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Difficulty: MediumDepositories, Clearing Corporations, and Settlement Entities

When two clearing member broker-dealers execute a trade in exchange-listed equities, which entity acts as the central counterparty (CCP) to interpose itself between the buying and selling firms, guaranteeing trade completion through novation?

  1. National Securities Clearing Corporation (NSCC)Answer
  2. B
    Depository Trust Company (DTC)
  3. C
    Securities and Exchange Commission (SEC)
  4. D
    Executing Broker-Dealer acting as prime broker

Answer

National Securities Clearing Corporation (NSCC)
The National Securities Clearing Corporation (NSCC) serves as the central counterparty (CCP) for equity trades in the U.S. capital markets. Through the process of novation, the NSCC steps into every cleared transaction, becoming the buyer to every seller and the seller to every buyer, thereby guaranteeing trade completion and mitigating credit risk.

Step-by-Step Solution

1
Identify the primary operational function described in the scenario (acting as central counterparty and guaranteeing trade completion via novation).
The required role is clearance and counterparty risk management for equity trades.
Novation replaces the direct contract between buyer and seller with two separate contracts involving the central clearing entity.
2
Distinguish between clearing corporation duties and depository custody duties.
The National Securities Clearing Corporation (NSCC) executes clearance, continuous net settlement, and central counterparty novation, whereas the Depository Trust Company (DTC) handles book-entry custody and settlement transfers.
NSCC guarantees trade performance, whereas DTC updates ownership records.

Key Concept

Central Counterparty (CCP) Novation and Clearing Functions
Estimated Time:1m 0s
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Topics

Depositories, Clearing Corporations, and Settlement Entities

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