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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Other Services Provided by Brokers

A broker offers margin trading facility (MTF) to a client. Which statement is correct under the exchange and SEBI framework?

Under margin trading facility, funding is allowed only for eligible securities, and the purchased securities are kept as collateral in a separate pledged account. Brokers cannot fund any stock at will or use client funds or securities for their own proprietary trading.

  1. AThe securities purchased under MTF must be held by the broker in a separate pledged account as collateral, and funding is given only for approved securitiesCorrect
  2. BThe broker may fund any security, including illiquid stocks, if the client agrees
  3. CMTF funds can be sourced only from the broker's own clients' credit balances
  4. DClient's MTF securities can be freely used by the broker for proprietary trading

Explanation

Under MTF, the securities purchased are kept as collateral by the broker, typically through pledge in a designated account, and funding is allowed only for eligible, liquid securities. Using client credit balances or securities for the broker's own purposes is prohibited.

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