Which of the following is a key function of a 'Clearing

Solution

• A Clearing Corporation (or Clearing House) is a central counterparty (CCP) that becomes vital for mitigating risk. Its core functions are:
• Novation:  After a trade is executed on an exchange, the Clearing Corporation legally  interposes itself  between the buyer and the seller. The original contract is replaced by two new contracts: one between the CCP and the buyer, and another between the CCP and the seller. The CCP becomes the buyer to every seller and the seller to every buyer.
• Settlement Guarantee:  By becoming the central counterparty, the CCP  guarantees the settlement  of all trades. If one party defaults, the CCP ensures the other party gets paid or receives the securities. It manages this risk through margin requirements and a default guarantee fund.