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Difficulty: MediumDepositories, Clearing Corporations, and Settlement Entities

Following the execution of a regular-way corporate equity transaction between two financial institutions, which entity acts as the central counterparty (CCP) to clear the trade, novate the contract, and guarantee trade completion through netting?

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

Answer

The National Securities Clearing Corporation (NSCC)
The National Securities Clearing Corporation (NSCC) serves as the primary central counterparty (CCP) for equity trades in the U.S. capital markets. It novates transactions—interposing itself as the buyer to every seller and seller to every buyer—to clear trades, reduce counterparty risk, and guarantee settlement through its Continuous Net Settlement (CNS) system.

Step-by-Step Solution

1
Identify the primary operational need described in the scenario
The scenario requires trade clearance, contract novation (acting as buyer to every seller and seller to every buyer), netting, and trade guarantee for corporate equities.
Post-trade lifecycle functions are divided between clearing organizations and depositories.
2
Evaluate the roles of the specialized post-trade infrastructure entities
The National Securities Clearing Corporation (NSCC), a subsidiary of DTCC, performs central counterparty (CCP) clearing and netting for equities, whereas the Depository Trust Company (DTC) provides custody and book-entry ownership transfer.
Matching the post-trade function to the correct DTCC subsidiary distinguishes clearing from depository services.

Key Concept

Distinguishing Clearing Corporations (NSCC) from Depositories (DTC) in Capital Markets
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Topics

Depositories, Clearing Corporations, and Settlement Entities

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