Novation, a feature of future exchanges stipulates

Question

Question

This question was previously asked in

UGC NET Paper 2: Management 4th Dec 2019 Shift 2

Answer 1

Key Points

Future exchange

The buying and selling of a wide variety of commodities futures, index futures, and options on futures contracts take place on a futures exchange.
Brokers and business traders who are members of the exchange are permitted access to the exchange.

Important Points

Novation

A novation is an arrangement that permits bilateral transactions to be carried out through an intermediary, i.e. clearinghouse.
Instead of dealing with buyers directly, sellers transfer their securities to the clearinghouse, which then makes them available for purchase by purchasers and vice versa.
As a legal counter party, central clearing house acts a intermediator between buyers and sellers.
The clearinghouse switches roles, becoming a seller to every buyer and a buyer to every seller.

Hence, Novation, a feature of future exchanges stipulates exchange becomes a counterparty for all trades.