC) for the options contract, and the Securities and Exchange Commission (SEC) for the equity trade
  4. D
    The Financial Industry Regulatory Authority (FINRA) for the options contract, and the executing broker-dealer for the equity trade

Answer

The Options Clearing Corporation (OCC) acts as the central issuer and guarantor for options contracts, while the National Securities Clearing Corporation (NSCC) provides central clearing and trade netting for equity transactions.
The Options Clearing Corporation (OCC) serves as the issuer, clearinghouse, and guarantor for all exchange-listed options contracts, ensuring performance on option obligations. The National Securities Clearing Corporation (NSCC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC), operates as the central counterparty providing clearing, risk management, and multilateral trade netting services for corporate equity and bond transactions.

Step-by-Step Solution

1
Identify the post-trade entity responsible for listed options contracts
Recognize that the Options Clearing Corporation (OCC) clears, issues, and guarantees all exchange-listed option contracts.
The OCC standardizes option contracts and eliminates counterparty credit risk for options traders.
2
Identify the entity responsible for equity trade clearance and multilateral netting
Determine that the National Securities Clearing Corporation (NSCC), a clearing subsidiary of the DTCC, performs central clearing and Continuous Net Settlement (CNS) for equity securities.
The NSCC acts as the central counterparty (CCP) for equity trades, whereas its sister subsidiary DTC acts as the central depository.
3
Match the entity pair to the options and equity transactions described in the scenario
The correct combination is OCC for options and NSCC for stock.
Each clearing entity specializes in distinct security classes within the U.S. capital markets infrastructure.

Key Concept

Distinction between post-trade entities: OCC for listed options vs. NSCC/DTC (DTCC) for equities and debt clearing/depository functions.
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Topics

Depositories, Clearing Corporations, and Settlement Entities

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