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NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Operational Aspects of Portfolio Managers

PMS Trade Execution, Settlement and Back Office Operations

Updated 11 October 2026 · Fact-checked

In PMS, the portfolio manager places orders through brokers, allocates executed trades fairly across client portfolios, settles them through clearing corporations and custodians, and records everything in the back office. Corporate actions such as dividends, splits and bonuses are credited to each client's account. Fair allocation and accurate records are the exam focus.

Understand Trade Execution, Settlement and Back Office Operations

A portfolio manager runs a separate portfolio for each PMS client. So every trade must end up in the right client account. Operations are the steps that make this happen after the investment decision is taken.

The process starts with order placement. The fund manager decides what to buy or sell. The dealing desk sends the order to a SEBI-registered broker. Often the manager places one combined order (a block or bunched order) for several clients to get better execution. The manager must not favour any client, and must not favour itself or its associates, when doing this.

After execution, the manager does trade allocation. The fair approach is to allocate the trade across the participating clients on a pro rata basis, at the same average price, as per a pre-defined and documented policy. The key idea is that allocation should be decided on a fair basis and not after seeing how the trade performed. Choosing winners for favoured clients afterwards is cherry picking, and it is a serious breach.

Next comes clearing and settlement. Trades in listed securities settle through the exchange's clearing corporation. Securities and funds move through the custodian and the depository. In the PMS structure, client securities are generally held in the client's own demat account or an account for the client, and the books of each client are kept separately. The back office reconciles trades with broker and custodian confirmations, tracks pending settlements, maintains each client's books, and checks holdings and cash.

Finally, corporate actions. Dividends, bonus issues, splits, rights issues, buybacks and mergers affect client holdings. The back office tracks the entitlement for each client, makes sure the benefit reaches the right client account, and records it. For a rights issue the manager must decide whether to subscribe, and should act in the client's interest and as the agreement provides.

Key formulas to remember

Pro rata allocation
Client's allocation = Total quantity executed × (Client's order quantity ÷ Total order quantity)
Same average price for every client in the bunched order. Round off fairly as per the written policy.
Average execution price
Average price = Σ(quantity × price of each fill) ÷ total quantity
Every participating client gets this single price, not a price chosen per client.
Allocation rule
Allocate fairly, on a pre-defined policy, no cherry picking
Allocation should not be altered after seeing price movement to benefit favoured clients.
Segregation rule
One client = one separate set of books and holdings
Client funds and securities are kept separate from the manager's own and from other clients'.

How to solve Trade Execution, Settlement and Back Office Operations questions

Most questions test who does what, in what order, and what is fair. Use this method.

  1. 1Identify the stage being asked: order placement, allocation, clearing and settlement, back office, or corporate action.
  2. 2Recall the owner of that stage: dealing desk, broker, clearing corporation, custodian or depository, back office.
  3. 3Check the fairness principle: pro rata, same average price, pre-defined policy, no favouring of clients or associates.
  4. 4If numbers are given, compute the average price first, then the pro rata quantity for each client.
  5. 5For corporate actions, ask what changes: number of shares, price, cash, or both, and whether the benefit goes to the client account.
  6. 6Eliminate options that allow favouring, mixing client assets, or changing allocation after the result is known.
  7. 7Choose the option that protects the client and keeps records accurate.

Quickest way: Fairness filter

When to use it: Use it on any MCQ about allocation, conflicts or client assets.

  1. Ask: does this option treat all clients equally?
  2. Ask: does it follow a policy fixed before the trade?
  3. Ask: are client assets kept separate?
  4. Reject any option with words like 'preferred client', 'after seeing performance' or 'mixed account'.

Common mistakes in Trade Execution, Settlement and Back Office Operations

  • Thinking allocation can be decided after the trade based on price performance.

    Students see allocation as a flexible back office adjustment.

    Fix: Remember allocation follows a pre-defined fair policy. Choosing after the outcome is cherry picking.

  • Giving different clients different prices in one bunched order.

    Students think each fill belongs to a specific client.

    Fix: Use the average price of the whole order for every participating client.

  • Mixing client assets in a pooled account like a mutual fund.

    PMS is confused with pooled vehicles.

    Fix: PMS is client-specific. Each client has separate books and holdings.

  • Assuming corporate action benefits are the manager's decision to keep or pass on.

    Students forget the manager acts for the client.

    Fix: Benefits belong to the client. The back office tracks and credits them to the right account.

  • Mixing up who does clearing and who does reconciliation.

    Several parties are involved after execution.

    Fix: The clearing corporation clears and settles. The back office reconciles records with broker and custodian.

Worked examples

Example 1

A portfolio manager places a bunched order to buy 1,000 shares for three clients. Orders are A 500, B 300, C 200. Only 800 shares are executed, 400 at ₹100 and 400 at ₹102. Find each client's allocation and price.

Show the solution
  1. Average price = (400 × 100 + 400 × 102) ÷ 800 = (40,000 + 40,800) ÷ 800 = 80,800 ÷ 800 = ₹101.
  2. Total order is 1,000, executed 800, so each client gets 80% of the order.
  3. A = 500 × 0.8 = 400 shares.
  4. B = 300 × 0.8 = 240 shares.
  5. C = 200 × 0.8 = 160 shares. Total = 800.

Answer: A gets 400, B 240, C 160 shares, each at an average price of ₹101.

Example 2

Which is the fair way to handle a partly executed bunched order for several clients? (a) Give it all to the client with the largest portfolio (b) Allocate pro rata to order sizes at the average price under a pre-defined policy (c) Allocate the cheaper fills to favoured clients (d) Wait and allocate to clients whose position gained the most

Show the solution
  1. Option (a) favours one client and ignores the others.
  2. Option (c) gives different prices to favour clients, which is unfair.
  3. Option (d) decides after the result is known, which is cherry picking.
  4. Option (b) is pro rata, uses one average price and follows a policy set in advance.

Answer: Option (b).

Exam tips

  • Expect scenario questions on fair allocation. The answer is almost always pro rata, same average price and a pre-defined policy.
  • Remember PMS holds client-specific portfolios, so segregation of client assets is a safe principle to apply.
  • Know the order of the flow: order, execution, allocation, clearing and settlement, reconciliation, corporate action credit.
  • Read for words like 'after', 'preferred' and 'own account'. They usually signal the wrong option.
  • Check the negative marking of 10% per question before guessing. Skip only if you cannot eliminate any option.

Practice questions from Operational Aspects of Portfolio Managers

Trade Execution, Settlement and Back Office Operations: frequently asked questions

What is cherry picking in PMS?

It means allocating profitable trades to favoured clients, or the manager's own account, and loss-making trades to others after seeing the outcome. It is unfair and a breach of the manager's duty to treat clients fairly.

How are trades allocated across PMS clients?

Bunched orders are allocated pro rata to the order sizes of participating clients, at the same average price, under a pre-defined written policy. This keeps treatment fair.

What does the PMS back office do?

It confirms trades, reconciles them with the broker and custodian, tracks settlement, maintains each client's books and holdings, and records corporate action entitlements.

How are corporate actions handled in a PMS account?

The back office tracks entitlements for each client holding. Dividends, bonus shares and splits are credited to the client's account, and decisions such as rights subscription are taken in the client's interest as the agreement provides.