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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Settlement Process

A broker has a net obligation to deliver 500 shares of a company at pay-in, and 40 of these are not available. The shares are auctioned, and the auction price is Rs 1,050 against the buyer's original trade price of Rs 1,000. Which party bears the cost difference of Rs 50 per share for the shortage, in the normal course?

The defaulting seller bears the difference between the higher auction price and the original trade price, here Rs 50 on 40 shares, or Rs 2,000, plus any penalty. The buyer is made whole through the auction, and neither the clearing corporation nor the depository pays it.

  1. AThe buyer who was due to receive the shares
  2. BThe clearing corporation from its own funds
  3. CThe defaulting seller, who bears the auction price differenceCorrect
  4. DThe depository

Explanation

The buyer is made whole by the auction. The defaulting seller bears the shortfall, here 40 x Rs 50 = Rs 2,000, in addition to other penalties. The buyer, clearing corporation and depository are not the ones to bear it.

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