Q1. [2]
"A clearing corporation plays a crucial role in managing risk in financial markets." What is the primary risk that clearing corporation mitigate, and how do they achieve this ?
Previously asked in CBSE board exam
2026 92 Q14
Generated by claude-sonnet-4-6 · 2026-06-15 07:06 · grounding rag
Model Answer
The primary risk that a Clearing Corporation mitigates is counterparty/default risk — the risk that a buyer or seller may fail to fulfil their obligation.
They achieve this by:
- Providing financial guarantee for all transactions executed on the exchange.
- Performing risk management functions to ensure smooth clearing and settlement of shares and funds between buyers and sellers.
Source: Chapter 8, Section 8.3 – Clearing & Settlement
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Explanation
- The examiner expects students to name the risk (counterparty/default risk) and link it to the two key mechanisms: financial guarantee and risk management.
- NSCCL (NSE's clearing corporation) is a good example to mention if space allows.
- Avoid vague answers like "it reduces all risks" — be specific to what the passage states.
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